SECURITIES AND EXCHANGE COMMISSION
Washington,
WASHINGTON, D.C. 20549
FORM 10-K
Form 10-K
(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20162019
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period fromto Commission File Number:001-36089
(Exact name of Registrant as specified in its charter)
Delaware
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| Delaware | 94-3322844 |
(State or other jurisdiction of
| | (I.R.S. Employer
Identification Number)No.) |
(Address of principal executive offices)
(650)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered | |
| Class A Common Stock par value $0.0001 | | RNG | | New York Stock Exchange | |
| par value $0.0001 | | | | | |
Securities registered pursuant to section 12(g) of the Act:
None
None
Indicate by a check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒x No ☐¨ Indicate by check mark if the Registrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐¨ No ☒x Indicate by check mark whether the Registrantregistrant (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 Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒x No ☐¨ Indicate by check mark whether the Registrantregistrant 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 Registrantregistrant was required to submit and post such files). Yes ☒x No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
¨ Indicate by check mark whether the
Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer”filer,” “smaller reporting company,” and
“smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | x | ☒
| | Accelerated filer | | ☐
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Non-accelerated filer | ¨ | ☐ (Do not check if a smaller reporting company)
| | 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 Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒x The aggregate market value of voting stock held by non-affiliates of the Registrant on June
30, 2016,28, 2019, based on the closing price of
$19.72$114.92 for shares of the Registrant’s common stock as reported by the New York Stock Exchange, was approximately
$1.2$8.4 billion. Shares of common stock held by each executive officer, director, and their affiliated holders have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February
23, 2017,19, 2020, there were
61,436,67176,065,062 shares of Class A common stock and
13,089,91811,039,473 shares of Class B common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in 2017.2020. Such Proxy Statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2016.2019.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 success in the enterprise market and with our carrier partners;
our progress against short termshort-term and long termlong-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 productssolutions 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 productssolutions 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 execute on, integrate, and realize the benefits of any significant acquisition, investment, strategic partnership, or other strategic transaction we may make;
our capital expenditure projections;
the estimates and estimate methodologies used in preparing our 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; and
our ability to retain key employees and to attract qualified personnel.
personnel; andthe 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K. You should read this Annual Report on Form 10-K 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 lookingforward-looking statements, even if new information becomes available in the future.
We are a leading provider of software-as-a-service
or SaaS,(“SaaS”) solutions
forthat enable businesses to
support modern communications for their increasingly mobilecommunicate, collaborate, and
distributed workforces.connect. We believe that our innovative, cloud-based approach disrupts the large market for business communications
solutionsand collaboration by providing flexible and cost-effective solutions that support distributed workforces, mobile employees, and the proliferation of
smart phonessmartphones and tablets. We enable convenient and effective communications for
our customers,organizations across all their locations
all theirand employees,
all the time, thus enabling
athem to be more productive and
dynamic workforce.more responsive to their customers.
Our cloud-based business communications and collaboration solutions are designed to be easy to use, providing a single user identity across multiple locations and devices, including smartphones, tablets, PCs and desk phones. Our solutions can be deployed rapidly and configured and managed easily. Through our platform, we enable third-party developers and customers to integrate our solution with leading business applications to customize their own business workflows.
Traditionally, business communications ishave been comprised of a series of inflexible, expensive, and disparate systems: on-premise hardware based private branch exchanges or ("PBX systems") which primarily support only voice on desktop phones. The rapid growth of mobile communications has changed the way businesses interact. Employees connect from anywhere with any device, using multiple modes of communications including voice, video, text, messaging, and social media. These forms of flexible communications enable employees to be productive in ways traditional on-premise systems whichdo not support. In addition, our cloud-based SaaS solutions are still prevalent in businesses today. The emergencelocation and device independent and better suited to address the needs of the cloudmodern mobile and the SaaS business model, combined with the proliferation of smart phones and tablets as well as the corresponding new paradigms in user experiences, is enabling a revolution in how people communicate. global enterprise workforces that are hard, if not impossible, for legacy on-premise systems to match.
We believe RingCentral
is poisedbenefits from both the shift to
benefit from this industry shift.mobile and distributed workforces and the migration of hardware on-premise based communication systems to cloud-based software solutions. RingCentral’s software cloud communications
and collaboration platform is designed from the ground-up, specifically for today’s
dispersed and mobile workforce. We unify the way employees communicate through mobile and
desktop devices, text messaging, audio,distributed workforce. RingCentral is a leading provider of global enterprise cloud communications, collaboration, and customer engagement solutions. We provide unified voice, video,
and web conferencing as well as collaborating on projects with document sharing andon-line meetings, team messaging,
from a single, easy-to-use carrier-grade SaaS platform. Further, throughdigital customer engagement, and contact center solutions. In addition, our
developmentdifferentiated open platform Application Programming Interfaces (“APIs”) enable seamless integration with third-party and custom software applications. These integrations improve business workflows resulting in higher employee productivity and better customer service. Our global delivery capabilities support the needs of
application programming interfaces (API’s), we enable integration of our platform with other cloud solutions to provide many off-the-shelf integrations to help today’s workforce be more productive.multi-national enterprises in multiple countries.
We primarily generate revenues primarily from softwarethe sale of subscriptions for our cloud-based services. We focus on acquiring and retaining our customers, adding value to their experience, and increasing their spending with us through adding additionaluse of our solutions. As their needs change, customers add users upselling current customersto services, upgrade to premium subscription editions and providingwhich provide additional features and functionality. functionality and expand use of other solutions.
We continue to invest in our direct sales force while also developing indirect sales channels to market our brand and sell our subscriptions directly, through both our websitesolutions. Our indirect sales channels consist of regional and inside sales teams, as well as indirectly through a networkglobal networks of over 4,000 sales agents and resellers, who are active in selling our solutions and with whom we have direct relationships,carriers including AT&T, which we refer to collectively as resellers. Our network of resellers includes master agents who manage other sales agents and resellers, resulting in an even larger reseller network. In addition,Inc. (“AT&T”), TELUS Communications Company (“TELUS”) and BT Group plc (“BT”). We have also entered into strategic partnerships, including with Avaya Holdings Corp. ("Avaya") and Atos SE ("Atos").
In October 2019 we entered into certain agreements for a strategic partnership with Avaya, to introduce a new solution, Avaya Cloud Office by RingCentral ("ACO"), which will be marketed and sold by Avaya and its subsidiaries. In December 2019 we entered into an agreement with Atos, which includes entering into a system integrator relationship and the introduction of a co-branded Unified Communications as a Service ("UCaaS") solution.
We were incorporated in California in 1990 and reincorporated in Delaware on September 26, 2013. Our principal executive offices are located in Belmont, California. Our principal address is 20 Davis Drive, Belmont, California 94002, and our primary website address is www.ringcentral.com. Information contained on, or TELUS, is a resellerthat can be accessed through, our website, does not constitute part of this Annual Report on Form 10-K and inclusion of our cloud solutionswebsite address in Canadathis Annual Report on Form 10-K is an inactive textual reference only.
“RingCentral” and
British Telecom, or BT, is a resellerother of our
cloud solutionstrademarks appearing in
the United Kingdom (U.K.). this report are our property. This report also contains trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.
Our cloud-based business communications,
collaboration, and customer engagement solutions
provide a single user identityfunction across multiple locations and devices, including smartphones, tablets, PCs and desk phones,
and allow for communication across multiple modes, including
HDhigh-definition (“HD”) voice, video, SMS, messaging and collaboration, conferencing, online meetings, and fax. Our proprietary solutions enable a more productive and dynamic workforce and are architected using industry standards to meet modern business communications
and collaboration requirements, including workforce mobility, “bring-your-own” communications device environments and multiple communications methods.
Our solutions are delivered using a highly available, and
rapidly and easily scalable infrastructure,
and are generally designed for easy self-service activation, provisioning and management with minimal technical expertise or training required. Our solutions scale easily and rapidly, allowing our customers to add new users regardless of where they are located.
TheyOur solutions are generally affordable, requiring little to no upfront infrastructure hardware costs or ongoing maintenance and upgrade costs commonly associated with on-premise systems and can be integrated with other existing communication systems.
RingCentral Office, our flagship offering, is a multi-tenant, multi-location, enterprise-grade communications solution. We also offer RingCentral Professional, primarily an inbound call routing subscription with additional text and fax capabilities targeting smaller deployments; RingCentral Fax, an Internet fax subscription that permits sending and receiving faxes over the Internet; RingCentral Contact Center, an integrated and automated communications solution that improves communications between business and its customers; and RingCentral Glip, a team messaging and collaboration tool that allows teams to share tasks, files, and more.We believe that our solutions go beyond the core functionality of existing on-premise communications solutions by providing additional key benefits that address the changing requirements of business to allow business communications using voice,
HD video web conferencing, SMS, team messaging, collaboration, fax, and
HD video web conferencing.social media. The key benefits of our solutions include:
Location Independence. Our cloud-based solution is designed to be location independent. We seamlessly connect distributed and mobile users, enabling employees to communicate with a single identity whether working from a central location, a branch office, on the road, or at home.
Device Independence. Our solution is designed to work with a broad range of devices, including smartphones, tablets, PCs and desk phones, enabling businesses to successfully implement a “bring-your-own” communications device strategy.
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| • | Location Independence. Our cloud-based solutions are designed to be location independent. We seamlessly connect distributed and mobile users, enabling employees to communicate with a single identity whether working from a central location, a branch office, on the road, or at home. |
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| • | Global. Our RingCentral Global Office capabilities support multinational enterprise workforces. RingCentral Global Office connects multinational workforces globally, while reducing the complexity and high costs of maintaining multiple legacy PBX systems with a single global cloud solution. |
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| • | Device Independence. Our solutions are designed to work with a broad range of devices, including smartphones, tablets, PCs, and desk phones, enabling businesses to successfully implement a “bring-your-own” communications device strategy. |
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| • | Instant Activation and Easy Account Management. Our solutions are designed for rapid deployment and ease of management. Our intuitive graphical user interfaces allow administrators and users to set up and manage their business communications system with little or no IT expertise, training, or dedicated staffing. |
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| • | Scalability. Our cloud-based solutions scale easily and efficiently with the growth of our customers. Customers can add users, regardless of their location, without having to purchase additional infrastructure hardware or software upgrades. |
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| • | Lower Cost of Ownership. We believe that our customers experience significantly lower cost of ownership compared to legacy on-premise systems. Using our cloud-based solutions, our customers can avoid the significant |
Instant Activation; Easy Account Management. Our solutions are designed for rapid deployment and ease of management. Our simple and intuitive graphical user interfaces allow administrators and users to set up and manage their business communications system with little or no IT expertise, training or dedicated staffing. Our solutions work with users’ existing smartphones, tablets, PCs and desk phones. Additionally, if a customer desires new desk phones, as a convenience, we can also provide pre-configured, Plug&Ring-ready phones that can be easily connected to the customer’s existing broadband service.
Scalability. Our cloud-based solutions scale easily and efficiently with the growth of our customers. Customers can add users, regardless of their location, without having to purchase additional infrastructure hardware or software upgrades.
Lower Cost of Ownership. We believe that our customers experience significantly lower cost of ownership compared to legacy on-premise systems. Using our cloud-based solutions, our customers can avoid the significant upfront costs of infrastructure hardware, software, ongoing maintenance and upgrade costs, and the need for dedicated and trained IT personnel to support these systems.
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| • | Seamless and Intuitive Integration with Other Applications.Applications are proliferating within businesses of all sizes. Integration of these business applications with legacy on-premise systems is typically complex and expensive, which limits the ability of businesses to leverage cloud-based applications. Our platform provides seamless and intuitive integration with multiple popular cloud-based business applications such as Microsoft productivity tools, Google G-Suite, Salesforce CRM, Oracle, Okta, Zendesk, Box, and Workday, as well as customer lines-of business applications. |
We have a portfolio of cloud-based offerings that are subscription-based and made available at different monthly rates, varying by the specific functionalities, services, and number of users. We primarily generate revenues from the sale of subscriptions of our offerings, which include the following:
Seamless and Intuitive Integration with Other Cloud-Based Applications.Cloud-based applications are proliferating within businesses of all sizes. Integration of these cloud-based business applications with legacy on-premise systems is typically complex and expensive, which limits the ability of businesses to leverage cloud-based applications. Our platform provides seamless and intuitive integration with multiple popular cloud-based business applications such as Office365, Google Cloud, Salesforce CRM, Oracle, Okta, and Zendesk.
Our Products
We currently offer five products: RingCentral Office, RingCentral Professional, RingCentral Fax, RingCentral Contact Center, and RingCentral Glip.
RingCentral Office.RingCentral Office, our flagship product, issolution, provides a multi-location, multi-user, enterprise-grade communications solution that enables employeesunified experience for communication and collaboration across multiple modes, including HD voice, video, SMS, messaging and collaboration, conferencing, online meetings, and fax. Offered globally, customers can extend RingCentral Office to communicate via different channels and on multiple devices.support their multinational workforce in many countries around the world. This subscription is designed primarily for businesses that require a communications solution, regardless of location, type of device, expertise, size, or budget. Businesses are able to seamlessly connect users working in multiple office locations on smartphones, tablets, PCs and desk phones. We sell RingCentral Office in threefour editions: Essentials, Standard, Premium, and Enterprise. Our Standard Edition of RingCentral Office includesUltimate. The features, capabilities and price per user increase from Essentials to Ultimate. The solution capabilities include high definition voice, call management, mobile applications, voice, business SMS and MMS, fax, team messaging and collaboration, business analytics and reporting, audio, video, audio/video/web conferencing capabilities, and out-of-the-box integrations with other cloud-based business applications, such as Box, Dropbox, Google for Work, Office365, and Outlook.business analytics and reporting. Our Premium and Enterprise Editions include the Standard Edition functionality together with additional software integrations with business applications such as Salesforce CRM, Zendesk, and Desk.com, the abilityplatform also enables customers to create, develop, and deploy custom applicationsintegrations using our Application Programming Interfaces (APIs), high-definition voice, more advanced call routing for our larger customers with multiple business units, and automatic call recording. All editions also vary in the number of included toll-free minutes and number of concurrent video and web conference meeting attendees.APIs. RingCentral Office customers also have available to them RingCentral Global Office.
Key features of RingCentral Office include:
Cloud-Based Business Communications Solutions. We offer multi-user, multi-extension, cloud-based business communications solutions that do not require installation, configuration, management or maintenance of on-premise hardware and software. Our solutions are instantly activated, and deliver a rich set of functionality across multiple locations and devices.
Mobile-Centric Approach.Our solution includes smartphone and tablet mobile applications that customers can use to set up and manage company, department, and user settings from anywhere. Our applications turn iOS and Android smartphones and tablets into business communication devices. Users can change their personal settings instantly and communicate via voice, text, team messaging and collaboration, HD video and web conferencing, and fax. Personal mobile devices are fully integrated into the customer’s cloud-based communication solution, using the company’s numbers, and displaying one of the company’s caller ID for calls made through our mobile applications.
Easy Set-Up and Control. Our user interfaces have a familiar smartphone touch-screen “look and feel” and provide a consistent user experience across smartphones, tablets, PCs and desk phones, making it intuitive and easy for our customers to quickly discover and use our solution across devices. Among other capabilities, administrators can specify and modify company, department, user settings, auto-receptionist settings, call-handling, and routing rules; and add, change, and customize users and departments.
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| • | Cloud-Based Business Communications Solutions. We offer multi-user, multi-extension, cloud-based business communications solutions that do not require installation, configuration, management, or maintenance of on-premise hardware and software. Our solutions are instantly activated and deliver a rich set of functionalities across multiple locations and devices. |
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| • | Collaboration. We offer team messaging and collaboration solutions which allow diverse teams to stay connected through multiple modes of communication. In addition to team messaging and communications, teams can share tasks, notes, group calendars, and files. |
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| • | Mobile-Centric Approach.Our solution includes smartphone and tablet mobile applications that customers can use to set up and manage company, department, and user settings from anywhere. Our applications turn iOS and Android smartphones and tablets into business communication devices. Users can change their personal settings instantly and communicate via voice, text, team messaging and collaboration, HD video and web conferencing, and fax. Personal mobile devices are fully integrated into the customer’s cloud-based communication solution, using the company’s numbers, and displaying one of the company’s caller ID for calls made through our mobile applications. |
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| • | Easy Set-Up and Control. Our user interfaces provide a consistent user experience across smartphones, tablets, PCs, and desk phones, making it intuitive and easy for our customers to quickly discover and use our solution across devices. Among other capabilities, administrators can specify and modify company, department, user settings, auto-receptionist settings, call-handling, and routing rules, and add, change, and customize users and departments. |
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| • | Flexible Call Routing. Our solution includes an auto-attendant to easily customize call routing for the entire company, departments, groups, or individual employees. It includes a robust suite of communication management options, including time of day, caller ID, call queuing, and sophisticated routing rules for complex call handling for the company, departments, groups, and individual employees. |
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| • | Integrated Voice, HD Video and Web Conferencing, Text and Fax Communications with One Business Number. By eliminating the need for multiple business numbers, users are able to easily control how, when, and where they conduct their business communications through routing logic with one number. Employees can stay connected, thus increasing efficiency, productivity, and responsiveness to their customers. Having one business number also enables users to keep personal mobile numbers private. RingCentral Rooms and Rooms Connector bring a cloud web conferencing solution to meeting rooms and support for large meetings and Webinars for a monthly per license add-on fee. |
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| • | Cloud-based Business Application Integrations. Our solution seamlessly integrates with other cloud-based business applications such as Salesforce CRM, Google Cloud, Box, Dropbox, Office365, Outlook, Oracle, Okta, Zendesk, Jira, Asana, and others. For example, our integration with Salesforce CRM brings up customer records immediately based on inbound caller IDs, resulting in increased productivity and efficiency. Our open platform is supported by APIs and software developers’ kits (“SDKs”) that allows developers to integrate our solution with leading business applications or with other custom applications to customize their own business workflows. |
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| • | RingCentral Global Office. Our solution includes RingCentral Global Office, a single global Unified Communications as a Service (“UCaaS”) solution designed for multinational enterprises that allows these companies to support distributed offices and employees globally with a single cloud solution. With RingCentral Global Office, multinational enterprises can operate in other countries while also acting as one integrated business, with capabilities including local phone numbers, local caller ID, worldwide extension-to-extension dialing, and included minute bundles for international calling. |
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| • | RingCentral CloudConnect. RingCentral CloudConnect is a service that allows enterprises to leverage their dedicated and secure connections to exchange data directly with the RingCentral cloud. Customers use their preferred network service provider to connect to the RingCentral cloud through a secure data exchange enabling lower latency, greater network reliability and availability, and added security. |
Flexible Call Routing. Our solution includes an auto-attendant to easily customize call routing for the entire company, departments, groups, or individual employees. It includes a robust suite of communication management options, including time of day, caller ID, call queuing, and sophisticated routing rules for complex call handling for the company, departments, groups, and individual employees.
Integrated Voice, Text, HD Video and Web Conferencing, and Fax Communications with One Business Number. By eliminating the need for multiple business numbers, users are able to easily control how, when, and where they conduct their business communications through routing logic with one number. Employees can stay connected, thus increasing efficiency, productivity and responsiveness to their customers. Having one business number also enables users to keep personal mobile numbers private. Recently, RingCentral introduced Rooms and Rooms Connector to bring a cloud web conferencing solution to meeting rooms for a monthly per license add-on fee.
Cloud-based Business Application Integrations. Our solution seamlessly integrates with other cloud-based business applications such as Salesforce CRM, Google Cloud, Box, Dropbox, Office365, Oracle, Okta, Desk.com, Zendesk, Jira, and Asana. For example, our integration with Salesforce CRM brings up customer records immediately based on inbound caller IDs, resulting in increased productivity and efficiency. Additionally, users can easily fax documents directly from their cloud-based storage accounts. We also offer RingCentral Connect Platform, which is an open platform supported by APIs and Software Development Kits (SDKs) that allows developers to integrate our solution with leading business applications or to customize within their own business workflows.
RingCentral Global Office. Our solution includes RingCentral Global Office, a single global Unified Communications as a Service (UCaaS) solution designed for multinational enterprises that allows these companies to support distributed offices and employees globally with a single cloud solution. With RingCentral Global Office, multinational enterprises can appear local for their regional customers while also acting as one integrated business, with capabilities including local phone numbers, local caller ID, worldwide extension-to-extension dialing, and included minute bundles for international calling.
RingCentral CloudConnect. RingCentral CloudConnect is a service that allows enterprises to leverage their dedicated and private connections to exchange data directly with the RingCentral cloud. Customers use their preferred network service provider to connect to the RingCentral cloud through a private data exchange enabling lower latency, greater network reliability and availability, and added security.
RingCentral Professional. Our RingCentral Professional solution provides a subset of our RingCentral Office solution capabilities designed primarily for smaller businesses. RingCentral Professional is principally used as an inbound call routing subscription with text and fax capabilities.
RingCentral Fax. Our RingCentral Fax solution provides Internet fax capabilities that allow businesses to send and receive fax documents without the need for a fax machine.
RingCentral Contact Center.Our RingCentral Contact Center solution providesis a cloud basedcollaborative contact center solution that delivers omni-channel capabilities soand integrates with RingCentral Office and RingCentral Glip. RingCentral Contact Center enables businesses can allowto transform the way they engage their customers to engage in the manner they prefer.across all channels while effectively maximizing agent availability. The solution leverages technology from NICE inContact, Inc., and has a comprehensive feature set, that integratesand can integrate with RingCentral Office. This enables businesses to build customer loyalty and increase productivity by resolving customer issues faster and more effectively.
RingCentral Engage Digital.RingCentral Engage is a digital customer engagement platform allowing enterprises to interact with their customers through a single platform across all digital channels. The platform uses AI-based smart routing engine that enables agents to efficiently manage customer interactions across digital channels including mobile and in-app messaging, social media, live chats, and email.
RingCentral Engage Voice.Engage Voice is a cloud-based outbound/blended customer engagement platform for midsize and enterprise companies. The platform provides automated dialing capabilities to help accelerate the sales process and improve the time it takes sales teams to reach prospects.
RingCentral Glip. Our RingCentral Glip team messaging and collaboration solution allows diverse teams to stay connected through multiple modes of communication through an integration with RingCentral Office. In addition to usingRingCentralGlip for team messaging and communications, teams can share tasks, notes, group calendars, and files.RingCentralGlip is designed for distributed and mobile teams and offers out-of-the-box integrations with a number of leading cloud business applications such as Asana, Dropbox, Evernote, JIRA,Jira, Github, Google, and others. Available stand-alone, this solution can be upgraded to the full cloud communications capabilities of RingCentral Office.
RingCentral Meetings. RingCentral Meetings is a collaborative meetings solution that offers web meetings, video conferencing, and screen sharing integrated with team messaging. Available stand-alone, this solution can be upgraded to the full cloud communications capabilities of RingCentral Office.
RingCentral Live Reports. RingCentral Live Reports is an add-on for RingCentral Office customers to gather real-time information needed to maximize the performance with dashboards that contain information on agent utilization and overall customer experience.
RingCentral Professional. RingCentral Professional is a cloud based virtual telephone service offering designed for professionals who are on the go. It provides inbound call answering and management services, and includes inbound local, long-distance, and toll-free minutes.
RingCentral Fax. RingCentral Fax provides online fax capabilities that allow businesses to send and receive fax documents without the need for a fax machine. RingCentral Fax capability is made available to all RingCentral Office customers or as a stand-alone offering at monthly subscription rates that vary based on the desired number of pages and phone numbers allotted to the plan.
We have a diverse and growing customer base across a wide range of industries, including advertising, financial services, education, healthcare, legal services, non-profit organizations, real estate, retail, technology, insurance, education, waste management, construction, security services, restaurant, software, solar, automotive dealership, managed care,hospitality, and publishing.state and local government, among others. For the yearsyear ended December 31, 2016, 2015,2019 and 2014, AT&T,2018, none of our customers accounted for more than 10% of total revenue. For the year ended December 31, 2017, revenue generated from one of our carrier resellers accounted for 14%, 13%, and 12%11% of our total revenuesrevenues.
We sell our solutions to enterprise customers, and 13%, 12%, and 11% of our software subscription revenues, respectively. Prior to 2014, we focused our principal efforts on the market for small-small and medium-sized businesses, defined by IDCbusinesses. We define a “customer” as less than 1,000 employees, inone individual billing relationship for the U.S., Canada,subscription to our services, which generally correlates to one company account per customer. We continuously expand our solution offering globally and the U.K. In 2014, we began targeting larger customers through our product development and marketing, and sales and support teams, and in 2015, we began selling to enterprise customers. We believe that there are additional growth opportunities in international markets.
Marketing, Sales and Support
We use a variety of marketing, sales, and support activities to generate and cultivate ongoing customer demand for our subscriptions, acquire new customers, and engage with our existing customers. We sell through both direct and indirect channels. We provide on-boardingonboarding implementation support to help our customers set up and configure their newly purchased communications system, as well as ongoing self-service, phone support, online chat support, and training. We also closely track and monitor customer acquisition costs to assess how we are deploying our marketing, sales, and customer support spending.
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| • | Marketing. Our marketing efforts include search engine marketing, search engine optimization, affiliates, list buys, shared leads, content leads, appointment setting, radio advertising, online display advertising, sports sponsorships, billboard advertising, tradeshows and events, and other forms of demand generation. We track and measure our marketing costs closely across all channels so that we can acquire customers in a cost-efficient manner. |
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| • | Direct Sales. We primarily sell our solutions and subscriptions through direct inbound and outbound sales efforts. We have direct sales representatives located in the U.S. and internationally. |
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| • | Indirect Sales. Our indirect sales channel consists of global and regional networks of resellers, carriers including AT&T, TELUS and BT. Our indirect sales channels help broaden the adoption of our solutions without the need for a large direct sales force. |
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| • | Customer Support and Services. While our intuitive and easy-to-use user interface serves to reduce our customers’ need for support and services, we provide online chat and phone customer support, as well as post-sale implementation support, as an option to help customers configure and use our solution. We track and measure our customer satisfaction and our support costs closely across all channels to provide a high level of customer service in a cost-efficient manner. |
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| • | Strategic Partnerships. We have strategic partnerships with several third parties including Avaya and Atos. |
Marketing. Our marketing efforts include search engine marketing, search engine optimization, affiliates, list buys, shared leads, content leads, appointment setting, radio advertising, online display advertising, billboard advertising, tradeshows and events, and other forms of demand generation. We track and measure our marketing costs closely across all channels so that we can acquire customers in a cost-efficient manner.
Direct Sales. We primarily sell our products and software subscriptions through direct inbound and outbound sales efforts. We have direct sales representatives located in the U.S. and internationally.
Indirect Sales. Our indirect sales channel consists of a network of over 4,000 resellers who are active in selling our solutions and with whom we have direct relationships, including our carrier partners AT&T, TELUS, and BT, which help broaden the adoption of our subscriptions without the need for a large direct field sales force. Our network of resellers includes master agents who manage other sales agents and resellers, resulting in an even larger reseller network.
Customer Support. While our intuitive and easy-to-use user interface serves to reduce our customers’ need for support, we provide online chat and phone customer support, as well as post-sale implementation support, as an option to help customers configure and use our solution. We track and measure our customer satisfaction and our support costs closely across all channels to provide a high level of customer service in a cost-efficient manner.
Research and Development
We believe that continued investment in research and development is critical to expanding our leadership position within the cloud-based business communications solutions market. We devote the majority of our research and development resources to software development. Our engineering team has significant experience in various disciplines related to our platform, such as voice, text, team messaging and collaboration, video and fax processing, mobile application development, IP networking and infrastructure,
contact center, digital customer engagement, user experience, security, and robust multi-tenant cloud-based system architecture.
Our development methodology, in combination with our SaaS delivery model, allows us to provide new and enhanced capabilities on a regular basis. Based on feedback from our customers and prospects and our review of the broader business communications and SaaS markets, we continuously develop new functionality while maintaining and enhancing our existing solution.
Our research We typically have multiple releases per year, where we constantly improve our solutions and development expenses were $65.5 million, $52.9 million,introduce new capabilities and $44.6 millionfeatures to make our customers’ workforce more productive and to build out the feature set required by larger and global enterprises.
As part of our strategy to expand our technological capabilities, we engage in
fiscal years 2016, 2015,strategic transactions from time to time. For example, we acquired Dimelo, a cloud-based digital customer engagement platform, in October 2018, and
2014, respectively.Connect First, Inc. (“Connect First”), a cloud-based outbound/blended customer engagement platform for midsize and enterprise companies, in January 2019. These strategic acquisitions enable us to complement our technology and skill sets and expand our solution reach.
Technology and Operations
Our
platform isplatforms are hosted both in private and public clouds. Our private clouds are built on a highly scalable and flexible infrastructure comprised of commercially available hardware and software components. We believe that both hardware and software components of our platform can be replaced, upgraded or added with minimal or no interruption in service. The system is designed to have no single point-of-failure.
We host our products and serve our customers
Our private cloud is served from over 25 data centers located in North America from two third-party U.S. based data center facilities in San Jose, California and Vienna, Virginia, and we host our products and serve our customersseveral cities in the United Kingdom from two third-party data center facilities in Amsterdam,States and throughout the Netherlands, and Zurich, Switzerland. As a part of our global expansion strategy, we use third-party data center facilities in the U.K., Singapore and Australia, and we plan to add third-party data center facilities in Canada, Brazil, and Japan by the end of 2017, to facilitate local media processing in these regions.world. Our data centers are designed to host mission-critical computer and communications systems with redundant, fault-tolerant subsystems, and compartmentalized security zones. We maintain a security program designed to ensure the security and integrity of customer data, protect against security threats or data breaches, and prevent unauthorized access to our customers’ data. We limit access to on-demand servers and networks at our production and remote backup facilities.
We serve North American customers out of two Points of Presence, known as POPs, one in San Jose, California and the other in Vienna, Virginia. RingCentral subscribers are divided into Parts of Data, or PODs, each comprised of two symmetrical, synchronized units. POPs and PODs are redundant with switchover and failover capabilities between POPs. In addition to the symmetric PODs and POPs, we have also deployed POPs in the U.K., Singapore, and Australia, and we plan to deploy POPs in Canada, Brazil, and Japan by the end of 2017, which serve as an extension of our architecture to help facilitate local media processing for global customers while maintaining core services and data in our POPs in North America and Europe. This architecture enables us to deliver our subscriptions in a scalable and reliable manner. We can manage our customer growth by adding additional PODs and POPs into our delivery infrastructure as required. We leverage third-party network service providers, including Level 3 Communications, Inc. (pending acquisition by CenturyLink, Inc. announced in October 2016), Bandwidth.com, Inc., Novatel Wireless, Inc. and AT&T Inc., for network connectivity. We also obtain connectivity and network services in certain regions from our subsidiary, RCLEC, Inc.
Intellectual Property
We rely on a combination of patent, copyright, and trade secret laws in the U.S. and other jurisdictions, as well as license agreements and other contractual protections, to protect our proprietary technology. We also rely on a number of registered and unregistered trademarks to protect our brand. In addition, we seek to protect our intellectual property rights by implementing a policy that requires our employees and independent contractors involved in the development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property generated or conceived by them on our behalf are our property, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise have in those works or property, to the extent allowable under applicable law.
Our intellectual property portfolio includes
106over 200 issued
U.S. patents, which expire between
20262022 and
2035.2038. We also have
5445 patent applications pending
for examination in the U.S. and
2016 patent applications pending
for examination in foreign jurisdictions, all of which are related to U.S. applications. In general, our patents and patent applications apply to certain aspects of our SaaS and mobile applications and underlying communications infrastructure. We are also a party to various license agreements with third parties that typically grant us the right to use certain third-party technology in conjunction with our
productssolutions and
software subscriptions.
The market for business communications solutions is very large, rapidly evolving, complex, fragmented and defined by changing technology, and customer needs. We expect competition to continue to increase in the future. We believe that the principal competitive factors in our market include:
subscription features and capabilities;
system reliability, availability, and performance;
speed and ease of activation, setup, and configuration;
ownership and control of the underlying technology;
open platform;
integration with mobile devices;
brand awareness and recognition;
simplicity of the pricing model; and
We believe that we generally compete favorably on the basis of the factors listed above.
We face competition from a broad range of providers of business communications solutions. Some of these competitors include:
traditional on-premise, hardware business communications providers such as Alcatel-Lucent S.A.,Enterprise, Avaya Inc., Cisco Systems, Inc., Mitel Networks Corporation, ShoreTel, Inc.,NEC Corporation, and Siemens Enterprise Networks, LLC, any of which may now or in the future also host their solutions through the cloud;
software providers such as Microsoft Corporation (Skype for Business) and Broadsoft,Cisco Systems, Inc. that generally license and/or host their software and may now or in the future also host their solutions, through the cloud, and their resellers including major carriers and cable companies;
established communications providers that resell on-premise hardware, software, and hosted solutions, such as AT&T, Inc., Verizon Communications Inc., Sprint Corporation, and Comcast Corporation in the United States, TELUS and others in Canada, and BT, Vodafone Group Plc, and others in the U.K., all of whom have significantly greater resources than us and do now or may in the future also develop and/or host their own or other solutions through the cloud;
other cloud companies such as 8x8, Inc., Amazon.com, Inc., DialPad, Inc., Fuze Inc., StarBlue, Inc., Intermedia.net, Inc., J2 Global, Inc., LogMeIn, Inc, Microsoft Corporation, Nextiva, Inc., Twilio Inc., Vonage Holdings Corp., Nextiva,West Corporation, and Zoom Video Communications, Inc.;
other large internet companies such as Alphabet Inc. (Google Voice), Facebook, Inc., Fuze (formerly Thinking Phone Networks), Jive Communications,Oracle Corporation, and salesforce.com, Inc., DialPad,any of which might launch its own cloud-based business communication services or acquire other cloud-based business communications companies in the future;
providers of communications platform as a service solutions and messaging software platforms with APIs such as Twilio Inc., j2 Global,Vonage Holding Corp., and Slack Technologies, Inc., and West Corporation; and
on which customers can build diverse solutions by integrating cloud communications into business applications;established contact center and customer relationship management providers such as Five9,Amazon.com, Inc., Aspect Software, Inc., Avaya Inc., Five9, Inc., NICE InContact, Genesys Interactive Intelligence,Telecommunications Laboratories, Inc., Serenova, LLC, Talkdesk, Inc., Vonage Holdings Corp., Salesforce.com, Inc., and NewVoiceMedia.
Twilio Inc.; andDigital engagement vendors such as Brand Embassy Ltd, eGain Corporation, Lithium Technologies, LLC, LivePerson, Inc., SparkCentral Inc., among others named above that may offer similar features.
Employees
and ContractorsAs of December 31,
2016,2019, we had
1,0372,363 full-time
employees. Our employees
including 262 in
research and development, 479 in sales and marketing, 67 in operations, 83 in customer support, and 146 in general and administrative. As of such date, we had 830 employees located in the U.S. and 207 internationally, including 158 in China. None of our employeesFrance are covered by
the Syntec Collective Bargaining Agreement. We are not subject to any other collective bargaining agreements. We believe that our employee relations are good, and we have never experienced any work stoppages.
We also contract with third-party contractors whose employees or subcontractors’ employees perform services for us. We refer to our third-party contractors’ employees and subcontractors’ employees as our contractors. As of December 31, 2016, we had 1,546 of these contractors, including 429 in research and development, 421 in sales and marketing, 86 in operations, 478 in customer support, and 132 in general and administrative. As of such date, we had 63 contractors located in the U.S. and 1,483 internationally, including 937 in the Philippines, 544 in Russia and Ukraine, and 2 in other countries.
As a provider of
communication services over the Internet,
communications services, we are subject to regulation in the U.S. by the FCC. Some of these regulatory obligations include contributing to the Federal Universal Service Fund, Telecommunications Relay Service Fund, and federal programs related to phone number administration; providing access to E-911 services; protecting customer information; and porting phone numbers upon a valid customer request. We are also required to pay state and local 911 fees and contribute to state universal service funds in those states that assess
interconnected Voice over Internet
voice communicationsProtocol (“VoIP”) services. In addition, we have certified a wholly owned subsidiary as a competitive local exchange carrier in
eighteen states and currently intend to obtain certificates for our subsidiary in several additionalthirty-four states. This subsidiary, RCLEC, is subject to the same FCC regulations applicable to telecommunications companies, as well as regulation by the public utility commissions in states where the subsidiary provides services. Specific regulations vary on a state-by-state basis, but generally include the requirement for our subsidiary to register or seek certification to provide its services, to file and update tariffs setting forth the terms, conditions and prices for our intrastate services and to comply with various reporting, record-keeping, surcharge collection, and consumer protection requirements.
As we expand internationally, we will be subject to laws and regulations in the countries in which we offer our subscriptions. Regulatory treatment of Internet communications services over the Internet outside the U.S. varies from country to country, is often unclear, and may be more onerous than imposed on our subscriptions in the U.S. In the United Kingdom, for example, our subscriptions are regulated by Ofcom, which, among other things, requires electronic communications services providers such as our company to provide all users access to both 112 (EU-mandated) and 999 (U.K.-mandated) emergency service numbers at no charge. Similarly, in Canada, our subscriptions are regulated by the CRTC, which, among other things, imposes requirements similar tolike those in the U.S. related to the provision of E-911 services, in all areas of Canada where the wireline incumbent carrier offers such 911 services. Our regulatory obligations in foreign jurisdictions could have a material adverse effect on the use of our subscriptions in international locations.
In the course of providing our services, we collect, store, and process many types of data, including personal data. Moreover, our customers can use our subscriptions to store contact and other personal or identifying information, and to process, transmit, receive, store, and retrieve a variety of communications and messages, including information about their own customers and other contacts. Customers are able, and may be authorized under certain circumstances, to use our subscriptions to transmit, receive, and/or store personal information.
There are a number of federal, state, local, and foreign laws and regulations, such as the European Union's General Data Protection Regulation ("GDPR") and the recently enacted California Consumer Privacy Act, as well as contractual obligations and industry standards, that provide for certain obligations and restrictions with respect to data privacy and security, and the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure, and protection of personal information and other customer data. We expect that with the implementation of our Global Office solution, we may become subject to additional data privacy regulations in other countries throughout the world. The scope of these obligations and restrictions is changing, subject to differing interpretations, and may be inconsistent among countries or conflict with other rules, and their status remains uncertain.
As Internet commerce and communication technologies continue to evolve, thereby increasing online service providers’ and network users’ capacity to collect, store, retain, protect, use, process, and transmit large volumes of personal information, increasingly restrictive regulation by federal, state, or foreign agencies becomes more likely.
Regulations that do not directly apply to our business, but which do apply to our customers and partners, can also impact our business. As we expand our business, addressing customer and partner requirements in new jurisdictions and new verticals often requires investment on our part to address regulations that apply to our customers. Globally, these regulations continue to be introduced and to change over time. Such regulations can impact our ability to offer services to various customer segments, and our cost to deliver our services.
See the section entitled “Risk Factors” for more information.
Geographic Information
For a description of our revenue by geographic location, see Note 13 of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K.
Available Information
Our principal executive offices are located at 20 Davis Drive, Belmont, CA 94002. The telephone number of our principal executive offices is (888) 528-7464, and our main corporate website is www.ringcentral.com. Information contained on, or that can be accessed through, our website, does not constitute part of this Annual Report on Form 10-K and inclusion of our website address in this Annual Report on Form 10-K is an inactive textual reference only.
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, free of charge on our website, www.ringcentral.comir.ringcentral.com as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Additionally, copies of materials filed by usthe “SEC”. In addition, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC may be accessed at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or at the SEC's website, www.sec.gov. For information about the SEC's Public Reference Room, contact 1-800-SEC-0330.
The Company announces material information to the public about the Company, its
productssolutions and services and other matters through a variety of means, including the Company’s website (www.ringcentral.com), the investor relations section of its website (ir.ringcentral.com), press releases, filings with the
Securities and Exchange Commission,SEC, and public conference calls, in order to achieve broad, non-exclusionary distribution of information to the public. The Company encourages investors and others to review the information it makes public in these locations, as such information could be deemed to be material information. Please note that this list may be updated from time to time.
ITEM 1A.
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ITEM 1A. RISK FACTORS |
This Report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risk factors set forth below. The risks and uncertainties described in this Report are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs and have a material adverse effect on us, our business, financial condition and results of operations could be seriously harmed.
Risks Related to Our Business and Our Industry
We have incurred significant losses and negative cash flows in the past and anticipate continuing to incur losses for at least the foreseeable future, and we may therefore not be able to achieve or sustain profitability in the future.
We have incurred substantial net losses since our
inception, including net losses of $29.3 million for fiscal 2016, $32.1 million for fiscal 2015, and $48.3 million for fiscal 2014, and had an accumulated deficit of $239.5 million as of December 31, 2016.inception. Over the past few years, we have spent considerable amounts of time and money to develop new business communications solutions and enhanced versions of our existing business communications solutions to position us for future growth. Additionally, we have incurred substantial losses and expended significant resources upfront to market, promote and sell our solutions and expect to continue to do so in the future. We also expect to continue to invest for future growth, including for advertising, customer acquisition, technology infrastructure, storage capacity, services development and international expansion. In addition, as a public company, we incur significant accounting, legal, and other expenses.
Although our net losses have decreased in recent years, we
We expect to continue to incur losses for at least the foreseeable future and will have to generate and sustain increased revenues to achieve future profitability. Achieving profitability will require us to increase revenues, manage our cost structure, and avoid significant liabilities. Revenue growth may slow, revenues may decline, or we may incur significant losses in the future for a number of possible reasons, including general macroeconomic conditions, increasing competition (including competitive pricing pressures), a decrease in the growth of the markets in which we compete, in particular the SaaS market, or if we fail for any reason to continue to capitalize on growth opportunities. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, service delivery, and quality problems and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed and our stock price could be volatile or decline.
Our relatively limited operating history makes it difficult to evaluate our current business and future prospects, which may increase the risk of investing in our stock.
Although we were incorporated in 1999, we did not formally introduce RingCentral Office, our current flagship product, until 2009. We have encountered and expect to continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly changing markets. If our assumptions regarding these uncertainties are incorrect or change in reaction to changes in our markets, or if we do not manage or address these risks successfully, our results of operations could differ materially from our expectations, and our business could suffer. Any success that we may experience in the future will depend, in large part, on our ability to, among other things:
retain and expand our customer base;
increase revenues from existing customers as they add users and, in the future, purchase additional functionalities and premium editions;
successfully acquire customers on a cost-effective basis;
improve the performance and capabilities of our products and applications through research and development and third-party service providers;
successfully expand our business to larger customers and internationally;
successfully compete in our markets;
continue to innovate and expand our offerings;
continue our relationship with AT&T, BT, TELUS, and other resellers;
successfully protect our intellectual property and defend against intellectual property infringement claims;
generate leads and convert potential customers into paying customers;
maintain and enhance our third-party data center hosting facilities to minimize interruptions in the use of our subscriptions; and
hire, integrate, and retain professional and technical talent.
Our quarterly and annual results of operations have fluctuated in the past and may continue to do so in the future. As a result, we may fail to meet or to exceed the expectations of research analysts or investors, which could cause our stock price to fluctuate.
Our quarterly and annual results of operations have varied historically from period to period, and we expect that they will continue to fluctuate due to a variety of factors, many of which are outside of our control, including:
our ability to retain existing customers, resellers, and resellers,carriers, and expand our existing customers’ user base, and attract new customers;
our ability to introduce new solutions;
the actions of our competitors, including pricing changes or the introduction of new solutions;
our ability to effectively manage our growth;
our ability to successfully penetrate the market for larger businesses;
the mix of annual and multi-year subscriptions at any given time;
the timing, cost, and effectiveness of our advertising and marketing efforts;
the timing, operating cost, and capital expenditures related to the operation, maintenance and expansion of our business;
our ability to successfully and timely execute on, integrate, and realize the benefits of any acquisition, investment, strategic partnership, or other strategic transaction or partnership we may make or undertake;
service outages or actual or perceived information security breaches and any related impact on our reputation;
our ability to accurately forecast revenues and appropriately plan our expenses;
our ability to realize our deferred tax assets;
costs associated with defending and resolving intellectual property infringement and other claims;
changes in tax laws, regulations, or accounting rules;
the timing and cost of developing or acquiring technologies, services or businesses, and our ability to successfully manage any such acquisitions;
the impact of foreign currencies on our business as we continue to expand our business internationally; and
the impact of worldwide economic, political, industry, and market conditions.
Any one of the factors above, or the cumulative effect of some or all of the factors referred to above, may result in significant fluctuations in our quarterly and annual results of operations. This variability and unpredictability could result in our failure to meet our publicly announced guidance or the expectations of securities analysts or investors for any period, which could cause our stock price to decline. In addition, a significant percentage of our operating expenses is fixed in nature and is based on forecasted revenues trends. Accordingly, in the event of revenue shortfalls, we may not be able to mitigate the negative impact on net income (loss) and margins in the short term. If we fail to meet or exceed the expectations of research analysts or investors, the market price of our shares could fall substantially, and we could face costly lawsuits, including securities class-action suits.
Our rapid growth and the quickly changing markets in which we operate make it difficult to evaluate our current business and future prospects, which may increase the risk of investing in our stock.
We have grown rapidly since 2009, when we introduced RingCentral Office, our current flagship product. We have encountered and expect to continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly changing markets. If our assumptions regarding these uncertainties are incorrect or change in reaction to changes in our markets, or if we do not manage or address these risks successfully, our results of operations could differ materially from our expectations, and our business could suffer.
Growth may place significant demands on our management and our infrastructure.
We have recently experienced substantial growth in our business. This growth has placed and may continue to place significant demands on our management and our operational and financial infrastructure. As our operations grow in size, scope, and complexity, we will need to increase our sales and marketing efforts and add additional sales and marketing personnel in various regions worldwide and improve and upgrade our systems and infrastructure to attract, service, and retain an increasing number of customers. For example, we expect the volume of simultaneous calls to increase significantly as our customer base grows. Our network hardware and software may not be able to accommodate this additional simultaneous call volume. The expansion of our systems and infrastructure will require us to commit substantial financial, operational, and technical resources in advance of an increase in the volume of business, with no assurance that the volume of business will increase. Any such additional capital investments will increase our cost base.
Continued growth could also strain our ability to maintain reliable service levels for our customers, resellers, and carriers develop and improve our operational, financial and management controls, enhance our billing and reporting systems and procedures and recruit, train and retain highly skilled personnel. In addition, our existing systems, processes, and controls may not prevent or detect all errors, omissions, or fraud. We may also experience difficulties in managing improvements to our systems, processes, and controls or in connection with third-party software licensed to help us with such improvements. Any future growth, particularly as we continue to expand internationally, would add complexity to our organization and require effective communication and coordination throughout our organization. Additionally, our productivity and the quality of our solutions and services may be adversely affected if we do not integrate and train our new employees quickly and effectively. If we fail to achieve the necessary level of efficiency in our organization as we grow, our business, results of operations and financial condition could be materially and adversely affected.
Our future operating results will rely in part upon the successful execution of our strategic partnerships with Avaya and others, which may not be successful.
A strategic partnership between two independent businesses is a complex, costly, and time-consuming process that will require significant management attention and resources. Realizing the benefits of our strategic partnerships, particularly our relationship with Avaya Holdings Corp. and its subsidiaries ("Avaya"), will depend in part on our ability to work with our strategic partners to develop, market and sell co-branded solutions, such as Avaya Cloud Office by RingCentral ("ACO"). Setting up and maintaining the operations and processes of these strategic partnerships may cause us to incur significant costs, disrupt our business and, if implemented ineffectively, would limit the expected benefits to us. In addition, the process of bringing ACO and other co-branded solutions to market may take longer than anticipated, which could negate or reduce our anticipated benefits and revenue opportunities. In addition, we must be successful in marketing and selling ACO to realize the benefits of our prepayment to Avaya
of $345 million in our common stock. The failure to successfully and timely implement and operate our strategic partnerships could harm our ability to realize the anticipated benefits of these partnerships and could adversely affect our results of operations.
We face intense competition in our markets and may lack sufficient financial or other resources to compete successfully.
The cloud-based business communications and collaboration solutions industry is competitive, and we expect competition to increase in the future. We face intense competition from other providers of business communications and collaboration systems and solutions.
Our competitors include traditional on-premise, hardware business communications providers such as Alcatel-Lucent
S.A.,Enterprise, Avaya Inc., Cisco Systems, Inc., Mitel Networks Corporation,
ShoreTel, Inc.,NEC Corporation, Siemens Enterprise Networks, LLC, their resellers, and
others;others, as well as companies such as
Broadsoft,Microsoft Corporation and Cisco Systems, Inc.
, and their resellers that license their software. In addition, certain of our
resellers are also our competitors.carriers and strategic partners, such as AT&T, BT,
TELUS, Avaya, and
TELUS, for example, each serve as resellersAtos SE ("Atos") sell or are expected to
ussell our solutions, but they are also competitors for business communications. These companies have significantly greater resources than us and currently, or may in the future, develop and/or host their own or other solutions through the cloud. Such competitors may
not be successful in or cease
resellingmarketing and selling our solutions to their customers and ultimately be able to transition some or all of those customers onto their competing solutions, which could materially and adversely affect our revenues and growth.
In this regard, in August 2016, AT&T announced its launch of a competing hosted business communications solution. In recent months, new subscriptions for our solution by AT&T have declined and could continue to decline or cease altogether in the current fiscal year or future periods. In addition, AT&T may transition some or all of its existing customers from our solution. We also face competition from other cloud companies
and established communications providers that resell on-premise hardware, software, and hosted solutions, such as 8x8, Inc.,
DialPad,Amazon.com, Inc., Dialpad, Inc., Fuze,
(formerly Thinking Phone Networks)Inc.,
StarBlue, Inc., Intermedia.net, Inc.,
j2J2 Global, Inc.,
Jive Communications,LogMeIn, Inc, Microsoft Corporation, Nextiva, Inc.,
Microsoft Corporation (Skype for Business), Nextiva,Twilio Inc., Vonage Holdings Corp.,
and West Corporation,
as well as from establishedand Zoom Video Communications, Inc., which announced a voice solution. Established communications providers, such as AT&T, Verizon Communications Inc.,
Sprint Corporation and Comcast Corporation in the United States, TELUS and others in Canada, and BT, Vodafone
Group plc, and others in the U.K., that resell on-premise hardware, software, and hosted solutions,
compete with us in business communications and
theycurrently, or may
in the future, develop and/or host their own
cloud solutions. We may also face competition from other large Internet companies, such as Alphabet Inc.
(Google Voice),
Amazon.com,Facebook, Inc.,
Oracle Corporation, and
Oracle,salesforce.com, inc., any of which might launch its own cloud-based business communications services or acquire other cloud-based business communications companies in the future.
In addition, in 2016 we began sellingWe also compete against providers of communications platform as a
contact center solution.service solutions and messaging software platforms with APIs such as Twilio Inc., Vonage Holdings Corp., and Slack Technologies, Inc., on which customers can build diverse solutions by integrating cloud communications into business applications. We face competition with respect to this solution from contact center
and customer relationship management providers such as
Amazon.com, Inc., Aspect Software, Inc., Avaya Inc., Five9, Inc.,
NICE InContact, Genesys
Interactive Intelligence,Telecommunications Laboratories, Inc.,
Serenova, LLC, Talkdesk, Inc., Vonage Holdings Corp., salesforce.com, inc., and
NewVoiceMedia.Twilio Inc. We also face competition from digital engagement vendors such as Brand Embassy Ltd, eGain Corporation, Lithium Technologies, LLC, LivePerson, Inc., SparkCentral Inc., among others named above that may offer similar features.
Many of our current and potential competitors have longer operating histories, significantly greater resources and name recognition, more diversified product offerings, and larger customer bases than we have. As a result, these competitors may have greater credibility with our existing and potential customers and may be better able to withstand an extended period of downward pricing pressure. In addition, certain of our competitors have partnered with, or been acquired by, and may in the future partner with or acquire, other competitors to offer services, leveraging their collective competitive positions, which makes it more difficult to compete with them and could significantly and adversely affect our results of operations. TheyDemand for our platform is also sensitive to price. Many factors, including our marketing, user acquisition and technology costs, and our current and future competitors’ pricing and marketing strategies, can significantly affect our pricing strategies. Our competitors may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their services than we can to ours. Some of these service providers have in the past and may choose in the future to sacrifice revenues in order to gain market share by offering their services at lower prices or for free.free, or offering alternative pricing models, such as “freemium” pricing, in which a basic offering is provided for free with advanced features provided for a fee, on the services they offer. Our competitors may also offer bundled service arrangements offering a more complete service offering, despite the technical merits or advantages of our subscriptions. Competition could force usresult in a decrease to decrease our prices, slow our growth, increase our customer turnover, reduce our sales, or decrease our market share. The adverse impact
We rely and may in the future rely significantly on our strategic partners, resellers, and carriers to sell our subscriptions; our failure to effectively develop, manage, and maintain our indirect sales channels could materially and adversely affect our revenues.
Our future success depends on our continued ability to establish and maintain a network of channel relationships, and we expect that we will need to expand our network in order to support and expand our historical base of smaller enterprises as well as attract and support larger customers and expand into international markets. An increasing portion of our revenues are
derived from our network of sales agents and resellers, which we refer to collectively as resellers, many of which sell or may in the future decide to sell their own services or services from other business communications providers. We generally do not have long-term contracts with these resellers, and the loss of or reduction in sales through these third parties could materially reduce our revenues. Our competitors may in some cases be effective in causing our current or potential resellers to favor their services or prevent or reduce sales of our subscriptions. Furthermore, while AT&T, BT, and TELUS also sell our solutions, and Avaya is expected to introduce the new ACO solution commencing at the end of the first quarter of 2020, they are also competitors for business communications. These companies have significantly greater resources than us and currently, or may in the future, develop and/or host their own or other solutions through the cloud. Such competitors may cease marketing or selling our solutions to their customers and ultimately be able to transition some or all of those customers onto their competing solutions, which could materially and adversely affect our revenues and growth. In this regard, AT&T launched a shortfallcompeting hosted business communications solution in 2016, and new subscriptions for our solution sold by AT&T declined to an immaterial level in 2017 and into 2018. In August 2018, we entered into a revised agreement with AT&T, under which AT&T resumed reselling our solutions, and sales of our solutions by AT&T have increased as a result, but there can be no guarantee that AT&T will not cease reselling our solutions in the future. We also recently entered into certain agreements for strategic partnerships with Avaya and Atos to sell certain of our solutions. We expect that the ACO solution will be introduced at the end of the first quarter of 2020; however, there can be no guarantee that Avaya or any of its channel partners will be successful in marketing or selling our solutions or that they will not cease marketing or selling our solutions in the future. If AT&T, Avaya and its channel partners, or Atos, are not successful in marketing and selling our solutions or cease to market and sell our solutions, our revenues and growth could be significantly and adversely affected. If we fail to maintain relationships with our resellers, carriers and strategic partners or fail to develop new and expanded relationships in existing or new markets, or if our networks of indirect channel relationships are not successful in their sales efforts, sales of our subscriptions may decrease and our operating results would suffer. In addition, we may not be successful in managing, training, and providing appropriate incentives to our existing resellers, carriers and strategic partners, and they may not be able to commit adequate resources in order to successfully sell our solutions.
Recruiting and retaining qualified resellers and carriers in our
revenuesnetwork and training them in our technology and subscription offerings requires significant time and resources. To develop and expand our indirect sales channels, we must continue to scale and improve our processes and procedures to support these channels, including investment in systems and training. Many resellers and carriers may
not be
magnified if we are unablewilling to
adjust spending adequatelyinvest the time and resources required to
compensate for such shortfall.train their staff to effectively market our subscriptions.
To deliver our subscriptions, we rely on third parties for our network connectivity and
co-location facilities, and for certain of the features in our subscriptions.
We currently use the infrastructure of third-party network service providers, and, in particular, the services of Level 3 Communications, Inc. (pending its acquisition byincluding CenturyLink, Inc. announced in October 2016) and Bandwidth.com, Inc., in North America and several others internationally, to deliver our subscriptions over their networks. Our third-party network service providers provide access to their Internet protocol or IP,(“IP”) networks and public switched telephone networks, or PSTN, and provide call termination and origination services, including 911 emergency calling in the U.S. and equivalent services in Canada and the U.K.,internationally, and local number portability for our customers. We expect that we will continue to rely heavily on third-party network service providers to provide these subscriptions for the foreseeable future. We
Through our wholly-owned local exchange carrier subsidiary, RCLEC, Inc. (“RCLEC”), we also obtain certain connectivity and network services
directly from
our wholly owned subsidiary, RCLEC, Inc., or RCLEC,incumbent local exchange carriers (“ILECS”) and from other competitive local exchange carriers (“CLECs”) in certain geographic
markets; however
markets at lower prices than we pay for such services through third-party network service providers. However, RCLEC also uses the infrastructure of third-party network service providers to deliver its services.services and the ILECs may favor themselves and their affiliates may not provide network services to us at lower prices than we could obtain through third-party CLECs, or at all. If we are unable to continue to reduce our pricing as a result of obtaining network services through our subsidiary, we may be forced to rely on other third-party network service providers and be unable to effectively lower our cost of service. Historically, our reliance on third-party networks has reduced our operating flexibility and ability to make timely service changes and control quality of service, and we expect that this will continue for the foreseeable future. If any of these network service providers stop providing us with access to their infrastructure, fail to provide these services to us on a cost-effective basis, cease operations, or otherwise terminate these services, the delay caused by qualifying and switching to another third-party network service provider, if one is available, could have a material adverse effect on our business and results of operations.
In addition, we currently use and may in the future use third-party service providers to deliver certain features of our subscriptions. For example, we rely on Free Conference Call Global, LLC for some conference calling features, Zoom Video Communications for our HD video and web conferencing and screen sharing features, Layered CommunicationsBandwidth.com for our texting capabilities, and NICE inContact, Inc. (acquired by NICE, Ltd.) for our contact center capabilities. We do not andor may not in the future, have long-term contracts with certain of these third-party providers, including Zoom Video Communications and Layered Communications.providers. If any of these service providers elects to stop providing us with access to their services, fails to provide these services to us on a cost-effective basis, ceases operations,
or otherwise terminates these services, the delay caused by qualifying and switching to another third-party service provider, if one is available, or building a proprietary replacement solution could have a material adverse effect on our business and results of operations.
Finally, if problems occur with any of these third-party network or service providers, it may cause errors or poor call quality in our subscriptions, and we could encounter difficulty identifying the source of the problem. The occurrence of errors or poor call quality in our subscriptions, whether caused by our systems or a third-party network or service provider, may result in the loss of our existing customers, delay or loss of market acceptance of our subscriptions, termination of our relationships and agreements with our resellers or
carriers, or liability for failure to meet service level agreements, and may seriously harm our business and results of operations.
We rely on third-party software that may be difficult to replace or which could cause errors or failures of our subscriptions.
We rely on software licensed from certain third parties in order to offer our solutions. In some cases, we integrate third-party licensed software components into our platform. This software may not continue to be available at reasonable prices or on commercially reasonable terms, or at all. Any loss of the right to use any of this software could significantly increase our expenses and otherwise result in delays in the provisioning of our solutions until equivalent technology is either developed by us, or, if available, is identified, obtained, and integrated. Any errors or defects in third-party software could result in errors or a failure of our solutions, which could harm our business.
Interruptions or delays in service from our third-party data center hosting facilities and co-location facilities could impair the delivery of our subscriptions, require us to issue credits or pay penalties and harm our business.
We currently serve our North American customers from
twogeographically disparate data center hosting facilities
located in
northern California and northern Virginia,North America, where we lease space from Equinix, Inc.
, and other providers, and we
also serve our
European customers
in the U.K. and other European countries from
two third-party data center hosting facilities in
Amsterdam, the Netherlands, and Zurich, Switzerland.Europe. We also use third-party co-location facilities
located in
the U.K., Australia, and Singapore, and we plan to add third-party co-location facilities in Canada, Brazil, and Japan by the end of 2017,various international regions to serve our customers in these regions.
Certain of our solutions are hosted by third party data center facilities including Amazon Web Services, Inc. (“AWS”), NICE inContact, Inc., and Google Cloud Platform. In addition, RCLEC uses
seven third-party co-location facilities to provide us with network services
and we expect RCLEC to use additional third-party co-location facilities in the future. Any damageat several locations. Damage to, or failure of, these facilities, the communications network providers with whom we or they contract, or with the systems by which our communications providers allocate capacity among their customers, including us,
or software errors, have in the past and could
in the future result in interruptions in our services. Additionally, in connection with the
addition of new data centers or expansion or consolidation of our existing data center facilities, we may move or transfer our data and our customers’ data to other data centers. Despite precautions that we take during this process, any unsuccessful data transfers may impair or cause disruptions in the delivery of our subscriptions. Interruptions in our subscriptions may reduce our revenues, may require us to issue credits or pay penalties, subject us to claims and litigation, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our ability to attract and retain customers depends on our ability to provide customers with a highly reliable subscription and even minor interruptions in our subscriptions could harm our brand and reputation and have a material adverse effect on our business.
As part of our current disaster recovery arrangements, our North American and European infrastructure and all of our North American and European customers’ data is currently replicated in near real-time at our two data center facilities in the U.S., and our European production environment and all of our U.K. and other European customers’ data is also currently replicated in near real-time at our two European data center facilities.Europe, respectively. We do not control the operation of these facilities or of our other data center facilities or RCLEC’s co-location facilities, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures, and similar events. They may also be subject to human error or to break-ins, sabotage, acts of vandalism, and similar misconduct.
Despite precautions taken at these facilities, the occurrence of a natural disaster, human error, or an act of terrorism or other unanticipated problems at these facilities could result in lengthy interruptions in our subscriptions. Even with the disaster recovery arrangements in place, our subscriptions could be interrupted.
We may also be required to transfer our servers to new data center facilities in the event that we are unable to renew our leases on acceptable terms, if at all, or the owners of the facilities decide to close their facilities, and we may incur significant costs and possible subscription interruption in connection with doing so. In addition, any financial difficulties, such as bankruptcy or foreclosure, faced by our third-party data center operators, or any of the service providers with which we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers are unable to keep up with our increasing needs for capacity, our ability to grow our business could be materially and adversely impacted.
Failures in Internet infrastructure or interference with broadband access could cause current or potential users to believe that our systems are unreliable, possibly leading our customers to switch to our competitors or to avoid using our subscriptions.
Unlike traditional communications services, our subscriptions depend on our customers’ high-speed broadband access to the
Internet, usually provided through a cable or digital subscriber line, or DSL, connection.Internet. Increasing numbers of users and increasing bandwidth requirements may degrade the performance of our
subscriptionsservices and applications due to capacity constraints and other Internet infrastructure limitations. As our customer base grows and their usage of
communications capacityour services increases, we will be required to make additional investments in network capacity to maintain adequate data transmission speeds, the availability of which may be limited, or the cost of which may be on terms unacceptable to us. If adequate capacity is not available to us as our customers’ usage increases, our network may be unable to achieve or maintain sufficiently high
data transmission capacity, reliability or performance. In addition, if Internet
access service providers
and other third parties providing Internet services have outages or deteriorations in their quality of service, our customers will not have access to our subscriptions or may experience a decrease in the quality of our
subscriptions. Furthermore, as the rate of adoption of new technologies increases, the networks on which our subscriptions and applications rely may not be able to sufficiently adapt to the increased demand for these services, including ours.services. Frequent or persistent interruptions could cause current or potential users to believe that our systems or
subscriptionsservices are unreliable, leading them to switch to our competitors or to avoid our subscriptions, and could permanently harm our reputation and brands.
In addition, users who access our subscriptions and applications through mobile devices, such as smartphones and tablets, must have a high-speed connection, such as Wi-Fi, 3G, 4G,
5G, or LTE, to use our
subscriptionsservices and applications. Currently, this access is provided by companies that have significant and increasing market power in the broadband and Internet access marketplace, including incumbent phone companies, cable companies, and wireless companies. Some of these providers offer
productssolutions and subscriptions that directly compete with our own offerings, which can potentially give them a competitive advantage. Also, these providers could take measures that degrade, disrupt or increase the cost of user access to third-party services, including our subscriptions, by restricting or prohibiting the use of their infrastructure to support or facilitate third-party services or by charging increased fees to third parties or the users of third-party services, any of which would make our subscriptions less attractive to users, and reduce our revenues.
On March 12, 2015,
Further, in January 2018, the
FCCFederal Communications Commission (the “FCC”) released an order reclassifying
both wired and wireless broadband Internet access as
a telecommunicationsan information service, subject to certain provisions of Title
III of the Communications
Act, including most significantly prohibiting unjust or unreasonable practices or discrimination but not regulating rates. The newAct. Among other things, the order eliminates rules
which went into effect on June 12,adopted in 2015
specifically prohibitthat prohibited broadband providers from blocking,
impairing, or degrading access to legal content, applications, services, or non-harmful
devices; impairingdevices, or
degrading lawful Internet traffic on the basis of content, application, services, or non-harmful devices; and engaging in the practice of paid prioritization, e.g., the favoring of some lawful Internet traffic over other traffic in exchange for higher payments.
The order was contested in federal court, was largely affirmed by a three-judge panel, and certain parties have requested rehearing by the full court. A number of
companies and trade associations filed legal appeals seeking to overturnstates have enacted or are considering legislation or executive actions that would regulate the
new rules. On June 14, 2016, the United States Court of Appeals for the District of Columbia Circuit (DC Circuit) issued a 2-1 decision upholding the FCC’s order. On July 29, 2016, a number of telecommunications companies and trade associations asked the full DC Circuit to rehear the case. In addition, the new chairman of the FCC has repeatedly stated his opposition to the reclassificationconduct of broadband
Internet access as a telecommunications service.providers. We cannot predict whether the
new rulesFCC order or state initiatives will be
modified, overturned, or vacated by legal action of the court,
federal or
state legislation, or the FCC.
If so,Under the new FCC rules, broadband
internetInternet access providers may be able to charge web-based services such as ours for priority access to customers, which could result in increased costs and a loss of existing users, impair our ability to attract new users, and materially and adversely affect our business and opportunities for growth.
Most
Interruptions in our services caused by undetected errors, failures, or bugs in our subscriptions could harm our reputation, result in significant costs to us, and impair our ability to sell our subscriptions.
Our subscriptions may have errors or defects that customers identify after they begin using them that could result in unanticipated interruptions of service. Internet-based services frequently contain undetected errors and bugs when first introduced or when new versions or enhancements are released. While the substantial majority of our customers are small and medium-sized businesses, the use of our subscriptions in complicated, large-scale network environments may terminateincrease our exposure to undetected errors, failures, or bugs in our subscriptions. Although we test our subscriptions to detect and correct errors and defects before their general release, we have, from time to time, experienced significant interruptions in our subscriptions as a result of such errors or defects and may experience future interruptions of service if we fail to detect and correct these errors and defects. The costs incurred in correcting such defects or errors may be substantial and could harm our results of operations. In addition, we rely on hardware purchased or leased and software licensed from third parties to offer our subscriptions.
Any defects in, or unavailability of, our or third-party software or hardware that cause interruptions of our subscriptions could, among other things:
cause a reduction in revenues or delay in market acceptance of our subscriptions;
require us to pay penalties or issue credits or refunds to our customers, resellers, or carriers, or expose us to claims for damages;
cause us to lose existing customers and make it more difficult to attract new customers;
divert our development resources or require us to make extensive changes to our software, which would increase our expenses and slow innovation;
increase our technical support costs; and
harm our reputation and brand.
We rely on third parties, including third parties outside the U.S., for some of our software development, quality assurance, operations, and customer support.
We currently depend on various third parties for some of our software development efforts, quality assurance, operations, and customer support services. Specifically, we outsource some of our software development and design, quality assurance, and operations activities to third-party contractors that have employees and consultants located in St. Petersburg, Russia, Odessa, Ukraine, and Manila, the Philippines. In addition, we outsource a portion of our customer support, inside sales and network operation control functions to third-party contractors located in Manila, the Philippines. Our dependence on third-party contractors creates a number of risks, in particular, the risk that we may not maintain service quality, control, or effective management with respect to these business operations. In addition, recent political and military events in Ukraine, poor relations between the U.S. and Russia, and sanctions by the U.S. and the EU against Russia could have an adverse impact on our third-party software development and quality assurance operations in Ukraine and Russia. Additionally, we rely on purchased or leased hardware and software licensed from third parties in order to offer our subscriptions, and in some cases, we integrate third-party licensed software components into our platform. Any errors or defects in third-party hardware or software could result in errors or a failure of our subscriptions which could harm our business.
We anticipate that we will continue to depend on these and other third-party relationships in order to grow our business for the foreseeable future. If we are unsuccessful in maintaining existing and, if needed, establishing new relationships with third parties, our ability to efficiently operate existing services or develop new services and provide adequate customer support could be impaired, and, as a result, our competitive position or our results of operations could suffer.
A cyber-attack, information security breach or denial of service event could delay or interrupt service to our customers, harm our reputation, or subject us to significant liability.
Our operations depend on our ability to protect our production and corporate information technology services from interruption or damage from unauthorized entry, computer malware or other events beyond our control. We have, from time to time, been subject to communications fraud and cyber-attacks by malicious actors, and denial of service events, and we may be subject to similar attacks in the future. We cannot assure you that our backup systems, regular data backups, security controls and other procedures currently in place, or that may be in place in the future, will be adequate to prevent significant damage, system failure, service outages, data breach, data loss, or increased charges from our technology vendors. Also, our subscriptions are web-based. The amount of data we store for our serviceusers increases as our business grows. We host services, which includes hosting customer data, both in co-located data centers and in multiple public cloud services. Our solutions allow users to store files, tasks, calendar events, messages and other data indefinitely on our services. We also maintain sensitive data related to our technology and business, and that of our employees, strategic partners, and customers, including intellectual property, proprietary business information and personally identifiable information (also called personal data) on our own systems and in multiple vendors’ cloud services. As a result of maintaining larger volumes of data and user files and/or as a result of our continued movement up market, or movement into new customer segments and acquisition of larger and more recognized customers, we may become more of a target for hackers, nation states and other malicious actors. In addition, we use third-party vendors which, in some cases, have access to our data and our customers’ data. We employ layered security measures and have a means of working with third parties who report vulnerabilities to us. Despite the implementation of security measures by us or our vendors, our computing devices, infrastructure, or networks, or our vendors’ computing devices, infrastructure, or networks, may be vulnerable to hackers, computer viruses, worms, other malicious software programs, or similar disruptive problems that are caused by or through a security weakness or vulnerability in our or our vendors’ infrastructure, network, or business practices or our or our vendors’ customers, employees, business partners, consultants, or other Internet users who attempt to invade our or our vendors’ corporate and personal computers, tablets, mobile devices, software, data networks, or voice networks. If there is a security weakness or vulnerability in our, our vendors’, or our customers’ infrastructure, networks, or business practices that is successfully targeted, we could face increased costs, liability claims, including contractual liability claims relating to security obligations in agreements with our partners and our customers, fines, reduced revenue, or harm to our reputation or competitive position. In addition, even if not targeted, in strengthening our security controls or in remediating security vulnerabilities, we could incur increased costs and capital expenditures.
Further, in some cases we do not have in place disaster recovery facilities for certain ancillary services, such as email delivery of messages. We rely on encryption and authentication technology to ensure secure transmission of and access to confidential information, including customer credit card numbers, debit card numbers, direct debit information, customer communications, and files uploaded by our customers. Advances in computer capabilities, new discoveries in the field of cryptography, discovery of software bugs or vulnerabilities, discovery of hardware bugs or vulnerabilities, social engineering
activities, or other developments may result in a compromise or breach of the technology we use to protect our data and our customer data, or of the data itself.
Additionally, third parties have attempted in the past, and may attempt in the future, to induce domestic and international employees, consultants, or customers into disclosing sensitive information, such as user names, provisioning data, customer proprietary network information (“CPNI”) or other information in order to gain access to our customers’ user accounts or data, or to our data. CPNI includes information such as the phone numbers called by a customer, the frequency, duration, and timing of such calls, and any services purchased by the consumer, such as call waiting, call forwarding, and caller ID, in addition to other information that may appear on a customer’s bill. Third parties may also attempt to induce employees, consultants, or customers into disclosing sensitive information regarding our intellectual property and other confidential business information, our customers, the customer information we hold, or our information technology systems. In addition, the techniques used to obtain unauthorized access, to perform hacking, phishing and social engineering, or to sabotage systems change and evolve frequently and may not be recognized until launched against a target, may be new and previously unknown or little-known, or may not be detected or understood until well after such actions are conducted. We may be unable to anticipate these techniques or to implement adequate preventative measures, and any security breach or other incident may take longer than expected to remediate or otherwise address. Any system failure or security breach that causes interruptions or data loss in our operations or in the computer systems of our customers or leads to the misappropriation of our or our customers’ confidential or personal information could result in significant liability to us, loss of our intellectual property, cause our subscriptions to be perceived as not being secure, cause considerable harm to us and our reputation (including requiring notification to customers, regulators, or the media), and deter current and potential customers from using our subscriptions. Any of these events could have a material adverse effect on our business, results of operations, and financial condition.
It is critical to our business that our information and our employees’, strategic partners’, and customers’ sensitive information remains secure and that our customers perceive that this information is secure. An information security incident could result in unauthorized access to, loss of, or unauthorized disclosure of such information. A cybersecurity breach could expose us to litigation, indemnity obligations, government investigations, contractual liability, and other possible liabilities. Additionally, a cyber-attack or other information security incident, whether actual or perceived, could result in negative publicity, which could harm our reputation and reduce our customers’ confidence in the effectiveness of our solutions, which could materially and adversely affect our business and operating results. A breach of our security systems could also expose us to increased costs, including remediation costs, disruption of operations, or increased cybersecurity protection costs, that may have a material adverse effect on our business. In addition, a cybersecurity breach of our customers’ systems can also result in exposure of their authentication credentials, unauthorized access to their accounts, exposure of their account information and data (including CPNI), and fraudulent calls on their accounts, which can subsequently have similar actual or perceived impacts to us as described above. A cybersecurity breach of our partners’ or vendors’ systems can result in similar actual or perceived impacts.
While we maintain cybersecurity insurance, our insurance may be insufficient to cover all liabilities incurred by privacy or security incidents. We also cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that an insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.
Laws, regulations, and enforcement actions relating to security and privacy information continue to evolve. We have incurred and expect to continue to incur significant expenses to prevent security incidents. It is possible that, in order to support changes to applicable laws and to support our expansion of sales into new geographic areas or into new industry segments, we will need to increase or change our cybersecurity systems and expenditures. Further, it is possible that changes to laws and regulations relating to security and privacy may make it more expensive to operate in certain jurisdictions and may increase the risk of our non-compliance with such changing laws and regulations.
Potential problems with our information systems could interfere with our business and operations.
We rely on our information systems and those of third parties for processing customer orders, distribution of our subscriptions, billing our customers, processing credit card transactions, customer relationship management, supporting financial planning and analysis, accounting functions and financial statement preparation, and otherwise running our business. Information systems may experience interruptions, including interruptions of related services from third-party providers, which may be beyond our control. Such business interruptions could cause us to fail to meet customer requirements. All information systems, both internal and external, are potentially vulnerable to damage or interruption from a variety of sources, including without limitation, computer viruses, security breaches, energy blackouts, natural disasters, terrorism, war, telecommunication failures, employee or
other theft, and third-party provider failures. In addition, since telecommunications billing is inherently complex and requires highly sophisticated information systems to administer, our internally developed billing system, which is currently being implemented, may experience errors or we may improperly operate the system, which could result in the system incorrectly calculating the fees owed by our customers for our subscriptions or related taxes and administrative fees. Any such errors in our customer billing could harm our reputation and cause us to violate truth in billing laws and regulations. Our current internally developed billing system requires us to process an increasing number of invoices manually, which could result in billing errors. Any errors or disruption in our information systems and those of the third parties upon which we rely could have a significant impact on our business. In addition, we may implement further and enhanced information systems in the future to meet the demands resulting from our growth and to provide additional capabilities and functionality. The implementation of new systems and enhancements is frequently disruptive to the underlying business of an enterprise, and can be time-consuming and expensive, increase management responsibilities, and divert management attention.
We depend largely on the continued services of our senior management and other highly-skilled employees, and if we are unable to hire, retain, manage and motivate our employees, we may not be able to grow effectively and our business, results of operations and financial condition could be adversely affected.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue opportunities and services innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience, and effort of our co-founder, Chairman and Chief Executive Officer, Vladimir Shmunis. None of our executive officers or other senior management personnel is bound by a written employment agreement and any of them may therefore terminate employment with us at any time without penalty,with no advance notice. The replacement of any of these senior management personnel would likely involve significant time and increasedcosts, and such loss could significantly delay or prevent the achievement of our business objectives. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition, or results of operations.
Our future success also depends on our ability to continue to attract and retain highly skilled personnel. We believe that there is, and will continue to be, intense competition for highly skilled technical and other personnel with experience in our industry in the San Francisco Bay Area, where our headquarters is located, in Denver, Colorado, where our U.S. sales and customer support office and our network operations center is located, and in other locations where we maintain offices. In addition, changes to U.S. immigration policies, particularly to H-1B and other visa programs, and restrictions on travel could restrain the flow of technical and professional talent into the U.S. and may inhibit our ability to hire qualified personnel. We must provide competitive compensation packages and a high-quality work environment to hire, retain, and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development, marketing, and sale of existing and new subscriptions, which could have a material adverse effect on our business, financial condition, and results of operations. To the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information. Volatility in, or lack of performance of, our stock price may also affect our ability to attract and retain key personnel.
Increased customer turnover, or costs we incur to retain
and upsell our customers,
and encourage them to add users and, in the future, to purchase additional functionalities and premium subscription editions, could materially and adversely affect our financial performance.
Although we have
recently begun to enterentered into long-term contracts with larger customers,
ourthose customers
generallywho do not have long-term contracts with us
and these customers may terminate their subscriptions at any time without penalty or early termination charges. We cannot accurately predict the rate of customer terminations or average monthly subscription cancellations or failures to renew, which we refer to as turnover. Our customers with subscription agreements have no obligation to renew their subscriptions for our service after the expiration of their initial subscription period, which is typically between one and three years. In the event that these customers do renew their subscriptions, they may choose to renew for fewer users, shorter contract lengths, or for a less expensive subscription plan or edition. We cannot predict the renewal rates for customers that have entered into subscription contracts with us.
Customer turnover, as well as reductions in the number of users for which a customer subscribes, each could have a significant impact on our results of operations, as does the cost we incur in our efforts to retain our customers and encourage them to upgrade their subscriptions and increase their number of users. Our turnover rate could increase in the future if customers are not satisfied with our subscriptions, the value proposition of our subscriptions or our ability to otherwise meet their needs and expectations. Turnover and reductions in the number of users for whom a customer subscribes may also increase due to factors beyond our control, including the failure or unwillingness of customers to pay their monthly subscription fees due to financial constraints and the impact of a
slowing economy. Due to turnover and reductions in the number of users for whom a customer subscribes, we have tomust acquire new customers, or acquire new users within our existing customer base, on an ongoing basis simply to maintain our existing level of customers and revenues. If a significant number of customers terminate, reduce, or fail to renew
their subscriptions, we may be required to incur significantly higher marketing expenditures than we currently anticipate in order to increase the number of new customers or to upsell existing customers, and such additional marketing expenditures could harm our business and results of operations.
Our future success also depends in part on our ability to sell additional subscriptions and additional functionalities to our current customers. This may require increasingly sophisticated and more costly sales efforts and a longer sales cycle. Any increase in the costs necessary to upgrade, expand and retain existing customers could materially and adversely affect our financial performance. If our efforts to convince customers to add users and, in the future, to purchase additional functionalities are not successful, our business may suffer. In addition, such increased costs could cause us to increase our subscription rates, which could increase our turnover rate.
If we are unable to attract new customers to our subscriptions or upsell to those customers on a cost-effective basis, our business will be materially and adversely affected.
In order to grow our business, we must continue to attract new customers and expand the number of users in, and services provided to, our existing customer base on a cost-effective basis. We use and periodically adjust the mix of advertising and marketing programs to promote our subscriptions. Significant increases in the pricing of one or more of our advertising channels would increase our advertising costs or may cause us to choose less expensive and perhaps less effective channels to promote our subscriptions. As we add to or change the mix of our advertising and marketing strategies, we may need to expand into channels with significantly higher costs than our current programs, which could materially and adversely affect our results of operations. We will incur advertising and marketing expenses in advance of when we anticipate recognizing any revenues generated by such expenses, and we may fail to otherwise experience an increase in revenues or brand awareness as a result of such expenditures. We have made in the past, and may make in the future, significant expenditures and investments in new advertising campaigns, and we cannot assure you that any such investments will lead to the cost-effective acquisition of additional customers. If we are unable to maintain effective advertising programs, our ability to attract new customers could be materially and adversely affected, our advertising and marketing expenses could increase substantially, and our results of operations may suffer.
Some of our potential customers learn about us through leading search engines, such as Google, Yahoo!, and Bing. While we employ search engine optimization and search engine marketing strategies, our ability to maintain and increase the number of visitors directed to our website is not entirely within our control. If search engine companies modify their search algorithms in a manner that reduces the prominence of our listing, or if our competitors’ search engine optimization efforts are more successful than ours, or if search engine companies restrict or prohibit us from using their services, fewer potential customers may click through to our website. In addition, the cost of purchased listings has increased in the past and may increase in the future. A decrease in website traffic or an increase in search costs could materially and adversely affect our customer acquisition efforts and our results of operations.
Most
Significant portion of our revenues today come from small and medium-sized businesses, which may have fewer financial resources to weather an economic downturn.
Most
A significant portion of our revenues today come from small and medium-sized businesses. These customers may be materially and adversely affected by economic downturns to a greater extent than larger, more established businesses. These businesses typically have more limited financial resources, including capital-borrowing capacity, than larger entities. As the majority of our customers pay for our subscriptions through credit and debit cards, weakness in certain segments of the credit markets and in the U.S. and global economies has resulted in and may in the future result in increased numbers of rejected credit and debit card payments, which could materially affect our business by increasing customer cancellations and impacting our ability to engage new small and medium-sized customers. If small and medium-sized businesses experience financial hardship as a result of a weak economy, industry consolidation or for any other reason, the overall demand for our subscriptions could be materially and adversely affected.
We face significant risks in our strategy to target medium-sized and larger businesses for sales of our subscriptions and, if we do not manage these efforts effectively, our business and results of operations could be materially and adversely affected.
Sales to medium-sized and larger businesses continue to grow in both absolute dollars and as a percentage of our total sales. As we continue to target more of our sales efforts to medium-sized and larger businesses, we expect to incur higher costs and longer sales cycles and we may be less effective at predicting when we will complete these sales. In these market segments, the decision to purchase our subscriptions generally requires the approval of more technical personnel and management levels within a potential customer’s organization, and therefore, these types of sales require us to invest more time educating these potential customers about the benefits of our subscriptions. In addition, larger customers may demand more features, integration services, and customization.customization, and may require highly skilled sales and support personnel. Our investment in marketing our
subscriptions to these potential customers may not be successful, which could significantly and adversely affect our results of operations and our overall ability to grow our customer base.
We also have only limited experience in
developing and managing sales channels and distribution arrangements for larger businesses. Furthermore, many medium-sized and larger businesses that we target for sales may already purchase business communications and solutions from our larger competitors. As a result of these factors, these sales opportunities may require us to devote greater research and development resources and sales support to individual customers, and invest in hiring and retaining highly skilled personnel, resulting in increased costs and could likely lengthen our typical sales cycle, which could strain our limited sales and support resources. Moreover, these larger transactions may require us to delay recognizing the associated revenues we derive from these customers until any technical or implementation requirements have been met. Furthermore, as we have limited experience selling to larger businesses, our investment in marketing our subscriptions to these potential customers may not be successful, which could materially and adversely affect our results of operations and our overall ability to grow our customer base.
We rely significantly on a network of resellers to sell our subscriptions; our failure to effectively develop, manage, and maintain our indirect sales channels could materially and adversely affect our revenues.
Our future success depends on our continued ability to establish and maintain a network of channel relationships, and we expect that we will need to expand our network in order to support and expand our historical base of smaller enterprises as well as attract and support larger customers and expand into international markets. An increasing portion of our revenues are derived from our network of sales agents and resellers, which we refer to collectively as resellers, many of which sell or may in the future decide to sell their own services or services from other business communications providers. We generally do not have long-term contracts with these resellers, and the loss of or reduction in sales through these third parties could materially reduce our revenues. Our competitors may in some cases be effective in causing our current or potential resellers to favor their services or prevent or reduce sales of our subscriptions. Furthermore, while AT&T, BT and TELUS serve as resellers to us, they are also competitors for business communications. These companies have significantly greater resources than us and currently, or may in the future, develop and/or host their own or other solutions through the cloud. Such competitors may cease reselling our solutions to their customers and ultimately be able to transition some or all of those customers onto their competing solutions, which could materially and adversely affect our revenues and growth. In this regard, in August 2016, AT&T announced its launch of a competing hosted business communications solution. In recent months, new subscriptions for our solution by AT&T have declined and could continue to decline or cease altogether in the current fiscal year or future periods. In addition, AT&T may transition some or all of its existing customers from our solution. If we fail to maintain relationships with our resellers, fail to develop relationships with new resellers in new markets or expand the number of resellers in our network in existing markets, or if we fail to manage, train, or provide appropriate incentives to our existing resellers, or if our resellers are not successful in their sales efforts, sales of our subscriptions may decrease and our operating results would suffer. If we are unable to maintain our relationships with AT&T, BT or TELUS, or if these resellers reduce resources committed to reselling the service, our results of operations may suffer.
Recruiting and retaining qualified resellers in our network and training them in our technology and subscription offerings requires significant time and resources. To develop and expand our indirect sales channels, we must continue to scale and improve our processes and procedures to support these channels, including investment in systems and training. Many resellers may not be willing to invest the time and resources required to train their staff to effectively market our subscriptions.
Support for smartphones and tablets are an integral part of our solutions. If we are unable to develop robust mobile applications that operate on mobile platforms that our customers use, our business and results of operations could be materially and adversely affected.
Our solutions allow our customers to use and manage our cloud-based business communications solution on smart devices. As new smart devices and operating systems are released, we may encounter difficulties supporting these devices and services, and we may need to devote significant resources to the creation, support, and maintenance of our mobile applications. In addition, if we experience difficulties in the future integrating our mobile applications into smart devices or if problems arise with our relationships with providers of mobile operating systems, such as those of Apple Inc. or Alphabet Inc. (the parent company of Google Inc.), our future growth and our results of operations could suffer.
If we are unable to develop, license, or acquire new services or applications on a timely and cost-effective basis, our business, financial condition, and results of operations may be materially and adversely affected.
The cloud-based business communications industry is an emerging market that is characterized by rapid
development of and changes in customer requirements, frequent introductions of new and enhanced services, and continuing and rapid technological advancement. We cannot predict the effect of technological changes on our
business. Tobusiness, and the market for cloud-based business communications may develop more slowly than we anticipate, or develop in a manner different than we expect, and our solutions could fail to achieve market acceptance. Our continued growth depends on continued use of voice and video communications by businesses, as compared to email and other data-based methods, and future demand for and adoption of Internet voice and video communications systems and services. In addition, to compete successfully in this emerging market, we must anticipate and adapt to technological changes and evolving industry standards, and continue to design, develop, manufacture, and sell new and enhanced services that provide increasingly higher levels of performance and reliability at lower cost. Currently, we derive a majority of our revenues from subscriptions to RingCentral Office, and we expect this will continue for the foreseeable future. However, our future success will also depend on our ability to introduce and sell new services, features, and functionality that enhance or are beyond the
voice, fax, and text communications subscriptions we currently offer, as well as to improve usability and support and increase customer satisfaction. Our failure to develop solutions that satisfy customer preferences in a timely and cost-effective manner may
harm our ability to renew our subscriptions with existing customers and create or increase demand for our subscriptions and may materially and adversely impact our results of operations.
The introduction of new services by competitors or the development of entirely new technologies to replace existing offerings could make our solutions obsolete or adversely affect our business and results of operations. Announcements of future releases and new services and technologies by our competitors or us could cause customers to defer purchases of our existing subscriptions, which also could have a material adverse effect on our business, financial condition or results of operations. We may experience difficulties with software development, operations, design, or marketing that could delay or prevent our development, introduction, or implementation of new or enhanced services and applications. We have in the past experienced delays in the planned release dates of new features and upgrades and have discovered defects in new services and applications after their introduction. We cannot assure you that new features or upgrades will be released according to schedule, or that, when released, they will not contain defects. Either of these situations could result in adverse publicity, loss of revenues, delay in market acceptance, or claims by customers brought against us, all of which could harm our reputation, business, results of operations, and financial condition. Moreover, the development of new or enhanced services or applications may require substantial investment, and we must continue to invest a significant amount of resources in our research and development efforts to develop these services and applications to remain competitive. We do not know whether these investments will be successful. If customers do not widely adopt any new or enhanced services and applications, we may not be able to realize a return on our investment. If we are unable to develop, license, or acquire new or enhanced services and applications on a timely and cost-effective basis, or if such new or enhanced services and applications do not achieve market acceptance, our business, financial condition, and results of operations may be materially and adversely affected.
A cyber attack, information security breach or denial of service could delay or interrupt service to our customers, harm our reputation, or subject us to significant liability.
Our operations depend on our ability to protect our production services from interruption or damage from unauthorized entry, computer viruses or other events beyond our control. We have from time to time been subject to communications fraud and cyber-attacks by malicious actors, and denial of service, or DoS, and we may be subject to similar attacks in the future. We cannot assure you that our backup systems, regular data backups, security protocols and other procedures currently in place, or that may be in place in the future, will be adequate to prevent significant damage, system failure, or data loss. Also, our subscriptions are web-based, the amount of data we store for our users on our servers has been increasing as our business has grown, we now host services, which includes hosting customer data, both in co-located data centers and public cloud services such as AWS, and our RingCentral Glip product allows users to store files and conversations indefinitely on our service. As a result of maintaining larger volumes of data and user files and/or as a result of our continued move upmarket and acquisition of larger and more recognized customers, RingCentral may become a more attractive target for hackers and other malicious actors. In addition, we use third-party vendors which in some cases have access to our data and our customers’ data. Despite the implementation of security measures by us or our vendors, our computing devices, infrastructure or networks, or our vendors’ computing devices, infrastructure or networks may be vulnerable to hackers, computer viruses, worms, other malicious software programs or similar disruptive problems that are caused by or through our or our vendors, customers, employees, business partners, consultants or other Internet users who attempt to invade our or our vendors’ public and private computers, tablets, mobile devices, software, data networks, or voice networks. Further, in some cases we do not have in place disaster recovery facilities for certain ancillary services, such as email delivery of messages. We rely on encryption and authentication technology to ensure secure transmission of and access to confidential information, including customer credit card numbers, debit card numbers, direct debit information, customer communications, and files uploaded by our customers. Advances in computer capabilities, new discoveries in the field of cryptography, discovery of software bugs, social engineering activities, or other developments may result in a compromise or breach of the technology we use to protect RingCentral and customer data, or of the data itself.
Additionally, third parties have attempted in the past, and may attempt in the future, to fraudulently induce domestic and international employees, consultants, or customers into disclosing sensitive information, such as user names, passwords or customer proprietary network information, or CPNI, or other information in order to gain access to our customers’ user accounts or data, or to our data. CPNI includes information such as the phone numbers called by a consumer, the frequency, duration, and timing of such calls, and any services purchased by the consumer, such as call waiting, call forwarding, and caller ID, in addition to other information that may appear on a consumer’s bill. Third parties may also attempt to induce employees, consultants, or customers into disclosing sensitive information regarding our intellectual property and other confidential business information, our customers or customer information, or our information technology systems. In addition, the techniques used to obtain unauthorized access, to perform hacking, phishing and social engineering, or to sabotage systems, change and evolve frequently and may not be recognized until launched against a target. We may be unable to anticipate these techniques or to implement adequate preventative measures. Any system failure or security breach that causes interruptions or data loss in our operations or in the computer systems of our customers or leads to the misappropriation of our or our customers’ confidential or personal information, or CPNI, could result in significant liability to us, cause our subscriptions to be perceived as not being secure, cause considerable harm to us and our reputation (including requiring notification to customers, regulators or the media), and deter current and potential customers from using our subscriptions. Any of these events could have a material adverse effect on our business, results of operations, and financial condition.
We also maintain sensitive data related to our employees, strategic partners, and customers including intellectual property, proprietary business information and personally identifiable information on our own systems. We employ layered security measures; however, we may face threats and security incidents across our infrastructure including unauthorized access, security breaches, and other system disruptions.
It is critical to our business that our employees’, strategic partners’ and customers’ sensitive information remains secure and that our customers perceive that this information is secure. An information security incident could result in unauthorized access to, loss of, or unauthorized disclosure of such information. A cybersecurity breach could expose us to litigation, indemnity obligations, government investigations and other possible liabilities. Additionally, a cyber attack or other information security incident, whether actual or perceived, could result in negative publicity which could harm our reputation and reduce our customers’ confidence in the effectiveness of our solutions, which could materially and adversely affect our business and operating results. A breach of our security systems could also expose us to increased costs including remediation costs, disruption of operations, or increased cybersecurity protection costs that may have a material adverse effect on our business. In addition, a cybersecurity breach of our customers’ systems can also result in exposure of their authentication credentials, unauthorized access to their accounts, exposure of their account information (including CPNI), and fraudulent calls on their accounts, which can subsequently have similar actual or perceived impacts to RingCentral as described above.
We rely on third parties, including third parties outside the U.S., for some of our software development, quality assurance, operations, and customer support.
We currently depend on various third parties for some of our software development efforts, quality assurance, operations, and customer support services. Specifically, we outsource some of our software development and design, quality assurance, and operations activities to third-party contractors that have employees and consultants located in St. Petersburg, Russia, Odessa, Ukraine, and Manila, the Philippines. In addition, we outsource a portion of our customer support, inside sales and network operation control functions to third-party contractors located in Manila, the Philippines. Our dependence on third-party contractors creates a number of risks, in particular, the risk that we may not maintain service quality, control or effective management with respect to these business operations. In addition, the political and military events in the Ukraine over the last few years, including political demonstrations, the annexation of the Crimea region of Ukraine by Russia, the hostile relations between Russia and the Ukraine, and disruptions caused by pro-Russian separatists in the Ukraine, could have an adverse impact on our third-party software development and quality assurance operations in Odessa, Ukraine. Further, the deteriorating relations between the U.S. and Russia and sanctions by the U.S. and the European Union, or EU, against Russia could adversely impact our third-party software development and quality assurance operations in St. Petersburg, Russia.
Our agreements with these third-party contractors are either not terminable by them (other than at the end of the term or upon an uncured breach by us) or require at least 60 days’ prior written notice of termination. If we experience problems with our third-party contractors, the costs charged by our third-party contractors increase or our agreements with our third-party contractors are terminated, we may not be able to develop new solutions, enhance or operate existing solutions, or provide customer support in an alternate manner that is equally or more efficient and cost-effective.
We anticipate that we will continue to depend on these and other third-party relationships in order to grow our business for the foreseeable future. If we are unsuccessful in maintaining existing and, if needed, establishing new relationships with third parties, our ability to efficiently operate existing services or develop new services and provide adequate customer support could be impaired, and, as a result, our competitive position or our results of operations could suffer.
Growth may place significant demands on our management and our infrastructure.
We have recently experienced substantial growth in our business. This growth has placed and may continue to place significant demands on our management and our operational and financial infrastructure. As our operations grow in size, scope, and complexity, we will need to increase our sales and marketing efforts and add additional sales and marketing personnel in various regions worldwide, and improve and upgrade our systems and infrastructure to attract, service, and retain an increasing number of customers. For example, we expect the volume of simultaneous calls to increase significantly as our customer base grows. Our network hardware and software may not be able to accommodate this additional simultaneous call volume. The expansion of our systems and infrastructure will require us to commit substantial financial, operational, and technical resources in advance of an increase in the volume of business, with no assurance that the volume of business will increase. Any such additional capital investments will increase our cost base. Continued growth could also strain our ability to maintain reliable service levels for our customers and resellers, develop and improve our operational, financial and management controls, enhance our billing and reporting systems and procedures and recruit, train and retain highly skilled personnel. If we fail to achieve the necessary level of efficiency in our organization as we grow, our business, results of operations and financial condition could be materially and adversely affected.
Accusations of infringement of third-party intellectual property rights could materially and adversely affect our business.
There has been substantial litigation in the areas in which we operate regarding intellectual property rights. For instance, we have in the past been sued by other third parties claiming infringement of their intellectual property rights and we may be sued for infringement from time to time in the future. In the past, we have settled infringement litigation brought against us; however, we cannot assure you that we will be able to settle any future claims or, if we are able to settle any such claims, that the settlement will be on terms favorable to us. Our broad range of technology may increase the likelihood that third parties will claim that we infringe their intellectual property rights.
We have in the past received, and may in the future receive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. Furthermore, regardless of their merits, accusations and lawsuits like these may require significant time and expense to defend, may negatively affect customer relationships, may divert management’s attention away from other aspects of our operations and, upon resolution, may have a material adverse effect on our business, results of operations, financial condition, and cash flows.
Certain technology necessary for us to provide our subscriptions may, in fact, be patented by other parties either now or in the future. If such technology were validly patented by another person, we would have to negotiate a license for the use of that technology. We may not be able to negotiate such a license at a price that is acceptable to us or at all. The existence of such a patent, or our inability to negotiate a license for any such technology on acceptable terms, could force us to cease using the technology and cease offering subscriptions incorporating the technology, which could materially and adversely affect our business and results of operations.
If we were found to be infringing on the intellectual property rights of any third-party, we could be subject to liability for such infringement, which could be material. We could also be prohibited from using or selling certain subscriptions, prohibited from using certain processes, or required to redesign certain subscriptions, each of which could have a material adverse effect on our business and results of operations.
These and other outcomes may:
result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers;
cause us to pay license fees for intellectual property we are deemed to have infringed;
cause us to incur costs and devote valuable technical resources to redesigning our subscriptions;
cause our cost of revenues to increase;
cause us to accelerate expenditures to preserve existing revenues;
cause existing or new vendors to require prepayments or letters of credit;
materially and adversely affect our brand in the marketplace and cause a substantial loss of goodwill;
cause us to change our business methods or subscriptions;
require us to cease certain business operations or offering certain subscriptions or features; and
lead to our bankruptcy or liquidation.
Our limited ability to protect our intellectual property rights could materially and adversely affect our business.
We rely, in part, on patent, trademark, copyright, and trade secret law to protect our intellectual property in the U.S. and abroad. We seek to protect our technology, software, documentation and other information under trade secret and copyright law, which afford only limited protection. For example, we typically enter into confidentiality agreements with our employees, consultants, third-party contractors, customers, and vendors in an effort to control access to use and distribution of our technology, software, documentation, and other information. These agreements may not effectively prevent unauthorized use or disclosure of confidential information and may not provide an adequate remedy in the event of such unauthorized use or disclosure, and it may be possible for a third-party to legally reverse engineer, copy or otherwise obtain and use our technology without authorization. In addition, improper disclosure of trade secret information by our current or former employees, consultants, third-party contractors, customers, or vendors to the public or others who could make use of the trade secret information would likely preclude that information from being protected as a trade secret.
We also rely, in part, on patent law to protect our intellectual property in the U.S. and internationally. Our intellectual property portfolio includes 106 issued U.S. patents, which expire between 2026 and 2035. We also have 54 patent applications pending examination in the U.S., and 20 patent applications pending examination in foreign jurisdictions all of which are related to U.S.
applications. We cannot predict whether such pending patent applications will result in issued patents or whether any issued patents will effectively protect our intellectual property. Even if a pending patent application results in an issued patent, the patent may be circumvented or its validity may be challenged in various proceedings in United States District Court or before the U.S. Patent and Trademark Office, such as Post Grant Review or Inter Partes Review, which may require legal representation and involve substantial costs and diversion of management time and resources. In addition, we cannot assure you that every significant feature of our solutions is protected by our patents, or that we will mark our products with any or all patents they embody. As a result, we may be prevented from seeking injunctive relief or damages, in whole or in part for infringement of our patents.
The unlicensed use of our brand, including domain names, by third parties could harm our reputation, cause confusion among our customers and impair our ability to market our products and subscriptions. To that end, we have registered numerous trademarks and service marks and have applied for registration of additional trademarks and service marks and have acquired a large number of domain names in and outside the U.S. to establish and protect our brand names as part of our intellectual property strategy. If our applications receive objections or are successfully opposed by third parties, it will be difficult for us to prevent third parties from using our brand without our permission. Moreover, successful opposition to our applications might encourage third parties to make additional oppositions or commence trademark infringement proceedings against us, which could be costly and time consuming to defend against. If we are not successful in protecting our trademarks, our trademark rights may be diluted and subject to challenge or invalidation, which could materially and adversely affect our brand.
Despite our efforts to implement our intellectual property strategy, we may not be able to protect or enforce our proprietary rights in the U.S. or internationally (where effective intellectual property protection may be unavailable or limited). For example, we have entered into agreements containing confidentiality and invention assignment provisions in connection with the outsourcing of certain software development and quality assurance activities to third-party contractors located in St. Petersburg, Russia and Odessa, Ukraine. We have also entered into an agreement containing a confidentiality provision with a third-party contractor located in Manila, the Philippines, where we have outsourced a significant portion of our customer support function. We cannot assure you that agreements with these third-party contractors or their agreements with their employees and contractors will adequately protect our proprietary rights in the applicable jurisdictions and foreign countries, as their respective laws may not protect proprietary rights to the same extent as the laws of the U.S. In addition, our competitors may independently develop technologies that are similar or superior to our technology, duplicate our technology in a manner that does not infringe our intellectual property rights or design around any of our patents. Furthermore, detecting and policing unauthorized use of our intellectual property is difficult and resource-intensive. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation, whether successful or not, could result in substantial costs and diversion of management time and resources and could have a material adverse effect on our business, financial condition, and results of operations.
Our success depends on the public acceptance of our products and applications.
Our future success depends on our ability to significantly increase revenues generated from our cloud-based business communications solutions. The market for cloud-based business communications is evolving rapidly and is characterized by an increasing number of market entrants. As is typical of a rapidly evolving industry, the demand for, and market acceptance of, these applications is uncertain. If the market for cloud-based business communications fails to develop, develops more slowly than we anticipate, or develops in a manner different than we expect, our products could fail to achieve market acceptance, which in turn could materially and adversely affect our business.
Our growth depends on the continued use of voice communications by businesses, as compared to email and other data-based methods. A decline in the overall rate of voice communications by businesses would harm our business. Furthermore, our continued growth depends on future demand for and adoption of Internet voice communications systems and services. Although the number of broadband subscribers worldwide has grown significantly in recent years, a small percentage of businesses have adopted Internet voice communications services to date. For demand and adoption of Internet voice communications services by businesses to increase, Internet voice communications networks must improve the quality of their service for real-time communications by managing the effects of and reducing packet loss, packet delay and packet jitter, as well as unreliable bandwidth, so that toll-quality service can be consistently provided. Additionally, the cost and feature benefits of Internet voice communications must be sufficient to cause customers to switch from traditional phone service providers. We must devote substantial resources to educate customers and their end users about the benefits of Internet voice communications solutions, in general, and our subscriptions in particular. If any or all of these factors fail to occur, our business may be materially and adversely affected.
Interruptions in our services caused by undetected errors, failures or bugs in our subscriptions could harm our reputation, result in significant costs to us, and impair our ability to sell our subscriptions.
Due to the fact our subscriptions are complex and we have incorporated a variety of new computer hardware, as well as software that is developed in-house or licensed or acquired from third-party vendors, our subscriptions may have errors or defects that customers
identify after they begin using them that could result in unanticipated interruptions of service. Internet-based services frequently contain undetected errors and bugs when first introduced or when new versions or enhancements are released. While the substantial majority of our customers are small and medium-sized businesses, the use of our subscriptions in complicated, large-scale network environments may increase our exposure to undetected errors, failures, or bugs in our subscriptions. Although we test our subscriptions to detect and correct errors and defects before their general release, we have from time to time experienced significant interruptions in our subscriptions as a result of such errors or defects and may experience future interruptions of service if we fail to detect and correct these errors and defects. The costs incurred in correcting such defects or errors may be substantial and could harm our results of operations. In addition, we rely on hardware purchased or leased and software licensed from third parties to offer our subscriptions.
Any defects in, or unavailability of, our or third-party software or hardware that cause interruptions of our subscriptions could, among other things:
cause a reduction in revenues or delay in market acceptance of our subscriptions;
require us to pay penalties or issue credits or refunds to our customers or resellers, or expose us to claims for damages;
cause us to lose existing customers and make it more difficult to attract new customers;
divert our development resources or require us to make extensive changes to our software, which would increase our expenses and slow innovation;
increase our technical support costs; and
harm our reputation and brand.
If we fail to continue to develop our brand or our reputation is harmed, our business may suffer.
We believe that continuing to strengthen our current brand will be critical to achieving widespread acceptance of our subscriptions and will require continued focus on active marketing efforts. The demand for and cost of online and traditional advertising have been increasing and may continue to increase. Accordingly, we may need to increase our investment in, and devote greater resources to, advertising, marketing, and other efforts to create and maintain brand loyalty among users. Brand promotion activities may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses incurred in building our brand.
If we fail to promote and maintain our brand, orIn addition, if
we incur substantial expense in an unsuccessful attempt to promote and maintain our brands, our business could be materially and adversely affected.Our services, as well as those of our competitors, are regularly reviewed and commented upon by online and social media sources, as well as computer and other business publications. Negative reviews, or reviews in which our competitors’ products and services are rated more highly than our software solutions, could negatively affect our brand and reputation. From time to time, our customers have expressed dissatisfaction with our services, including dissatisfaction with our customer support, our billing policies and the way our subscriptions operate. If we do not handle customer complaints effectively, our brand and reputation may suffer, we may lose our customers’ confidence, and they may choose to terminate, reduce or not to renew their subscriptions. In addition, manyMany of our customers also participate in social media and online blogs about Internet-based software solutions, including our subscriptions, and our success depends in part on our ability to minimize negative and generate positive customer feedback through such online channels where existing and potential customers seek and share information. If actions we take or changes we makefail to our subscriptions upset these customers, their blogging could negatively affectpromote and maintain our brand, and reputation. Complaints or negative publicity about our subscriptions or customer servicebusiness could be materially and adversely impact our ability to attract and retain customers and our business, financial condition and results of operations.
affected.
If we experience excessive fraudulent activity or cannot meet evolving credit card association merchant standards, we could incur substantial costs and lose the right to accept credit cards for payment, which could cause our customer base to decline significantly.
Most of our customers authorize us to bill their credit card accounts directly for service fees that we charge. If
peoplecustomers pay for our subscriptions with stolen credit cards, we could incur substantial third-party vendor costs for which we may not be reimbursed. Further, our customers provide us with credit card billing information online or over the phone, and we do not review the physical credit cards used in these transactions, which increases our risk of exposure to fraudulent activity. We also incur charges, which
we referare referred to
in the industry as chargebacks, from the credit card companies from claims that
thea customer did not authorize the
specific credit card transaction to purchase our subscription. If the number of chargebacks becomes excessive, we could be assessed substantial fines or be charged higher transaction fees, and we could lose the right to accept credit cards for payment. In addition, credit card issuers may change merchant
and/or service provider standards, including data protection
and documentation standards, required to utilize their services from time to time. We
are complianthave established and implemented measures intended to comply with the Payment Card Industry Data Security Standard
or (“PCI
DSS,DSS”) in the United States,
and Canada, and
intend to become PCI DSS-compliant in the U.K. If we fail to maintain compliance with
current merchantsuch standards
such as PCI, or fail to meet new
standards, the credit card associations could fine us or terminate their agreements with us, and we would be unable to accept credit cards as payment for our subscriptions. If we fail to maintain compliance with current service provider standards, such as PCI DSS, or fail to meet new standards, customers may choose not to use our services for certain types of communication they have with their customers. If such a failure to comply with relevant standards occurs, we may also face legal liability if we are found to not comply with applicable laws that incorporate, by reference or by adoption of substantially similar provisions, merchant or service provider standards, including PCI DSS. Our subscriptions may also be subject to fraudulent usage, including but not limited to revenue share fraud, domestic traffic pumping, subscription fraud, premium text message scams, and other fraudulent schemes. Although our customers are required to set passwords and personal identification numbers, or PINs, to protect their accounts and may configure in which destinations international calling is enabled from their extensions, third parties have in the past and may in the future be able to access and use their accounts through fraudulent means. This usage can result in, among other things, substantial bills tofrom our vendors, for which we would be responsible, for terminating fraudulent call traffic. In addition, third parties may have attempted in the past, and may attempt in the future, to fraudulently induce domestic and international employees, sub-contractors, or consultants into disclosing customer credentials and other account information. Communications fraudinformation, which can result in unauthorized access to customer accounts and customer data, unauthorized use of customers’ services, charges to customers for fraudulent usage and expensecosts that we must pay to carriers. We may be required to pay for these charges and expenses with no reimbursement from the customer, and our reputation may be harmed if our subscriptions are subject to fraudulent usage. Although we implement multiple fraud prevention and detection controls, we cannot assure you that these controls will be adequate to protect against fraud. Substantial losses due to fraud or our inability to accept credit card payments which could cause our paid customer base to significantly decrease, couldwhich would have a material adverse effect on our results of operations, financial condition, and ability to grow our business.
Potential problems with
We are in the process of expanding our information systems could interfere withinternational operations, which exposes us to significant risks.
We have significant operations in the United States, Canada, the United Kingdom, Russia, China, Ukraine, the Philippines and France. We also sell our solutions to customers in other countries in the EU and in Australia, and we expect to grow our international presence in the future. The future success of our business
and operations.We relywill depend, in part, on our information systems and those of third parties for processing customer orders, distribution of our subscriptions, billing our customers, processing credit card transactions, customer relationship management, supporting financial planning and analysis, accounting functions and financial statement preparation and otherwise running our business. Information systems may experience interruptions, including interruptions of related services from third-party providers, which may be beyond our control. Such business interruptions could cause us to fail to meet customer requirements. All information systems, both internal and external, are potentially vulnerable to damage or interruption from a variety of sources, including without limitation, computer viruses, security breaches, energy blackouts, natural disasters, terrorism, war and telecommunication failures, employee or other theft, and third-party provider failures. In addition, since telecommunications billing is inherently complex and requires highly sophisticated information systems to administer, our billing system may experience errors or we may improperly operate the system, which could result in the system incorrectly calculating the fees owed by our customers for our subscriptions or related taxes and administrative fees. Any such errors in our customer billing could harm our reputation and cause us to violate truth in billing laws and regulations. Any errors or disruption in our information systems and those of the third parties upon which we rely could have a significant impact on our business.
In the future we intend to implement a billing system or internally develop an enhanced billing system, to replace our current internally developed billing system. We may also implement further and enhanced information systems in the future to meet the demands resulting from our growth and to provide additional capabilities and functionality. The implementation of new systems and enhancements is frequently disruptive to the underlying business of an enterprise, and can be time-consuming and expensive, increase management responsibilities, and divert management attention. Any disruptions relating to our systems enhancements or any problems with the implementation, particularly any disruptions impacting our operations or our ability to accurately reportexpand our financial performance on a timely basis duringoperations and customer base worldwide. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the implementation period,U.S. Due to our limited experience with international operations and developing and managing sales and distribution channels in international markets, our international expansion efforts may not be successful. In addition, we will face risks in doing business internationally that could materially and adversely affect our business. Even if we do not encounter these material and adverse effects, the implementation of these enhancements may be much more costly than we anticipated. If we are unable to successfully implement the information systems enhancements as planned, our financial position, results of operations and cash flows could be negatively impacted.
Our use of open source technology could impose limitations on business, including:
our ability to
commercialize our subscriptions.We use open source software in our platform on which our subscriptions operate. There is a risk thatcomply with differing and evolving technical and environmental standards, telecommunications regulations, and certification requirements outside the owners of the copyrights in such software may claim that such licenses impose unanticipated conditions or restrictions on U.S.;
difficulties and costs associated with staffing and managing foreign operations;
our ability to market or provide our subscriptions. If such owners prevail in such claim, we could be required to make the source code for our proprietary software (which contains our valuable trade secrets) generally available to third parties, including competitors, at no cost, to seek licenses from third parties in order to continue offering our subscriptions, to re-engineer our technology, or to discontinue offeringeffectively price our subscriptions in competitive international markets;
potentially greater difficulty collecting accounts receivable and longer payment cycles;
the event re-engineering cannot be accomplishedneed to adapt and localize our subscriptions for specific countries;
the need to offer customer care in various native languages;
reliance on a timely basisthird parties over which we have limited control, including those that market and resell our subscriptions;
availability of reliable broadband connectivity and wide area networks in targeted areas for expansion;
lower levels of adoption of credit or atdebit card usage for Internet related purchases by foreign customers and compliance with various foreign regulations related to credit or debit card processing and data protection requirements;
difficulties in understanding and complying with local laws, regulations, and customs in foreign jurisdictions;
restrictions on travel to or from countries in which we operate or inability to access certain areas;
export controls and economic sanctions;
changes in diplomatic and trade relationships, including tariffs and other non-tariff barriers, such as quotas and local content rules;
U.S. government trade restrictions, including those which may impose restrictions, including prohibitions, on the exportation, re-exportation, sale, shipment or other transfer of programming, technology, components, and/or services to foreign persons;
our ability to comply with different and evolving laws, rules, and regulations, including the European General Data Protection Regulation (the “GDPR”) and other data privacy and data protection laws, rules and regulations;
compliance with various anti-bribery and anti-corruption laws such as the Foreign Corrupt Practices Act and U.K. Bribery Act of 2010;
more limited protection for intellectual property rights in some countries;
adverse tax consequences;
fluctuations in currency exchange rates;
exchange control regulations, which might restrict or prohibit our conversion of other currencies into U.S. Dollars;
restrictions on the transfer of funds;
new and different sources of competition;
political and economic instability created by the U.K.'s departure from the EU ("Brexit"); and
deterioration of political relations between the U.S. and other countries in which we operate, particularly Russia, Ukraine, China, and the Philippines; or
political or social unrest, economic instability, conflict or war in such countries, or sanctions implemented by the U.S. against these countries, all
any of which
could cause us to discontinue our subscriptions, harm our reputation, result in customer losses or claims, increase our costs or otherwise materially and adversely affect our business and results of operations.
Exposure to U.K. political developments, including the outcome of the U.K. referendum on membership in the EU, could have a material adverse effect on us.
On June 23, 2016,our operations.
Our failure to manage any of these risks successfully could harm our future international operations and our overall business.
We may expand through acquisitions of, investments in, or strategic partnerships or other strategic transactions with other companies, each of which may divert our management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations, and harm our results of operations.
Our business strategy may, from time to time, include acquiring or investing in complementary services, technologies or businesses, strategic investments and partnerships, or other strategic transactions, such as our recent acquisitions of Dimelo SA and Connect First, and our investment in and strategic partnerships with Avaya and Atos. We cannot assure you that we will successfully identify suitable acquisition candidates or transaction counterparties, integrate or manage disparate technologies, lines of business, personnel and corporate cultures, realize our business strategy or the expected return on our investment, or manage a referendum was heldgeographically dispersed company. Any such acquisition, investment, strategic partnership, or other strategic transaction could materially and adversely affect our results of operations. The process of negotiating, effecting, and realizing the benefits from acquisitions, investments, strategic partnerships, and strategic transactions is complex, expensive and time-consuming, and may cause an interruption of, or loss of momentum in, development and sales activities and operations of both companies, and we may incur substantial cost and expense, as well as divert the attention of management. We may issue equity securities which could dilute current stockholders’ ownership, incur debt, assume contingent or other liabilities and expend cash in acquisitions, investments, strategic partnerships, and other strategic transactions which could negatively impact our financial position, stockholder equity, and stock price.
Acquisitions, investments, strategic partnerships, and other strategic transactions involve significant risks and uncertainties, including:
the potential failure to achieve the expected benefits of the acquisition, investment, strategic partnership, or other strategic transaction;
unanticipated costs and liabilities;
difficulties in integrating new solutions and subscriptions, software, businesses, operations, and technology infrastructure in an efficient and effective manner;
difficulties in maintaining customer relations;
the potential loss of key employees of any acquired businesses;
the diversion of the attention of our senior management from the operation of our daily business;
the potential adverse effect on our cash position to the U.K.’s membershipextent that we use cash for the transaction consideration;
the potential significant increase of our interest expense, leverage, and debt service requirements if we incur additional debt to pay for an acquisition, investment, strategic partnership, or other strategic transaction;
the potential issuance of securities that would dilute our stockholders’ percentage ownership;
the potential to incur large and immediate write-offs and restructuring and other related expenses;
the potential liability or expenses associated with new types of data stored, existing security obligations or liabilities, unknown weaknesses in our solutions, insufficient security measures in place, and compromise of our networks via access to our systems from assets not previously under our control; and
the inability to maintain uniform standards, controls, policies, and procedures.
Any acquisition, investment, strategic partnership, or other strategic transaction could expose us to unknown liabilities. Moreover, we cannot assure you that we will realize the anticipated benefits of any acquisition, investment, strategic partnership, or other strategic transaction. In addition, our inability to successfully operate and integrate newly acquired businesses or newly formed strategic partnerships appropriately, effectively, and in a timely manner could impair our ability to take advantage of future growth opportunities and other advances in technology, as well as on our revenues, gross margins, and expenses.
For example, in connection with our strategic partnership with Avaya, we purchased $125.0 million of Avaya Series A Preferred Stock and made an advance of $375.0 million, predominantly for future commissions, as well as for certain licensing rights (paid primarily in our Class A Common Stock). These are significant investments on which we may not realize the anticipated benefits for various reasons, including a lack of success in the EU the outcomemarketing and sale of ACO, potential or actual financial distress, insolvency, or bankruptcy of Avaya or any of its subsidiaries, or other facts or circumstances that may limit our ability to recover, or realize benefits from, these investments.
We may be subject to liabilities on past sales for taxes, surcharges, and fees and our operating results may be harmed if we are required to collect such amounts in jurisdictions where we have not historically done so.
We believe we collect state and local sales tax and use, excise, utility user, and ad valorem taxes, fees, or surcharges in all relevant jurisdictions in which
was a vote in favor of leaving the EU (commonly referred to as “Brexit”). The Brexit vote creates an uncertain political and economic environment in the U.K. and potentially across other EU member states, which may last for a number of months or years.Article 50we generate sales, based on our understanding of the Treatyapplicable laws in those jurisdictions. Such tax, fees and surcharge laws and rates vary greatly by jurisdiction, and the application of the EU, or Article 50, allowssuch taxes to e-commerce businesses, such as ours, is a member state to decide to withdraw from the EU in accordance with its own constitutional requirements. The formal process for leaving the EU will be triggered only when the U.K. delivers an Article 50 notice to the European Council, although informal negotiations around the terms of any exit may be held before such noticecomplex and evolving area. There is given. Delivery of the Article 50 notice will start a period of up to two years for the U.K. to exit from the EU, although this period can be extended with the unanimous agreement of the European Council, (requiring unanimity among all other EU Member States). Without any such extension (and assuming that the terms of withdrawal have not already been agreed), the U.K.'s membership in the EU would end automatically on the expiration of that two-year period.
The result of the Brexit vote means that the long-term nature of the U.K.'s relationship with the EU is unclear and that there is considerable uncertainty as to when anywhat constitutes sufficient “in state presence” for a state to levy taxes, fees, and surcharges for sales made over the Internet, and after the U.S. Supreme Court’s ruling in South Dakota v. Wayfair, U.S. states may require an online retailer with no in-state property or personnel to collect and remit sales tax on sales to the state’s residents, which may permit wider enforcement of sales tax collection requirements. Therefore, the application of existing or future laws relating to indirect taxes to our business, or the audit of our business and operations with respect to such relationship will be agreedtaxes or challenges of our positions by taxing authorities, all could result in increased tax liabilities for us or our customers that could materially and implemented. In the interim, there is a riskadversely affect our results of instability for both the U.K.operations and the EU, whichour relationships with our customers.
Changes in effective tax rates, or adverse outcomes resulting from examination of our income or other tax returns, could adversely affect our results of operations and financial conditioncondition.
Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
changes in the valuation of our deferred tax assets and
prospects.It is currently expected thatliabilities;
expiration of, or lapses in, the U.K. government will shortly commence negotiationsresearch and development tax credit laws;
expiration or non-utilization of net operating loss carryforwards;
tax effects of share-based compensation;
expansion into new jurisdictions;
potential challenges to and costs related to implementation and ongoing operation of our intercompany arrangements;
changes in connection with any exit from the EU. The government has notified its intention to serve an Article 50 notice no later than March 30, 2017. There is also considerable uncertaintytax laws and regulations and accounting principles, or interpretations or applications thereof; and
certain non-deductible expenses as to whether, following any Article 50 notice being given, the arrangements for the U.K. to leave the EU will be agreed upon within the two-year period and, if not, whether an extensiona result of that time period would be agreed upon. It is also possible that the EU will pressure the U.K. to exit prior to the end of the two-year period. There is also a risk of the U.K.'s exit from the EU being affected without mutually acceptable terms being agreed and that any terms of such exitacquisitions.
Any changes in our effective tax rate could adversely affect our operating results financial conditionof operations.
Changes in U.S. and
prospects.The political and economic instability created by the Brexit vote has caused and may continue to cause significant volatility in global financial markets and the value of the Pound Sterling currency or other currencies, including the Euro. Depending on the terms reached regarding any exit from the EU, it is possible that there may beforeign tax laws could have a material adverse practical and/or operational implicationseffect on our business.
Brexit has also created uncertainty with regardbusiness, cash flow, results of operations or financial conditions.
We are subject to
the regulation of data protectiontax legislation in
the U.K. In the immediate term, the U.K. will remain bound by the European General Data Protection Regulation (GDPR) following its exit from the EU since the U.K. government has announced its intention to enact a ‘Great Repeal Bill’ which enshrines all EU law into domestic U.K. legislation. While the U.K. Information Commissioner’s Office has announced that there are no plans to dilute U.K. data protection laws, it is less certain how data protectionseveral countries; changes in tax laws or
regulations will develop in the mediumchallenges to
longer term, and how data transfers to and from the U.K. will be regulated.Consequently, no assurance can be given as to the overall impact of the Brexit and, in particular, no assurance can be given that our operating results, financial condition and prospects would not betax positions could adversely impacted by the result.
Our business could be negatively impacted by changes in the United States political environment.
The recent presidential and congressional elections in the United States have resulted in significant uncertainty with respect to, and could result in changes in, legislation, regulation and government policy at the federal level, as well as the state and local levels. Any such changes could significantly impact our business as well as the markets in which we compete. Specific legislative and regulatory proposals discussed during election campaigns and more recently that might materially impact us include, but are not limited to, changes to existing trade agreements, import and export regulations, tariffs and customs duties, income tax regulations and the federal tax code, public company reporting requirements, and antitrust enforcement. To the extent changes in the political environment have a negative impact on us or on our markets,affect our business, results of operationoperations, and financial condition. As such, we are subject to tax laws, regulations, and policies of the U.S. federal, state, and local governments and of comparable taxing authorities in foreign jurisdictions. Changes in tax laws, including the U.S. federal tax legislation enacted in 2017, commonly referred to as the Tax Cuts and Jobs Act of 2017, as well as other factors, could cause us to experience fluctuations in our tax obligations and effective tax rates in 2018 and thereafter and otherwise adversely affect our tax positions and/or our tax liabilities. There can be no assurance that our effective tax rates, tax payments, tax credits, or incentives will not be adversely affected by these or other initiatives.
We may be unable to use some or all of our net operating loss carryforwards, which could materially and adversely affect our reported financial condition and results of operations.
As of December 31, 2019, we had federal and state net operating loss carryforwards (“NOLs”) of $782.7 million and $675.6 million, respectively, available to offset future taxable income, due to prior period losses, which, if not utilized, will begin to expire in 2023 for federal purposes and will begin to expire in 2021 for state purposes. We also have federal research tax credit carryforwards that will begin to expire in 2028. Realization of these net operating loss and research tax credit carryforwards depends on future income, and there is a risk that our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could materially and adversely affect our results of operations.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders, who each own at least 5% of our stock, increase their collective ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws.
No material deferred tax assets have been recognized on our Consolidated Balance Sheets related to these NOLs, as they are fully offset by a valuation allowance. If we have previously had, or have in the future, one or more Section 382 “ownership changes,” including in connection with our initial public offering or another offering, or if we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOLs, even if we achieve profitability. If we are limited in our ability to use our NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOLs. This could materially and adversely affect our results of operations.
If we are unable to effectively process local number and toll-free number portability provisioning in a timely manner, our growth may be negatively affected.
We support local number and toll-free number portability, which allows our customers to transfer to us and thereby retain their existing phone numbers when subscribing to our services. Transferring numbers is a manual process that can take up to 15 business days or longer to complete. A new customer of our subscriptions must maintain both our subscription and the customer’s existing phone service during the number transferring process. Any delay that we experience in transferring these numbers typically results from the fact that we depend on third-party carriers to transfer these numbers, a process that we do not control, and these third-party carriers may refuse or substantially delay the transfer of these numbers to us. Local number portability is considered an important feature by many potential customers, and if we fail to reduce any related delays, we may experience increased difficulty in acquiring new customers. Moreover, the FCC requires Internet voice communications providers to comply with specified number porting timeframes when customers leave our subscription for the services of another provider. Several international jurisdictions have imposed similar number portability requirements on subscription providers like us. If we or our third-party carriers are unable to process number portability requests within the requisite timeframes, we could be subject to fines and penalties. Additionally, in the U.S., both customers and carriers may seek relief from the relevant state public utility commission, the FCC, or in state or federal court for violation of local number portability requirements.
Our business could suffer if we cannot obtain or retain direct inward dialing numbers or are prohibited from obtaining local or toll-free numbers or if we are limited to distributing local or toll-free numbers to only certain customers.
Our future success depends on our ability to procure large quantities of local and toll-free direct inward dialing numbers (“DIDs”) in the U.S. and foreign countries in desirable locations at a reasonable cost and without restrictions. Our ability to procure and distribute DIDs depends on factors outside of our control, such as applicable regulations, the practices of the communications carriers that provide DIDs, the cost of these DIDs, and the level of demand for new DIDs. Due to their limited availability, there are certain popular area code prefixes that we generally cannot obtain. Our inability to acquire DIDs for our operations would
make our subscriptions less attractive to potential customers in the affected local geographic areas. In addition, future growth in our customer base, together with growth in the customer bases of other providers of cloud-based business communications, has increased, which increases our dependence on needing sufficiently large quantities of DIDs.
We may not be able to manage our inventory levels effectively, which may lead to inventory obsolescence that would force us to incur inventory write-downs.
Our vendor-supplied phones have lead times of up to 10 to 13 weeks for delivery to our fulfillment agents and are built to forecasts that are necessarily imprecise. It is likely that, from time to time, we will have either excess or insufficient product inventory. In addition, because we rely on third-party vendors for the supply of our vendor-supplied phones, our inventory levels are subject to the conditions regarding the timing of purchase orders and delivery dates that are not within our control. Excess inventory levels would subject us to the risk of inventory obsolescence, while insufficient levels of inventory may negatively affect relations with customers. For instance, our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply of our subscriptions could result in loss of customers or harm to our ability to attract new customers. Any reduction or interruption in the ability of our vendors to supply our customers with vendor-supplied phones could cause us to lose revenue, damage our customer relationships and harm our reputation in the marketplace. Any of these factors could have a material adverse effect on our business, financial condition or results of operations.
We currently depend on three phone device suppliers and two fulfillment agents to configure and deliver the phones that we sell and any delay or interruption in manufacturing, configuring and delivering by these third parties would result in delayed or reduced shipments to our customers and may harm our business.
We rely on three suppliers to provide phones that we offer for sale to our customers that use our subscriptions, and we rely on two fulfillment agents to configure and deliver the phones that we sell to our customers. Accordingly, we could be adversely affected if such third parties fail to maintain competitive phones or configuration services or fail to continue to make them available on attractive terms, or at all.
If our fulfillment agents are unable to deliver phones of acceptable quality, or if there is a reduction or interruption in their ability to supply the phones in a timely manner, our ability to bring services to market, the reliability of our subscriptions and our relationships with customers or our overall reputation in the marketplace could suffer, which could cause us to lose revenue. We expect that it could take several months to effectively transition to new third-party manufacturers or fulfillment agents.
If our vendor-supplied phones are not able to interoperate effectively with our own back-end servers and systems, our customers may not be able to use our subscriptions, which could harm our business, financial condition and results of operations.
Phones must interoperate with our back-end servers and systems, which contain complex specifications and utilize multiple protocol standards and software applications. Currently, the phones used by our customers are manufactured by only three third-party providers. If any of these providers changes the operation of their phones, we will be required to undertake development and testing efforts to ensure that the new phones interoperate with our system. In addition, we must be successful in integrating our solutions with strategic partners' devices in order to market and sell these solutions. These efforts may require significant capital and employee resources, and we may not accomplish these development efforts quickly or cost-effectively, if at all. If our vendor-supplied phones do not interoperate effectively with our system, our customers’ ability to use our subscriptions could be delayed or orders for our subscriptions could be canceled, which would harm our business, financial condition, and results of operations.
We may require additional capital to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances. If capital is not available to us, our business, results of operations, and financial condition may be adversely affected.
We intend to continue to make expenditures and investments to support the growth of our business and may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them on terms that are acceptable to us, or at all. Any debt financing that we secure in the future could involve restrictive covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, the restrictive covenants in credit facilities we may secure in the future may restrict us from being able to conduct our operations in a manner required for our business and may restrict our growth, which could have an adverse effect on our business, financial condition, or results of operations.
We cannot assure you that we will be able to comply with any such restrictive covenants. In the event that we are unable to comply with these covenants in the future, we would seek an amendment or waiver of the covenants. We cannot assure you that any such waiver or amendment would be granted. In such event, we may be required to repay any or all of our existing borrowings, and we cannot assure you that we will be able to borrow under our existing credit agreements, or obtain alternative funding arrangements on commercially reasonable terms, or at all.
In addition, volatility in the credit markets may have an adverse effect on our ability to obtain debt financing. The conversion of our 0% convertible senior notes due 2023 (the “Notes”) and any future issuances of other equity or any future issuances of equity or convertible debt securities could result in significant dilution to our existing stockholders, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our Class A Common Stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges, or unforeseen circumstances could be significantly limited, and our business, results of operations, financial condition and prospects could be materially and adversely impactedaffected.
If our internal control over financial reporting is not effective, it may adversely affect investor confidence in our company.
Pursuant to Section 404 of the Sarbanes-Oxley Act, our independent registered public accounting firm, KPMG LLP, is required to and has issued an attestation report as of December 31, 2019. While management concluded internal control over financial reporting was at a reasonable assurance level as of December 31, 2019, there can be no assurance that material weaknesses will not be identified in the future.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. As a result, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Our remediation efforts may not enable us to avoid a material weakness in the future.
If our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our Class A Common Stocks to decline, and we may be subject to investigation or sanctions by the Securities and Exchange Commission (the “SEC”).
The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory environment affecting generally accepted accounting principles is uncertain. Significant changes in current principles could affect our financial statements going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and harm our operating results.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board (the “FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from the FASB and the SEC have focused on the integrity of financial reporting and internal controls. In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could materially impact our financial statements.
We cannot predict the impact of future changes to accounting principles or our accounting policies on our financial statements going forward, which could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of the change. In addition, if we were to change our critical accounting estimates, including those related to the recognition of subscription revenue and other revenue sources, our operating results could be significantly affected.
Our corporate headquarters, one of our data centers and co-location facilities, our third-party customer service and support facilities, and a research and development facility are located near known earthquake fault zones, and the occurrence of an earthquake, tsunami, or other catastrophic disaster could damage our facilities or the facilities of our contractors, which could cause us to curtail our operations.
Our corporate headquarters and many of our data centers, co-location and research and development facilities, and third-party customer service call centers are located in California, Florida, and several countries in Asia, including the Philippines and Australia. All of these locations are near known earthquake fault zones, which are vulnerable to damage from earthquakes and
tsunamis, or are in areas subject to hurricanes. We and our contractors are also vulnerable to other types of disasters, such as power loss, fire, floods, pandemics, such as the recent outbreak of coronavirus in China and other parts of the world, cyber-attack, war, political unrest, and terrorist attacks and similar events that are beyond our control. If any disasters were to occur, our ability to operate our business could be seriously impaired, and we may endure system interruptions, reputational harm, loss of intellectual property, delays in our subscriptions development, lengthy interruptions in our services, breaches of data security, and loss of critical data, all of which could harm our future results of operations. In addition, we do not carry earthquake insurance and we may not have adequate insurance to cover our losses resulting from other disasters or other similar significant business interruptions. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.
Risks Related to Regulatory Matters
Our subscriptions are subject to regulation, and future legislative or regulatory actions could adversely affect our business and expose us to liability in the U.S. and internationally.
Our business is regulated by the FCC. As a communications services provider, we are subject to existing or potential FCC regulations relating to privacy, disability access, porting of numbers, Federal Universal Service Fund
or USF,(“USF”) contributions,
E-911,Enhanced 911 (“E-911”), outage reporting,
call authentication, and other
requirements.requirements and regulations. FCC classification of our Internet voice communications services as telecommunications
services could result in additional federal and state regulatory obligations. If we do not comply with FCC rules and regulations, we could be subject to FCC enforcement actions, fines, loss of licenses, and possibly restrictions on our ability to operate or offer certain of our subscriptions. Any enforcement action by the FCC, which may be a public process, would hurt our reputation in the industry, possibly impair our ability to sell our subscriptions to customers and could have a materially adverse impact on our revenues.
Through RCLEC, we also provide competitive local exchange carrier
services, or CLEC(“CLEC”) services which are regulated by the FCC as traditional telecommunications services. Our CLEC services depend on certain provisions of the Telecommunications Act of 1996 that require incumbent local exchange carriers
or ILECs,(“ILECs”) to provide us facilities and services that are necessary to provide our services. Over the past several years, the FCC has reduced or eliminated a number of regulations governing ILECs’ wholesale offerings. If ILECs were no longer required by law to provide such services to us, or ceased to provide these services at reasonable rates, terms and conditions, our business could be adversely affected and our cost of providing CLEC services could increase. This could have a materially adverse impact on our results of operations and cash flows.
In addition, the
TCPAfederal Telephone Consumer Protection Act (“TCPA”) and FCC rules implementing the TCPA, as amended by the Junk Fax Prevention Act of 2005, prohibit sending unsolicited facsimile advertisements, subject to certain exceptions. The FCC may take enforcement action against persons or entities that send “junk faxes,” and individuals also may have a private cause of action. Although the FCC’s rules prohibiting unsolicited fax advertisements apply to those who “send” the advertisements, fax transmitters or other service providers that have a high degree of involvement in, or actual notice of, unlawful sending of junk faxes and have failed to take steps to prevent such transmissions also face liability under the FCC’s rules. We take significant steps designed to prevent our systems from being used to send unsolicited faxes on a large scale, and we do not believe that we have a high degree of involvement in, or notice of, the use of our systems to broadcast junk faxes. However, because fax transmitters and related service providers do not enjoy an absolute exemption from liability under the TCPA and related FCC rules, we could face FCC inquiry and enforcement or civil litigation, or private causes of action, if someone uses our system for such purposes. If any of these were to occur, we could be required to incur significant costs and management’s attention could be diverted. Further, if we were to be held liable for the use of our service to send unsolicited faxes or to settle any action or proceeding, any judgment, settlement, or penalties could cause a material adverse effect on our operations.
We have recently been named as defendants to a class action litigation involving alleged violations of the TCPA brought by SPS. For more information about this lawsuit, see Part I, Item 3 of this Annual Report on Form 10-K entitled “Legal Proceedings.”Our subscriptions are also subject to a number of other FCC regulations. Among others, we must comply (in whole or in part) with:
the Communications Assistance for Law Enforcement Act, or CALEA, which requires covered entities to assist law enforcement in undertaking electronic surveillance;
requirements to provide E-911 to our customers;
contributions to the USF which requires that we pay a percentage of our interstate and international revenues to support certain federal programs;
payment of annual FCC regulatory fees based on our interstate and international revenues;
rules pertaining to access to our subscriptions by people with disabilities and contributions to the Telecommunications Relay Services fund;
rules regarding certain customer proprietary information, which require that we not use such information without customer approval, subject to certain exceptions;
rules requiring the reporting of certain services outages; and
rules requiring the monitoring and reporting of call quality and call completion rates to rural areas of the United States.
If we do not comply with any current or future rules or regulations that apply to our business, we could be subject to substantial fines and penalties, we may have to restructure our service offerings, exit certain markets or raise the price of our subscriptions, any of which could ultimately harm our business and results of operations.
State Regulation
States currently do not regulate our Internet voice communications
subscriptions. However, a small number of states have ruled that non-nomadic Internet voice communications services may or do fall within the definition of “telecommunications services” and therefore those states assert that they have jurisdiction to regulate the service. No states currently require certification for nomadic Internet voice communications service providers. Even if a state does not require Internet voice communications service providerssubscriptions, which are considered to be
certified,nomadic because they can be used from any broadband connection. However, a number of states require us to register as a
VoIPVoice over Internet Protocol (“VoIP”) provider, contribute to state USF, contribute to E-911, and pay other surcharges and annual fees that fund various utility commission programs, while others are actively considering extending their public
policy programs to include the subscriptions we provide. We pass USF, E-911 fees, and other surcharges through to our customers, which may result in our subscriptions becoming more expensive or require that we absorb these costs. We expect that stateState public utility commissions will continue their attemptsmay attempt to apply state telecommunications regulations to Internet voice communications subscriptions like ours.
Our CLEC subsidiary’s
RCLEC services are subject to regulation by the public utility regulatory agency in those states where we provide local telecommunications services. This regulation includes the requirement to obtain a certificate of public convenience and necessity or other similar licenses prior to offering our CLEC services. We may also be required to file tariffs that describe our CLEC’sCLEC services
and provide rates for those services. We are also required to comply with
state regulations that vary
from state toby state concerning service quality, disconnection and billing requirements. State commissions also have authority to review and approve interconnection agreements between incumbent phone carriers and CLECs such as our
subsidiary, and to conduct arbitration of disputes arising in the negotiation of such agreements.subsidiary.
Both we and
our CLEC subsidiaryRCLEC are also subject to state consumer protection laws, as well as U.S. state or municipal sales, use, excise, gross receipts, utility user and ad valorem taxes, fees, or surcharges.
As we expand internationally, we may be subject to telecommunications, consumer protection, data protection,
emergency call services, and other laws,
regulations, taxes, and
regulationsfees in the foreign countries where we offer our subscriptions.
Any foreign regulations could impose substantial compliance costs on us, restrict our ability to compete, and impact our ability to expand our service offerings in certain markets. Moreover, the regulatory environment is constantly evolving and changes to the applicable regulations could impose additional compliance costs and require modifications to our technology and operations. Internationally, we currently offer our subscriptions in Canada,
and the U.K.
, Australia, and several European countries. We
have also
launchedoffer our
new Global Office solution, enabling our multinational customers in the U.S., U.K.,
Canada, and
Canadaother locations where we sell our solutions, to establish local phone solutions in various countries internationally. We may be subject to telecommunications, consumer protection, data protection,
emergency call services, and other laws and regulations in additional countries as we continue to expand our Global Office solution internationally.
We are a provider of Internet voice telecommunications subscriptions in Canada. As a provider of Internet voice communications subscriptions, we, directly and through our Canadian subsidiary, are subject to regulation in Canada by the Canadian Radio-television and Telecommunications Commission, or CRTC. We are registered with the CRTC as a reseller of telecommunications services and have been issued a basic international telecommunications services, or BITS, license by the CRTC. As an Internet voice communications provider, we are subject to obligations imposed by the CRTC, including providing access to emergency calling services, providing access to operator assistance, directory information services, number portability, providing minimum customer information, charging customers certain regulatory charges and paying contribution charges. As a holder of a BITS license, we also must comply with various annual reporting requirements. We are also subject to Canadian federal privacy and anti-spam laws and provincial consumer protection legislation.
As a provider of electronic communications services in the U.K., we, through our subsidiary, are subject to regulation in the U.K. by the Office of Communications, or Ofcom. Some of these regulatory obligations include providing access to emergency call services (E999/112) without charge; providing access to operator assistance, directories and directory enquiry services, offering contracts with minimum terms, providing and publishing certain information transparently, providing itemized billing, protecting customer information (including personal data); porting phone numbers upon a valid customer request and implementing a code of practice. We are required to comply with laws and matters relating to, among other things, competition law, distance selling, telecommunications, e-commerce, and consumer protection. We must also comply with various reporting and recordkeeping requirements. The requirement to comply with such laws and any future legal or regulatory changes could adversely affect our business and expose us to liability.
In addition, our international operations are potentially subject to country-specific governmental regulation and related actions that may increase our costs or impact our productsolution and service offerings or prevent us from offering or providing our productssolutions and subscriptions in certain countries. Certain of our subscriptions may be used by customers located in countries where VoIP and other forms of IP communications may be illegal or require special licensing or in countries on a U.S. embargo list. Even where our productssolutions are reportedly illegal or become illegal or where users are located in an embargoed country, users in those countries may be able to continue to use our productssolutions and subscriptions in those countries notwithstanding the illegality or embargo. We may be subject to penalties or governmental action if consumerscustomers continue to use our productssolutions and subscriptions in countries where it is illegal to do so, and any such penalties or governmental action may be costly and may harm our business and damage our brand and reputation. We may be required to incur additional expenses to meet applicable international regulatory requirements or be required to discontinue those subscriptions if required by law or if we cannot or will not meet those requirements.
The increasing growth and popularity of Internet voice communications, video conferencing and messaging heighten the risk that governments will regulate or impose new or increased fees or taxes on these services. To the extent that the use of our subscriptions continues to grow, and our user base continues to expand, regulators may be more likely to seek to regulate or impose new or additional taxes, surcharges or fees on our subscriptions.
We process, store, and use personal information and other data, which subjects us and our customers to a variety of evolving
international statutes, governmental regulation, industry standards and self-regulatory schemes, contractual obligations, and other legal obligations related to privacy and data protection, which may increase our costs, decrease adoption and use of our
productssolutions and subscriptions, and expose us to liability.
In the course of providing our services, we collect, store, and process many types of data, including personal data. Moreover, our customers can use our subscriptions to store contact and other personal or identifying information, and to process, transmit, receive, store, and retrieve a variety of communications and messages, including information about their own customers and other contacts. Customers are able, and may be authorized under certain circumstances, to use our subscriptions to transmit, receive, and/or store personal information.
There are a number of federal, state, local, and foreign laws and regulations, as well as contractual obligations and industry standards, that provide for certain obligations and restrictions with respect to data privacy and security, and the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure, and protection of personal information and other customer data. We expect that with the implementation of our Global Office solution, we may become subject to additional data privacy regulations in other countries throughout the world. The scope of these obligations and restrictions is changing, subject to differing interpretations, and may be inconsistent among countries or conflict with other rules, and their status remains uncertain.
Within the EU, strict laws already apply Failure to comply with obligations and restrictions related to data privacy and security in connection with the collection, storage, retention, use, processing, transmission, sharing, disclosure and protection of personal information,any jurisdiction in which we operate could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, and other customer data. The EU model has been replicated substantially orlosses that could harm our business.
For example, the GDPR, which came into force in
part in various jurisdictions outside the U.S., including in certain Asia-Pacific Economic Cooperation countries. Data protection regulators within the EU and other jurisdictions have the power to fine non-compliant organizations significant amounts and seek injunctive relief, including the cessation of certain data processing activities. With regard to transfers of personal data from our European customers to the U.S., we have taken contractual and other measures designed to ensure adequate protection for the personal data transferred from the EU to the U.S., including, where appropriate, the implementation of Model Clause agreements. Historically, RingCentral had self-certified to the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks as agreed to by the U.S. Department of Commerce, and the EU and Switzerland, which established means for legitimizing the transfer of personal data by U.S. companies from the European Economic Area, or EU, to the U.S. However, as a result of the October 6, 2015 EU Court of Justice, or ECJ, opinion in Case C-362/14 (Schrems v. Data Protection Commissioner) (the “ECJ Ruling”), the U.S.-EU Safe Harbor Framework was deemed an invalid method of compliance with restrictions set forth in EU Directive 95/46/EC (and member states’ implementations thereof) regarding the transfer of personal data outside of the EU. A new framework was agreed by the EU and U.S. authorities to replace the invalidated Safe Harbor Framework known as “Privacy Shield”. On July 12, 2016, the Privacy Shield was formally adopted by the European Commission. In light of the ECJ Ruling, it is possible that some of the other adequate protection measures we have adopted to legitimize the transfer of personal data may also be vulnerable to challenge in the same vein as those that were applicable to the Safe Harbor Framework. We anticipate engaging in additional measures to ensure compliance with EU law with respect to our transfers of personal data from the EU to the U.S., and may find it necessary or desirable to make other changes to our personal data handling in light of the ECJ Ruling. These changes may entail, for example, adopting additional measures to ensure that the other adequate protection measures remain compliant. We may be unsuccessful in establishing compliant means for us to transfer such personal data from the EU or otherwise responding to the ECJ Ruling, and we may experience reluctance or refusal by European or multinational customers to use our solutions as a result of the ECJ Ruling. We may face a risk of enforcement actions taken by EU data protection authorities until the time, if any, that personal data transfers to us and by us from the EU are legitimized under EU Directive 95/46/EC and applicable member states’ implementations thereof.Additionally, the EU General Data Protection Regulation (GDPR) has been implemented and is set to enter into full force during 2018. The GDPR strengthensMay 2018, strengthened the existing data protection regulations in the EU and its provisions include increasing the maximum level of fines that EU regulators may impose for the most serious of breaches to the greater of €20 million or 4% of worldwide annual turnover. Such fines would be in addition to (i) the rights of individuals to sue for damages in respect of any data privacy breach which causes them to suffer lossharm and (ii) the right of individual
member states to impose additional sanctions over and above the administrative fines specified in the GDPR. In light ofOther examples include, but are not limited to, Canadian anti-spam legislation and Australia’s Spam Act 2003, as amended.
At present, we use the Brexit vote, there is uncertainty regardingEU-U.S. and Swiss-U.S. Privacy Shield framework and EU Standard Contractual Clauses (“Model Clauses”) to protect data exports between the European Economic Area (the “EEA”) and U.S. The future of cross-border data protection legislation inflows following the U.K. There’s exit from the EU on January 31, 2020 is likelyuncertain. After the transition period, currently set to last until December 31, 2020, it may become necessary for us to implement additional data export solutions like the Model Clauses to enable the continued flow of personal data between our U.K. operations and our EU customers and affiliates. These solutions may take time and be challenging to put in place and, if not implemented promptly before or immediately following Brexit, our business may be disrupted, and we may be exposed to potential regulatory fines and civil claims. The EU-U.S. Privacy Shield and the Model Clauses are subject to ongoing legal challenges. Any of these challenges, or any future challenges, may result in a ruling that the industry-standard measures we, and other companies, have taken are insufficient. Additionally, it is possible that the EU-U.S. Privacy Shield or the Model Clauses may need to be some overlap between the GDPR coming into force and the United Kingdom leaving the EU. The U.K. Government has announced its intention to pass legislation which incorporates all existing EU data protection legislation into U.K.’s domestic legislation, notwithstanding Brexit, meaning that even after the U.K. has exited the EU, our applicable entities and operations likely will be bound to comply with the provisions of the GDPR. One anticipated consequence of the GDPR coming into force is that the Model Clause agreements that have been approvedupdated by the European Commission, the Swiss Administration, and the U.S. Department of Commerce. Should any of these prove to be the case, we will need to be updated to reflect the GDPR’s requirements. This means that we may need to revise our existing arrangementstake any necessary and additional measures to ensure thatcompliance with EU law with respect to our transfers of personal data transfers from the EEA to the USU.S. and other non-EEA countries. If we are unable to take such measures, then we may be at risk of experiencing reluctance or refusal of European or multi-national customers to use our solutions and incurring regulatory penalties, which may have an adverse effect on our business.
In the United States, there are numerous federal and state laws governing the privacy and security of personal information. In particular, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) establishes privacy and security standards that limit the use and disclosure of individually identifiable health information and requires the implementation of administrative, physical, and technical safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity, and availability of electronic protected health information by certain institutions. We act as a “Business Associate” through our relationships with certain customers and are thus directly subject to certain provisions of HIPAA. In addition, if we are unable to protect the privacy and security of protected health information, we could be found to have breached our contracts with customers with whom we have a Business Associate relationship. Additionally, we are subject to FCC regulations imposing obligations related to our use and disclosure of certain data related our interconnected VoIP service. If we experience a data security incident, we may be required by state law or FCC regulations to notify our customers and/or law enforcement. We may also be subject to Federal Trade Commission (“FTC”) enforcement actions if the FTC has reason to believe we have engaged in unfair or deceptive privacy or data security practices.
Noncompliance with laws and regulations relating to privacy and security of personal information, including HIPAA, or with contractual obligations under any Business Associate agreement may lead to significant fines, civil and criminal penalties, or liabilities. The U.S. Department of Health and Human Services (“HHS”) audits the compliance of Business Associates and enforces HIPAA privacy and security standards. HHS enforcement activity has become more significant over the last few years and HHS has signaled its intent to continue this trend. Violation of the FCC’s privacy rules can result in large monetary forfeitures and injunctive relief. The FTC has broad authority to seek monetary redress for affected consumers and injunctive relief. In addition to federal regulators, state attorneys general (and, in some states, individual residents) are authorized to bring civil actions seeking either injunctions or damages to the extent violations implicate the privacy of state residents. Class action lawsuits are common in the event of a data breach affecting financial or other forms of sensitive information.
Additionally, California has enacted the California Consumer Privacy Act (“CCPA”), which came into effect on January 1, 2020. Pursuant to the CCPA, we are required, among other things, to make certain enhanced disclosures related to California residents regarding our use or disclosure of their personal information, allow California residents to opt-out of certain uses and disclosures of their personal information without penalty, provide Californians with other choices related to personal data in our possession, and obtain opt-in consent before engaging in certain uses of personal information relating to Californians under the age of 16. The California Attorney General may seek substantial monetary penalties and injunctive relief in the event of our non-compliance with the CCPA. The CCPA also allows for private lawsuits from Californians in the event of certain data breaches. Aspects of the CCPA remain
compliant as well as incurring additional compliance costs. uncertain, and we may be required to make modifications to our policies or practices in order to comply.
As Internet commerce and communication technologies continue to evolve, thereby increasing online service providers’ and network users’ capacity to collect, store, retain, protect, use, process, and transmit large volumes of personal information, increasingly restrictive regulation by federal, state, or foreign agencies becomes more likely. For example, a variety of regulations that would increase restrictions on online service providers in the area of data privacy are currently being proposed, both in the U.S. and in other jurisdictions, and we believe that the adoption of increasingly restrictive regulation in the field of data privacy and security is likely, possibly as restrictive as the EU model. Canadian, anti-spam legislation, or CASL, prescribes certain rules regarding the use of electronic messages for commercial purposes and imposes certain restrictions on a service provider’s ability to electronically automatically update or change software used in a customer’s service without the customer’s consent. Penalties for non-compliance with CASL are considerable, including administrative monetary penalties of up to $10 million and a private right of action, and the
CRTC has begun actively enforcing the law and penalization non-compliant organizations. Obligations and restrictions imposed by current and future applicable laws, regulations, contracts, and industry standards may affect our ability to provide all the current features of our products and subscriptions and our customers’ ability to use our products and subscriptions, and could require us to modify the features and functionality of our products and subscriptions. In 2015, Canada’s privacy legislation was amended to implement mandatory data breach notification requirements and fines of up to $100,000 per occurrence for organizations that fail to keep a log of breaches or notify the Office of the Privacy Commissioner or affected individuals. The amendments will not become in force until such time as related regulations are created and approved, which currently is expected sometime in 2017 or early 2018. Such obligations and restrictions may limit our ability to collect, store, process, use, transmit, and share data with our customers, and to allow our customer to collect, store, retain, protect, use, process, transmit, share, and disclose data with others through our products and subscriptions. Compliance with, and other burdens imposed by, such obligations and restrictions could increase the cost of our operations. Failure to comply with obligations and restrictions related to data privacy and security could subject us to lawsuits, fines, criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity, and other losses that could harm our business.
Our customers can use our subscriptions to store contact and other personal or identifying information, and to process, transmit, receive, store, and retrieve a variety of communications and messages, including information about their own customers and other contacts. Our terms of service prohibit the use of our subscriptions to store protected health information, or PHI (a category of information regulated under the US Health Insurance Portability and Accountability Act of 1996, or HIPAA), on a non-temporary basis and impose additional restrictions and conditions with respect to customers’ use of our subscriptions to transmit or receive PHI or to store PHI on a temporary basis. Customers are able, and may be authorized under certain circumstances, to use our subscriptions to transmit, receive, and/or store PHI, and in such cases they must agree to the activation of our HIPAA conduit settings. In addition, RingCentral may execute Business Associate Agreements, or BAAs, which are HIPAA-defined contracts related to the security of PHI, with HIPAA-regulated customers. Noncompliance with laws and regulations relating to privacy and HIPAA or with contractual obligations under any BAAs may lead to significant fines, penalties, or liabilities. Our actual compliance, our customers’ perception of our compliance, costs of compliance with such regulations and obligations and customer concerns regarding their own compliance obligations (whether factual or in error) may limit the use and adoption of our subscriptions and reduce overall demand. Furthermore, privacy concerns, including the inability or impracticality of providing advance notice to customers of privacy issues related to the use of our subscriptions, may cause our customers’ customers to resist providing the personal data necessary to allow our customers to use our subscriptions effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our subscriptions in certain industries.
In addition to government activity, privacy advocacy groups and industry groups have adopted and are considering the adoption of various self-regulatory standards and codes of conduct that, if applied to our or our customers’ businesses may place additional burdens on us and our customers, which may further reduce demand for our subscriptions and harm our business.
While we try to comply with all applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and contractual commitments to the extent possible, any actual or alleged failure by us to comply with any of the foregoing or to protect our users’ privacy and data, including as a result of our systems being compromised by hacking or other malicious or surreptitious activity, could result in a loss of user confidence in our subscriptions and ultimately in a loss of users, which could materially and adversely affect our business.
Our
Regulation of personal information is evolving, and new laws could further impact how we handle personal information or could require us to incur additional compliance costs, either of which could have an adverse impact on our operations. Further, our actual compliance, our customers’ perception of our compliance, costs of compliance with such regulations, and obligations and customer concerns regarding their own compliance obligations (whether factual or in error) may limit the use and adoption of our subscriptions and reduce overall demand. Privacy-related concerns, including the inability or impracticality of providing advance notice to customers of privacy issues related to the use of our subscriptions, may alsocause our customers’ customers to resist providing the personal data necessary to allow our customers to use our subscriptions effectively. Even the perception of privacy-related concerns, whether or not valid, may inhibit market adoption of our subscriptions in certain industries.
Additionally, due to the nature of our service, we are unable to maintain complete control over data security or the implementation of measures that reduce the risk of a data security incident. For example, our customers may accidentally disclose their passwords or store them on a mobile device that is lost or stolen, creating the perception that our systems are not secure against third-party access. Additionally, our third-party contractors in the Philippines, Russia, Ukraine, India, and Poland may have access to customer data. If these or other third-party vendors violate applicable laws or our policies, such violations may also put our customers’ information at risk and could in turn have a material and adverse effect on our business.
Use or delivery of our subscriptions may become subject to new or increased regulatory requirements, taxes, or fees.
The increasing growth and popularity of Internet voice communications heighten the risk that governments will regulate or impose new or increased fees or taxes on Internet voice communications services. To the extent that the use of our subscriptions continues to grow, regulators may be more likely to seek to regulate or impose new or additional taxes, surcharges or fees on our subscriptions. Similarly, advances in technology, such as improvements in locating the geographic origin of Internet voice communications, could cause our subscriptions to become subject to additional regulations, fees or taxes, or could require us to invest in or develop new technologies, which may be costly. In addition, as we continue to expand our user base and offer more subscriptions, we may become subject to new regulations, taxes, surcharges, or fees. Increased regulatory requirements, taxes, surcharges or fees on Internet voice communications services, which could be assessed by governments retroactively or prospectively, would substantially increase our costs, and, as a result, our business would suffer. In addition, the tax status of our subscriptions could subject us to conflicting taxation requirements and complexity with regard to the collection and remittance of applicable taxes. Any such additional taxes could harm our results of operations.
Our emergency and E-911 calling services may expose us to significant liability.
The FCC requires Internet voice communications providers, such as our company, to provide E-911 service in all geographic areas covered by the traditional wire-line E-911 network. Under the FCC’s rules, Internet voice communications providers must transmit the caller’s phone number and registered location information to the appropriate public safety answering point
or PSAP,(“PSAP”) for the caller’s registered location. Our CLEC services are also required by the FCC and state regulators to provide E-911 service to the extent that they provide services to end users. We are also
requiredsubject to
route text messages to 911 to the appropriate PSAP.In Canada, the Canadian Radio-television and Telecommunications Commission, or the CRTC, has imposed similar requirements related to the provision of E-911 services in all areas of Canada where the wireline incumbent carrier offers such 911 services. The CRTC also mandates certain customer notification requirements pursuant to which new customers are required to be notified of 911 service limitations and to consent to the same before their service with us commences and we are required to provide annual update notifications to our customers of the 911 limitations of our service.
Additionally, as a provider of electronic communications services in the U.K., we are subject to regulation in the U.K. by Ofcom. Similar to the requirements in the U.S., Ofcom requires electronic communications providers, such as our company, to provide all users access to both 112 (EU-mandated) and 999 (U.K.-mandated) emergency service numbers at no charge. Ofcom also requires us to clearly and transparently inform our users of any emergency service limitations on their device including by way of labels and network announcements.
We provide E-911/999/112 service in compliance with the Ofcom, the CRTC and the FCC’s rules, as applicable, to substantially all of our customers’ interconnected VoIP lines. In some circumstances, 911/999/112 calls may be routed to a national emergency call center that routes the call to the appropriate PSAP. In addition, certain of our Internet voice communications services that work with mobile devices and are accessed through Wi-Fi networks may not be able to complete 911/999/112 calls. The FCC is considering requiring providers of Internet voice communications services on mobile devices and softphones to provide E-911 service, if such service may be used to make calls to the public telephone network. In Canada, the CRTC requires providers of Internet voice communications services on mobile devices and softphones to provide E-911 service, if such service may be used to make calls to the public telephone network. The adoption of such a requirement in the U.S. could increase our costs and make our service more expensive, which could adversely affect our results of operations.
internationally.
In connection with the regulatory requirements that we provide E-911/999/112access to all ofemergency services dialing to our interconnected VoIP customers, we must obtain from each customer, prior to the initiation of or changes to service, the physical locations at which the service will first be used for each VoIP line. For subscriptions that can be utilized from more than one physical location, we must provide customers one or more methods of updating their physical location. Because we doare not validateable to confirm that the service is used at the physical address at each location where the subscriptions may be usedaddresses provided by our customers, and because customers may use the subscriptions in locations that differ from the registeredprovide an incorrect location without providing us with theor fail to provide updated location information, it is possible that E-911/999/112emergency services calls may get routed to the wrong PSAP. We are also aware that certain customer registered addresses are incorrect, or may not have been updated. If E-911/999/112emergency services calls or text messages are not routed to the correct PSAP, and if the delay results in serious injury or death, we could be sued and the damages substantial. We are evaluating measures to attempt to verify and update the addresses for locations where our subscriptions are used. The
In August 2019, the FCC
is also considering requiringadopted an order that will require providers of non-fixed interconnected VoIP
providersservice (service that is capable of being used from more than one location) to automatically
update subscriberprovide with each 911 call, when technically feasible, specific address information that can be used to adequately identify the location
information, for purposes of
routing 911 calls.the caller. The requirement is scheduled to take effect on January 6, 2022. The implementation of this requirement may increase our costs and make our service more expensive, which could adversely affect our results of operations.
We could be subject to enforcement action by the FCC
the CRTC or
Ofcominternational regulators for our customer lines that cannot provide
E-911/999/112 serviceaccess to emergency services in accordance with regulatory requirements. This enforcement action could result in significant monetary penalties and restrictions on our ability to offer non-compliant subscriptions.
Customers
In addition, customers may in the future attempt to hold us responsible for any loss, damage, personal injury, or death suffered as a result of delayed, misrouted, or uncompleted emergency service calls or text messages. The New and Emerging Technologies 911 Improvement Act of 2008 provides that Internet voice communications providers and interconnected text messaging providers have the same protections from liability for the operation of 911 services as traditional wire-line and wireless providers. Limitations on liability for the provision of 911 service are normally governed by state law, but these limitations typically are not absolute. It is also unclear whether themessages, subject to any limitations on a provider’s liability would apply to thoseprovided by applicable laws, regulations and our customer lines for which we do not provide E-911 service. In the U.K., by law we cannot limit our liability for any death or injury arising out of our negligence, including as a result of emergency service calls that are delayed, misrouted or uncompleted due to our negligence. In Canada, the CRTC does not permit any limitation of liability related to the provision of E-911 services that is due to our gross negligence or where negligence on the part of a service provider results in physical injury, death, or damage to the customer's property or premises. In addition, Canadian provincial consumer protection laws may constrain our ability to limit liability to our non-business customers for any liability caused due to the 911 shortfalls inherent in Internet voice communications services.agreements.
We rely on third parties to provide the majority of our customer service and support representatives and to fulfill various aspects of our E-911 service. If these third parties do not provide our customers with reliable, high-quality service, our reputation will be harmed, and we may lose customers.
We offer customer support through both our online account management website and our toll-free customer support
number.number in multiple languages. Our customer support is currently provided via a third-party provider located in the Philippines, as well as our employees in the U.S.
We currently offer support almost exclusively in English. Our third-party providers generally provide customer service and support to our customers without identifying themselves as independent parties. The ability to support our customers may be disrupted by natural disasters, inclement weather conditions, civil unrest, strikes, and other adverse events in the Philippines. Furthermore, as we expand our operations internationally, we may need to make significant expenditures and investments in our customer service and support to adequately address the complex needs of international customers, such as support in
multipleadditional foreign languages.
We also use third parties to deliver onsite professional services to our customers in deploying our solutions. If these vendors do not deliver timely and high-quality services to our customers, our reputation could be damaged, and we could lose customers. In addition,
third party professional services vendors may not be available when needed, which would adversely impact our ability to deliver on our customer commitments.
We also contract with third parties to provide
E-911emergency services
and 999/112 services (incalls in the United States, Canada, the U.K.
),
and other jurisdictions in which we provide access to emergency services dialing, including assistance in routing emergency calls and terminating
E-911/999/112emergency services calls. Our
domestic providers operate a national call center that is available 24 hours a day, seven days a week, to receive certain emergency calls and maintain PSAP
(Emergency Call Handling in the U.K.) databases for the purpose of deploying and operating
E-911/999/112E-911 services.
We rely on providers for similar functions in other jurisdictions in which we provide access to emergency services dialing. On mobile devices, we
generally rely on the underlying cellular or wireless carrier to provide
E-911/999/112 services.emergency services dialing. Interruptions in service from our vendors could cause failures in our customers’ access to E-911/999/112 services and expose us to liability and damage our reputation.
If any of these third parties do not provide reliable, high-quality service, our reputation and our business will be harmed. In addition, industry consolidation among providers of services to us may impact our ability to obtain these services or increase our costs for these services.
We are
Risks Related to Intellectual Property
Accusations of infringement of third-party intellectual property rights could materially and adversely affect our business.
There has been substantial litigation in the
process of expanding our international operations,areas in which
exposes us to significant risks.To date,we operate regarding intellectual property rights. For instance, we have not generated significant revenues from outside of the U.S., Canadarecently and the U.K. However, we already have significant operations outside these countries, including software development operations in Russia and China, and software development and quality assurance operations in Ukraine, and sales and marketing operations in the Philippines,past been sued by third parties claiming infringement of their intellectual property rights and we expectmay be sued for infringement from time to growtime in the future. Also, in some instances, we have agreed to indemnify our international presencecustomers, resellers, and carriers for expenses and liability resulting from claimed intellectual property infringement by our solutions. From time to time, we have received requests for indemnification in connection with allegations of intellectual property infringement and we may choose, or be required, to assume the defense and/or reimburse our customers and/or resellers and carriers for their expenses, settlement and/or liability. In the past, we have settled infringement litigation brought against us; however, we cannot assure you that we will be able to settle any future claims or, if we are able to settle any such claims, that the settlement will be on terms favorable to us. Our broad range of technology may increase the likelihood that third parties will claim that we, or our customers and/or resellers, and carriers, infringe their intellectual property rights.
We have in the past received, and may in the future including through the expansionreceive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. Furthermore, regardless of their merits, accusations and lawsuits like these, whether against us or our Global Office solution. The future successcustomers, resellers, and carriers, may require significant time and expense to defend, may negatively affect customer relationships, may divert management’s attention away from other aspects of our business will depend, in part, on our ability to expand our operations and, customer base worldwide. Operating in international markets requires significant resourcesupon resolution, may have a material adverse effect on our business, results of operations, financial condition, and management attention and will subjectcash flows.
Certain technology necessary for us to regulatory, economic, and political risks that are different from thoseprovide our subscriptions may, in fact, be patented by other parties either now or in the U.S. Duefuture. If such technology were validly patented by another person, we would have to our limited experience with international operations and developing and managing sales and distribution channels in international markets, our international expansion effortsnegotiate a license for the use of that technology. We may not be successful. In addition, we will face risks in doing business internationallyable to negotiate such a license at a price that is acceptable to us or at all. The existence of such a patent, or our inability to negotiate a license for any such technology on acceptable terms, could force us to cease using the technology and cease offering subscriptions incorporating the technology, which could materially and adversely affect our business including:and results of operations.
If we, or any of our abilitysolutions, were found to comply with differing and evolving technical and environmental standards, data protection and telecommunications regulations, and certification requirements outsidebe infringing on the U.S.;
difficulties and costs associated with staffing and managing foreign operations;
potentially greater difficulty collecting accounts receivable and longer payment cycles;
the need to adapt and localize our subscriptions for specific countries;
the need to offer customer care in various native languages;
reliance on third parties over which we have limited control, including TELUS, BT, and other international resellers, for marketing and reselling our subscriptions;
availability of reliable broadband connectivity and wide area networks in targeted areas for expansion;
lower levels of adoption of credit or debit card usage for Internet related purchases by foreign customers and compliance with various foreign regulations related to credit or debit card processing and data protection requirements;
difficulties in understanding and complying with local laws, regulations, and customs in foreign jurisdictions;
export controls and economic sanctions administered by the Department of Commerce Bureau of Industry and Security and the Treasury Department’s Office of Foreign Assets Control;
tariffs and other non-tariff barriers, such as quotas and local content rules;
compliance with various anti-bribery and anti-corruption laws such as the Foreign Corrupt Practices Act and U.K. Bribery Act of 2010;
more limited protection for intellectual property rights in some countries;
adverse tax consequences;
fluctuations in currency exchange rates, particularly in light of the Brexit vote and other recent political developments,any third party, we could be subject to liability for such infringement, which could increase the pricebe material. We could also be prohibited from using or selling certain subscriptions, prohibited from using certain processes, or required to redesign certain subscriptions, each of our subscriptions outside of the U.S. when denominated in USD, increase the expenses of our international operations, including expenses related to foreign contractors, and expose us to foreign currency exchange rate risk;
fluctuations in currency exchange rates, particularly in light of the Brexit vote and other recent political developments, which could reduce the amount of revenues we generate outside of the U.S. related to customer contracts that are denominated in local currencies of the countries we operate in, currently Canada and the U.K., or which could reduce the expenses incurred in our operations or through our contractors outside the U.S. that are denominated in local currencies, currently the U.K., Russia, China, the Philippines, and Ukraine;
exchange control regulations, which might restrict or prohibit our conversion of other currencies into U.S. Dollars;
restrictions on the transfer of funds;
our ability to effectively price our subscriptions in competitive international markets;
new and different sources of competition;
deterioration of political relations between the U.S. and other countries, particularly Russia, Ukraine, China, and the Philippines; and including the possibility of a breakdown in diplomatic relations between the U.S., the U.K., or the EU and Russia or sanctions implemented by the U.S., the U.K., or the EU against Russia or vice versa, which could have a material adverse effect on our business and results of operations.
These and other outcomes may:
result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers;
cause us to pay license fees for intellectual property we are deemed to have infringed;
cause us to incur costs and devote valuable technical resources to redesigning our subscriptions;
cause our cost of revenues to increase;
cause us to accelerate expenditures to preserve existing revenues;
cause existing or new vendors to require pre-payments or letters of credit;
materially and adversely affect our brand in the marketplace and cause a substantial loss of goodwill;
cause us to change our business methods or subscriptions;
require us to cease certain business operations or offering certain subscriptions or features; and
lead to our bankruptcy or liquidation.
Our limited ability to protect our intellectual property rights could materially and adversely affect our business.
We rely, in part, on patent, trademark, copyright, and trade secret law to protect our intellectual property in the U.S. and abroad. We seek to protect our technology, software, documentation and other information under trade secret and copyright law, which afford only limited protection. For example, we typically enter into confidentiality agreements with our employees, consultants, third-party contractors, customers, and vendors in an effort to control access to, use of, and distribution of our technology, software, development operationsdocumentation, and other information. These agreements may not effectively prevent unauthorized use or disclosure of confidential information and may not provide an adequate remedy in Russia;the event of such unauthorized use or disclosure, and
it may be possible for a third party to legally reverse engineer, copy, or otherwise obtain and use our technology without authorization. In addition, improper disclosure of trade secret information by our current or former employees, consultants, third-party contractors, customers, or vendors to the public or others who could make use of the trade secret information would likely preclude that information from being protected as a trade secret.politicalWe also rely, in part, on patent law to protect our intellectual property in the U.S. and internationally. Our intellectual property portfolio includes over 200 issued patents, which expire between 2022 and 2038. We also have 45 patent applications pending examination in the U.S. and 16 patent applications pending examination in foreign jurisdictions, all of which are related to U.S. applications. We cannot predict whether such pending patent applications will result in issued patents or social unrest, economic instability, conflictwhether any issued patents will effectively protect our intellectual property. Even if a pending patent application results in an issued patent, the patent may be circumvented or warits validity may be challenged in a specific countryvarious proceedings in United States District Court or region,before the U.S. Patent and Trademark Office, such as Post Grant Review or Inter Partes Review, which may require legal representation and involve substantial costs and diversion of management time and resources. In addition, we cannot assure you that every significant feature of our solutions is protected by our patents, or that we will mark our solutions with any or all patents they embody. As a result, we may be prevented from seeking injunctive relief or damages, in whole or in part for infringement of our patents.
The unlicensed use of our brand, including domain names, by third parties could harm our reputation, cause confusion among our customers and impair our ability to market our solutions and subscriptions. To that end, we have registered numerous trademarks and service marks and have applied for registration of additional trademarks and service marks and have acquired a large number of domain names in and outside the events over the last few yearsU.S. to establish and protect our brand names as part of our intellectual property strategy. If our applications receive objections or are successfully opposed by third parties, it will be difficult for us to prevent third parties from using our brand without our permission. Moreover, successful opposition to our applications might encourage third parties to make additional oppositions or commence trademark infringement proceedings against us, which could be costly and time consuming to defend against. If we are not successful in protecting our trademarks, our trademark rights may be diluted and subject to challenge or invalidation, which could materially and adversely affect our brand.
Despite our efforts to implement our intellectual property strategy, we may not be able to protect or enforce our proprietary rights in the Ukraine, including political demonstrations,U.S. or internationally (where effective intellectual property protection may be unavailable or limited). For example, we have entered into agreements containing confidentiality and invention assignment provisions in connection with the annexationoutsourcing of the Crimea region of Ukraine by Russia, the hostile relations between Russia and the Ukraine, and disruptions caused by pro-Russian separatists in the Ukraine, which could have an adverse impact on our third-partycertain software development and quality assurance operations there.
Our failureactivities to managethird-party contractors located in Russia and Ukraine. We have also entered into an agreement containing a confidentiality provision with a third-party contractor located in the Philippines, where we have outsourced a significant portion of our customer support function. We cannot assure you that agreements with these third-party contractors or their agreements with their employees and contractors will adequately protect our proprietary rights in the applicable jurisdictions and foreign countries, as their respective laws may not protect proprietary rights to the same extent as the laws of the U.S. In addition, our competitors may independently develop technologies that are similar or superior to our technology, duplicate our technology in a manner that does not infringe our intellectual property rights or design around any of these risks successfully could harm our future international operationspatents. Furthermore, detecting and our overall business.
We depend largely on the continued servicespolicing unauthorized use of our seniorintellectual property is difficult and resource-intensive. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation, whether successful or not, could result in substantial costs and diversion of management and other key employees, the loss of any of whom could adversely affect our business, results of operations and financial condition.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue opportunities and services innovations. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience, and effort of our co-founder, Chairman and Chief Executive Officer, Vladimir Shmunis. None of our executive officers or other senior management personnel is bound by a written employment agreement and any of them may therefore terminate employment with us at any time with no advance notice. The replacement of any of these senior management personnel would likely involve significant time and costs,resources and such loss could significantly delay or prevent the achievement of our business objectives. The loss of the services of our senior management or other key employees for any reason could adversely affect our business, financial condition, or results of operations.
If we are unable to hire, retain, and motivate qualified personnel, our business will suffer.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. We believe that there is, and will continue to be, intense competition for highly skilled technical and other personnel with experience in our industry in the San Francisco Bay Area, where our headquarters is located, in Denver, Colorado, where our U.S. sales and customer support office and our network operations center is located, and in other locations, such as Charlotte, North Carolina; Boca Raton, Florida; London, England, and Xiamen, China, where we maintain offices. We must provide competitive compensation packages and a high-quality work environment to hire, retain, and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development, marketing, and sale of existing and new subscriptions, which could have a material adverse effect on our business, financial condition, and results of operations. To the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.
Volatility in, or lack
Our use of performance of, our stock price may also affectopen source technology could impose limitations on our ability to attract and retain key personnel. Many ofcommercialize our key personnel are, or will soon be, vested in a substantial amount of shares of common stock, stock options, or restricted stock units. Employees may be more likely to terminate their employment with us if the shares they own or the shares underlying theirsubscriptions.
vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our Class A common stock. If we are unable to retain our employees, our business, results of operations, and financial condition will be harmed.
We may expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations, and harm our results of operations.
Our business strategy may, from time to time, include acquiring or investing in complementary services, technologies or businesses, such as our acquisition of Glip in 2015. We cannot assure you that we will successfully identify suitable acquisition candidates, integrate or manage disparate technologies, lines of business, personnel and corporate cultures, realize our business strategy or the expected return on our investment, or manage a geographically dispersed company. Any such acquisition or investment could materially and adversely affect our results of operations. The acquisition and integration process is complex, expensive and time-consuming, and may cause an interruption of, or loss of momentum in, product development and sales activities and operations of both companies, and we may incur substantial cost and expense, as well as divert the attention of management. We may issue equity securities which could dilute current stockholders’ ownership, incur debt, assume contingent or other liabilities and expend cash in acquisitions, which could negatively impact our financial position, stockholder equity, and stock price.
Acquisitions and other strategic investments involve significant risks and uncertainties, including:
the potential failure to achieve the expected benefits of the combination or acquisition;
unanticipated costs and liabilities;
difficulties in integrating new products and subscriptions,use open source software businesses, operations, and technology infrastructure in an efficient and effective manner;
difficulties in maintaining customer relations;
the potential loss of key employees of the acquired businesses;
the diversion of the attention of our senior management from the operation of our daily business;
the potential adverse effect on our cash position to the extent that we use cash for the purchase price;
the potential significant increase of our interest expense, leverage, and debt service requirements if we incur additional debt to pay for an acquisition;
the potential issuance of securities that would dilute our stockholders’ percentage ownership;
the potential to incur large and immediate write-offs and restructuring and other related expenses; and
the inability to maintain uniform standards, controls, policies, and procedures.
Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that we will realize the anticipated benefits of any acquisition or investment. In addition, our inability to successfully operate and integrate newly acquired businesses appropriately, effectively, and in a timely manner could impair our ability to take advantage of future growth opportunities and other advances in technology, as well as on our revenues, gross margins, and expenses.
We may be subject to liabilities on past sales for taxes, surcharges, and fees.
We believe we collect state and local sales tax and use, excise, utility user, and ad valorem taxes, fees, or surcharges in all relevant jurisdictions in which we generate sales, based on our understanding of the applicable laws in those jurisdictions. Such tax, fees and surcharge laws and rates vary greatly by jurisdiction. 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. Therefore, taxing authorities may challenge our position and may decide to audit our business and operations with respect to such taxes, which could result in increased tax liabilities for us or our customers that could materially and adversely affect our results of operations and our relationships with our customers.
The application of other indirect taxes (such as sales and use tax, value added tax, goods and services tax, business tax, and gross receipt tax) to e-commerce businesses, such as ours, is a complex and evolving area. In February 2016, the U.S. federal government enacted legislation permanently extending the moratorium on states and other local authorities imposing access or discriminatory taxes on the Internet. The application of existing, new, or future laws relating to indirect taxes on e-commerce businesses, whether in the U.S. or internationally, could have adverse effects on our business, prospects, and results of operations.
There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.
Changes in effective tax rates, or adverse outcomes resulting from examination of our income or other tax returns, could adversely affect our results of operations and financial condition.
Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
changes in the valuation of our deferred tax assets and liabilities;
expiration of, or lapses in, the research and development tax credit laws;
expiration or non-utilization of net operating loss carryforwards;
tax effects of share-based compensation;
expansion into new jurisdictions;
potential challenges to and costs related to implementation and ongoing operation of our intercompany arrangements;
changes in tax laws and regulations and accounting principles, or interpretations or applications thereof; and
certain non-deductible expenses as a result of acquisitions.
Any changes in our effective tax rate could adversely affectplatform on which our results of operations.
We may be unable to use some or all of our net operating loss carryforwards, which could materially and adversely affect our reported financial condition and results of operations.
As of December 31, 2016, we had federal and state net operating loss carryforwards, or NOLs, of $197.6 million and $137.6 million, respectively, available to offset future taxable income, due to prior period losses, which, if not utilized, will begin to expire in 2023 for federal purposes and have started to expire in 2013 for state purposes. We also have federal research tax credit carryforwards that will begin to expire in 2028. Realization of these net operating loss and research tax credit carryforwards depends on future income, and theresubscriptions operate. There is a risk that our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could materially and adversely affect our results of operations.
In addition, under Section 382the owners of the Internal Revenue Code of 1986, as amended,copyrights in such software may claim that such licenses impose unanticipated conditions or the Code, our ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders, who each own at least 5% of our stock, increase their collective ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws.
Except for an insignificant amount of deferred tax assets recognized in connection with NOLs in the Netherlands and China, no deferred tax assets have been recognized on our consolidated balance sheets related to these NOLs, as they are fully offset by a valuation allowance. If we have previously had, or have in the future, one or more Section 382 “ownership changes,” including in connection with our initial public offering or another offering, or if we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOLs, even if we achieve profitability. If we are limited in our ability to use our NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our NOLs. This could materially and adversely affect our results of operations.
If our internal control over financial reporting is not effective, it may adversely affect investor confidence in our company.
Pursuant to Section 404 of the Sarbanes-Oxley Act, our independent registered public accounting firm, KPMG LLP, is required to and has issued an attestation report as of December 31, 2016. While management concluded internal control over financial reporting was effective as of December 31, 2016, there can be no assurance that material weaknesses will not be identified in the future. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. As a result, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Our remediation efforts may not enable us to avoid a material weakness in the future.
If our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our Class A common stock to decline, and we may be subject to investigation or sanctions by the Securities and Exchange Commission, or the SEC.
We may not be successful in continuing to obtain local access services through our CLEC subsidiary.
Through our competitive local exchange carrier subsidiary, RCLEC, we have been able to purchase network services directly from ILECs and from other CLECs in certain geographic markets, at lower prices than we pay for such services through third-party network service providers, such as Level 3 Communications, Inc. and Bandwidth.com, Inc. Using the services of our CLEC subsidiary has also helped us improve our quality of service. However, the ILECs may favor themselves and their affiliates and may not provide network services to us at lower prices than we could obtain through Level 3 Communications, Inc., Bandwidth.com, Inc., other third-party CLECs, or at all. If we are unable to continue to reduce our pricing as a result of obtaining network services through our subsidiary, we may be forced to rely on other third-party network service providers and be unable to effectively lower our cost of service. In addition, if ILECs or other CLECs do not provide us with any access, we will not be able to use our RCLEC subsidiary as intended to improve the quality of our subscriptions or lower the cost of our subscriptions.
If we are unable to effectively process local number and toll-free number portability provisioning in a timely manner, our growth may be negatively affected.
We support local number and toll-free number portability, which allows our customers to transfer to us and thereby retain their existing phone numbers when subscribing to our services. Transferring numbers is a manual process that can take up to 15 business days or longer to complete. A new customer of our subscriptions must maintain both our subscription and the customer’s existing phone service during the number transferring process. Any delay that we experience in transferring these numbers typically results from the fact that we depend on third-party carriers to transfer these numbers, a process that we do not control, and these third-party carriers may refuse or substantially delay the transfer of these numbers to us. Local number portability is considered an important feature by many potential customers, and if we fail to reduce any related delays, we may experience increased difficulty in acquiring new customers. Moreover, the FCC requires Internet voice communications providers, which are companies like us that provide subscriptions similar to traditional phone companies, including the ability to make calls to and receive calls from the public phone network, to comply with specified number porting timeframes when customers leave our subscription for the services of another provider. In Canada, the CRTC has imposed a similar number portability requirement on subscription providers like us. Similarly in the U.K., Ofcom requires providers of electronic communications services, like us, to provide number portability as soon as practicable and on reasonable terms. If we, or our third-party carriers, are unable to process number portability requests within the requisite timeframes, we could be subject to fines and penalties, including, in the U.K., compensation payable to our customers. Additionally, in the U.S., both customers and carriers may seek relief from the relevant state public utility commission, the FCC, or in state or federal court for violation of local number portability requirements.
Our business could suffer if we cannot obtain or retain direct inward dialing numbers, or DIDs, are prohibited from obtaining local or toll-free numbers, or are limited to distributing local or toll-free numbers to only certain customers.
Our future success dependsrestrictions on our ability to procure large quantities of local and toll-free DIDsmarket or provide our subscriptions. If such owners prevail in such claim, we could be required to make the U.S. and foreign countries in desirable locations at a reasonable cost and without restrictions. Our ability to procure and distribute DIDs depends on factors outside of our control, such as applicable regulations, the practices of the communications carriers that provide DIDs, the cost of these DIDs, and the level of demand for new DIDs. Due to their limited availability, there are certain popular areasource code prefixes that we generally cannot obtain. Our inability to acquire DIDs for our operations would makeproprietary software (which contains our subscriptions less attractivevaluable trade secrets) generally available to potential customers in the affected local geographic areas. In addition, future growth in our customer base, together with growth in the customer bases of other providers of cloud-based business communications, has increased, which increases our dependence on needing sufficiently large quantities of DIDs.
We rely on third-party hardware and software that may be difficultthird parties, including competitors, at no cost, to replace or which could cause errors or failures of our subscriptions.
We rely on purchased or leased hardware and software licensedseek licenses from third parties in order to offercontinue offering our subscriptions. In some cases, we integrate third-party licensed software components intosubscriptions, to re-engineer our platform. This hardware and software may not continuetechnology, or to discontinue offering our subscriptions in the event re-engineering cannot be available at reasonable prices oraccomplished on commercially reasonable terms,a timely basis or at all. Any loss of the right to useall, any of this hardware or software could significantly increase our expenses and otherwise result in delays in the provisioning of our subscriptions until equivalent technology is either developed by us, or, if available, is identified, obtained, and integrated. Any errors or defects in third-party hardware or software could result in errors or a failure of our subscriptions which could harm our business.
We may not be able to manage our inventory levels effectively, which may lead to inventory obsolescence that would force us to incur inventory write-downs.
Our vendor-supplied phones have lead times of up to 10 to 20 weeks for delivery and are built to forecasts that are necessarily imprecise. It is likely that from time to time we will have either excess or insufficient product inventory. In addition, because we rely on third-party vendors for the supply of our vendor-supplied phones, our inventory levels are subject to the conditions regarding the timing of purchase orders and delivery dates that are not within our control. Excess inventory levels would subject us to the risk of inventory obsolescence, while insufficient levels of inventory may negatively affect relations with customers. For instance, our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply of our subscriptions could result in loss of customers or harm to our ability to attract new customers. Any reduction or interruption in the ability of our vendors to supply our customers with vendor-supplied phones could cause us to lose revenue, damage our customer relationships and harm our reputation in the marketplace. Any of these factors could have a material adverse effect on our business, financial condition or results of operations.
We currently depend on three suppliers and one fulfillment agent to configure and deliver the phones that we sell and any delay or interruption in manufacturing, configuring and delivering by these third parties would result in delayed or reduced shipments to our customers and may harm our business.
We rely on Cisco Systems, Inc., Polycom, Inc., and Yealink Network Technology Co., Ltd. to provide phones that we offer for sale to our customers that use our subscriptions, and we rely on Westcon Group, Inc. (Westcon) to configure and deliver the phones that we sell to our customers. Accordingly, we could be adversely affected if our suppliers or Westcon fail to maintain competitive phones or configuration services, or fail to continue to make them available on attractive terms, or at all.
If Westcon is unable to deliver phones of acceptable quality, or if there is a reduction or interruption in Westcon’s ability to supply the phones in a timely manner, our ability to bring services to market, the reliability of our subscriptions and our relationships with customers or our overall reputation in the marketplace could suffer, which could cause us to lose revenue. We expect that it could take several months to effectively transition to new third-party manufacturers or fulfillment agents.
If our vendor-supplied phones are not able to interoperate effectively with our own back-end servers and systems, our customers may not be able to usediscontinue our subscriptions, which could harm our reputation, result in customer losses or claims, increase our costs or otherwise materially and adversely affect our business financial condition and results of operations.
Phones must interoperate with our back-end servers and systems, which contain complex specifications and utilize multiple protocol standards and software applications. Currently, the phones used by our customers are manufactured by only three third-party providers: Cisco Systems, Polycom, and Yealink Network Technology Co. If any of these providers changes the operation of their phones, we will be required
Risks Related to
undertake development and testing efforts to ensure that the new phones interoperate with our system. These efforts may require significant capital and employee resources, and we may not accomplish these development efforts quickly or cost-effectively, if at all. If our vendor-supplied phones do not interoperate effectively with our system, our customers’ ability to use our subscriptions could be delayed or orders for our subscriptions could be cancelled, which would harm our business, financial condition, and results of operations.We may require additional capital to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances. If capital is not available to us, our business, results of operations, and financial condition may be adversely affected.
We intend to continue to make expenditures and investments to support the growth of our business and may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances, including the need to develop new solutions or enhance our existing solutions, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them on terms that are acceptable to us, or at all. Any debt financing that we secure in the future could involve restrictive covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, the restrictive covenants in credit facilities we may secure in the future may restrict us from being able to conduct our operations in a manner required for our business and may restrict our growth, which could have an adverse effect on our business, financial condition, or results of operations.
We cannot assure you that we will be able to comply with any such restrictive covenants. In the event that we are unable to comply with these covenants in the future, we would seek an amendment or waiver of the covenants. We cannot assure you that any such waiver or amendment would be granted. In such event, we may be required to repay any or all of our existing borrowings, and we cannot assure you that we will be able to borrow under our existing credit agreements, or obtain alternative funding arrangements on commercially reasonable terms, or at all.
In addition, volatility in the credit markets may have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of ourOur Class A common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to pursue our business objectivesCommon Stock, Our Notes and to respond to business opportunities, challenges, or unforeseen circumstances could be significantly limited, and our business, results of operations, financial condition and prospects could be materially and adversely affected.
Our Charter Provisions
The market price of our Class A common stock is likely to be volatile and could decline.
The stock market in general, and the market for SaaS and other technology-related stocks in particular, has been highly volatile. As a result, the market price and trading volume for our Class A common stockCommon Stock has been and may continue to be highly volatile, and investors in our Class A common stockCommon Stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. Factors that could cause the market price of our Class A common stockCommon Stock to fluctuate significantly include:
our operating and financial performance and prospects and the performance of other similar companies;
our quarterly or annual earnings or those of other companies in our industry;
conditions that impact demand for our subscriptions;
the public’s reaction to our press releases, financial guidance, and other public announcements, and filings with the Securities and Exchange Commission, or SEC;
changes in earnings estimates or recommendations by securities or research analysts who track our Class A common stock;
market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
strategic actions by us or our competitors, such as acquisitions or restructurings;
changes in government and other regulations;
changes in accounting standards, policies, guidance, interpretations, or principles;
arrival and departure of key personnel;
sales of common stock by us, our investors, or members of our management team; and
changes in general market, economic, and political conditions in the U.S. and global economies or financial markets, including those resulting from natural disasters, telecommunications failure, cyber attack,cyber-attack, changes in diplomatic or trade relationships, civil unrest in various parts of the world, acts of war, terrorist attacks, or other catastrophic events.
Any of these factors may result in large and sudden changes in the trading volume and market price of our Class A
common stockCommon Stock and may prevent investors from being able to sell their shares at or above the price they paid for their shares of our Class A
common stock.Common Stock. Following periods of volatility in the market price of a company’s securities, stockholders often file securities class-action lawsuits against such company. Our involvement in a class-action lawsuit could divert our senior management’s attention and, if adversely determined, could have a material and adverse effect on our business, financial condition, and results of operations.
Our corporate headquarters, one of our data centers and co-location facilities, our third-party customer service and support facilities, and a research and development facility are located near known earthquake fault zones, and the occurrence of an earthquake, tsunami, or other catastrophic disaster could damage our facilities or the facilities of our contractors, which could cause us to curtail our operations.
Our corporate headquarters, one of our data centers and one of our subsidiary’s co-location facilities are located in California, our third-party customer service call centers operated by our contractors are located in the Philippines, and one of our research and development facilities is located on the coast of China. All of these locations are on the Pacific Rim near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes and tsunamis. Additionally, our China facility, our third-party customer service and support facilities in the Philippines, and our CLEC subsidiary’s co-location facility in Florida are located in areas subject to hurricanes. We and our contractors are also vulnerable to other types of disasters, such as power loss, fire, floods, pandemics, cyber attack, war, political unrest, and terrorist attacks and similar events that are beyond our control. If any disasters were to occur, our ability to operate our business could be seriously impaired, and we may endure system interruptions, reputational harm, loss of intellectual property, delays in our subscriptions development, lengthy interruptions in our services, breaches of data security, and loss of critical data, all of which could harm our future results of operations. In addition, we do not carry earthquake insurance and we may not have adequate insurance to cover our losses resulting from other disasters or other similar significant business
interruptions. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.
The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations. Compliance with these rules and regulations has increased our legal and financial compliance costs, made some activities more difficult, time-consuming, or costly, and increased demand on our systems and resources, and these costs and demands may become greater especially now that we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. Our failure to comply with these laws, regulations, and standards could materially and adversely affect our business and results of operations.
As a result of filings required of a public company, our business and financial condition has become more visible, which we believe may result in more litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be materially and adversely affected, and even if the claims do not result in litigation or are resolved in our favor. These claims, and the time and resources necessary to resolve them, could divert the resources of our management and materially and adversely affect our business and results of operations.
The dual class structure of our common stock as contained in our charter documents has the effect of concentrating voting control with a limited number of stockholders that held our stock prior to our initial public offering, including our founders and our executive officers, employees and directors and their affiliates, and venture capital investors, and limiting other stockholders’ ability to influence corporate matters.
Our Class B common stock,
par value $0.0001 per share (“Class B Common Stock”), has 10 votes per share, and our Class A
common stockCommon Stock has one vote per share. Stockholders who hold shares of Class B
common stock,Common Stock, including our founders, previous investors and our executive officers, employees and directors and their affiliates, together hold approximately
68%59% of the voting power of our outstanding capital stock, and our founders, including our CEO and Chairman, together hold a majority of such voting power. As a result, for the foreseeable future
, our stockholders who acquired their shares prior to the completion of our initial public offering will continue to have significant influence over the management and affairs of our company and over the outcome of
allmany matters submitted to our stockholders for approval, including the election of directors and significant corporate transactions, such as a merger, consolidation or sale of substantially all of our assets.
In addition, the holders of Class B
common stockCommon Stock collectively will continue to control
allmany matters submitted to our stockholders for approval even if their stock holdings represent less than 50% of the outstanding shares of our common stock. Because of the
ten-to-oneten to one voting ratio between our Class B and Class A
common stock,Common Stock, the holders of our Class B
common stockCommon Stock collectively will continue to control a majority of the combined voting power of our common stock so long as the shares of Class B
common stockCommon Stock represent at least 10% of all outstanding shares of our Class A and Class B
common stock.Common Stock. This concentrated control
willmay limit your ability to influence corporate matters for the foreseeable future, and, as a result, the market price of our Class A
common stockCommon Stock could be adversely affected.
Future transfers by holders of Class B
common stockCommon Stock will generally result in those shares converting to Class A
common stock,Common Stock, which
willmay have the effect, over time, of increasing the relative voting power of those holders of Class B
common stockCommon Stock who retain their shares in the long term. If, for example, Mr. Shmunis retains a significant portion of his holdings of Class B
common stockCommon Stock for an
extended period of time, he could, in the future, control a majority of the combined voting power of our Class A and Class B common stock.Common Stock. As a board member, Mr. Shmunis owes a fiduciary dutyduties to our stockholders and must act in
good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Shmunis is
generally entitled to vote his shares in his own interests, which may not always be in the interests of our stockholders generally.
We have never paid cash dividends and do not anticipate paying any cash dividends on our common stock.
We currently do not plan to declare dividends on shares of our common stock in the foreseeable future and plan to, instead, retain any earnings to finance our operations and growth. Because we have never paid cash dividends and do not anticipate paying any cash dividends on our common stock in the foreseeable future, the only opportunity to achieve a return on an investor’s investment in our company will be if the market price of our Class A
common stockCommon Stock appreciates and the investor sells its shares at a profit. There is no guarantee that the price of our Class A
common stockCommon Stock that will prevail in the market will ever exceed the price that an investor pays.
If research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our Class A
common stock,Common Stock, our stock price and trading volume may decline.
The trading market for our Class A
common stockCommon Stock will depend in part on the research and reports that research analysts publish about us and our business. If we do not maintain adequate research coverage or if one or more analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, the price of our Class A
common stockCommon Stock may decline. If one or more of the research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our Class A
common stockCommon Stock may decrease, which could cause our stock price or trading volume to decline.
We may not have the ability to raise funds necessary to settle conversions of the Notes in cash or to repurchase the Notes upon a fundamental change or pay the principal amount at maturity, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes.
Holders of the “Notes will have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change before the maturity date at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid special interest, if any, as set forth in the indenture governing the Notes. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our Class A Common Stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted, as set forth in the indenture governing the Notes. Moreover, we will be required to repay the Notes in cash at their maturity unless earlier converted, redeemed or repurchased. However, we may not have enough available cash on hand or be able to obtain financing at the time we are required to make repurchases of the Notes surrendered therefor or pay cash with respect to the Notes being converted or at their maturity.
In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes or at their maturity may be limited by law, regulatory authority, or agreements governing our future indebtedness. Our failure to repurchase the Notes at a time when the repurchase is required by the indenture governing the Notes or to pay cash upon conversions of Notes or at their maturity as required by the indenture governing the Notes would constitute a default under such indenture. Moreover, the occurrence of a fundamental change under the indenture governing the Notes could constitute an event of default under any such agreement. A default under such indenture, or the fundamental change itself, could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled under the Indenture to convert their Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, in certain circumstances, such as conversion by holders or redemption, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability.
The capped call transactions may affect the value of the Notes and our Class A Common Stock and we are subject to counterparty risk.
In connection with the issuance of the Notes, we entered into capped call transactions with the counterparties. The capped call transactions cover, subject to customary adjustments, the number of shares of our Class A Common Stock initially underlying the Notes. The capped call transactions are expected to offset the potential dilution as a result of conversion of the Notes.
In connection with establishing their initial hedge of the capped call transactions, the counterparties or their respective affiliates entered into various derivative transactions with respect to our Class A Common Stock concurrently with or shortly after the pricing of the Notes, including with certain investors in the Notes.
In addition, the counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our Class A Common Stock and/or purchasing or selling our Class A Common Stock or other securities of ours in secondary market transactions at any time prior to the maturity of the Notes (and are likely to do so on each exercise date of the capped call transactions). This activity could also cause or prevent an increase or a decrease in the market price of our Class A Common Stock.
We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of the Notes or the shares of our Class A Common Stock. In addition, we do not make any representation that these transactions will not be discontinued without notice.
In addition, the counterparties to the capped call transactions are financial institutions and we will be subject to the risk that one or more of the counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the capped call transactions. If a counterparty to one or more capped call transaction becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure will depend on many factors but, generally, it will increase if the market price or the volatility of our Class A Common Stock increases. Upon a default or other failure to perform, or a termination of obligations, by a counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our Class A Common Stock. We can provide no assurances as to the financial stability or viability of the counterparties.
Anti-takeover provisions in our restated certificate of incorporation and bylaws and under Delaware corporate law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our Class A
common stock.Common Stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation and bylaws include provisions that:
authorize our board of directors to issue, without further action by the stockholders, up to 100,000,000 shares of undesignated preferred stock;
require that, once our outstanding shares of Class B common stockCommon Stock represent less than a majority of the combined voting power of our common stock, any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; specify that special meetings of our stockholders can be called only by our board of directors, the ChairChairman of our board of directors, or our Chief Executive Officer;
establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
prohibit cumulative voting in the election of directors;
provide that our directors may be removed only for cause, subject to such amendment as provided in our current proxy statement;
provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation; and
reflect two classes of common stock, as discussed above.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
ITEM
| |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
Our corporate headquarters is located in Belmont, California, and consists ofapproximately 84,000110,000 square feet of office space, under a leaseleases that expires inexpire from July 2021.2021 through December 2022.
We also lease offices in Denver, Colorado; Charlotte, North Carolina; Boca Raton,Fort Lauderdale, Florida; London, England; Xiamen, China; Paris, France; and Kwun Tong, Hong Kong.other small offices worldwide. In addition, we lease space from third-party datacenter hosting facilities under co-location agreements that support our cloud infrastructure, the most significant locations being Vienna and Ashburn, Virginia; San Jose and Santa Clara, California; Chicago, Illinois; Amsterdam, the Netherlands; Zurich, Switzerland; Sydney, Australia; and Singapore. We expect to further expand our facilities and datacenter capacity internationally during the year ending December 31, 2017.other small locations worldwide. We believe that we will be able to obtain additional space at other locations at commercially reasonable terms to support our continuing expansion.
We are subject
Information with respect to certain legal proceedings described below, and from time to timethis item may be involvedfound in a variety of claims, lawsuits, investigations,Note 9 - Commitment and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters, and other litigation matters relating to various claims that ariseContingencies in the normal course of business. Defending such proceedings is costly and can impose a significant burden on management and employees, we may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained.We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. We assess our potential liability by analyzing specific litigation and regulatory matters using reasonably available information. We develop our views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Legal fees are expensed in the period in which they are incurred. As of December 31, 2016, we did not have any accrued liabilities recorded for such loss contingencies.
On April 21, 2016, Supply Pro Sorbents, LLC (SPS) filed a putative class action against us 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 our customers when sending facsimile transmissions over our system (Lawsuit). SPS seeks 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, we 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). The Petition remains pending. On July 8, 2016, we 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 our Petition. On October 7, 2016, the Court granted our motion to dismiss and gave SPS 20 days to amend its complaint. The Court concurrently dismissed our motion to dismiss or stay as moot. SPS filed its amended complaint on October 27, 2016, alleging essentially the same theories and claims. On November 21, 2016, we filed a motion to dismiss the amended complaint, along with a renewed motion to dismiss or stay the case pending resolution of the FCC Petition. The motions to dismiss and to stay the Lawsuit are fully briefed and under submissionaccompanying notes to the Court. Discovery has not yet commenced. We intend to vigorously defend ourselves in the Lawsuit. 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 us as of the date of this filing and the rules and regulations applicable to the preparation of our consolidated financial statements itincluded in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, under “Legal Matters” which is not possible to provide an estimated amount of any such loss or range of loss that may occur.
incorporated herein by reference. | |
| ITEM 4. | MINE SAFETY DISCLOSURES |
PART II
| |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information for Common Stock
Our Class A common stock has been listed on the New York Stock Exchange under the symbol “RNG” since September 27, 2013.
The following table sets forth for the indicated periods the high and low closing sales prices of our Class A common stock as reported by the New York Stock Exchange:
| High | | | Low | |
Year ended December 31, 2016: | | | | | | | |
First quarter | $ | 23.36 | | | $ | 14.38 | |
Second quarter | $ | 20.85 | | | $ | 15.94 | |
Third quarter | $ | 24.14 | | | $ | 19.37 | |
Fourth quarter | $ | 24.15 | | | $ | 19.80 | |
Year ended December 31, 2015: | | | | | | | |
First quarter | $ | 16.32 | | | $ | 13.50 | |
Second quarter | $ | 19.41 | | | $ | 15.35 | |
Third quarter | $ | 20.70 | | | $ | 16.40 | |
Fourth quarter | $ | 25.47 | | | $ | 17.80 | |
Our Class B common stock is not listed or traded on any stock exchange.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors considers relevant.
As of February
23, 2017,19, 2020, there were
3020 stockholders of record of our Class A common stock and Class B common stock. Because most of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.
Sales of Unregistered Equity Securities and Use of Proceeds
On July 6, 2016, we issued 45,893 shares of our Class A common stock to the former stockholders of Glip upon the satisfaction of certain milestones achieved in connection with our June 2015 acquisition of Glip. No underwriters were involved in the foregoing sales of securities. The issuance of such shares was deemed to be exempt from registration under the Securities Act, in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering or Regulation S of the Securities Act.
None.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding the securities authorized for issuance under our equity compensation plans can be found under Item 12 of this Annual Report on Form 10-K.
The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of 1933, as amended, except to the extent we specifically incorporate it by reference into such filing.
The graph below
comparesmatches RingCentral Inc.'s cumulative 5-Year total shareholder return on common stock with the cumulative total
return on our Class A common stock with thatreturns of the Russell 2000 Index,
the Russell 1000 Index, and the
NasdaqNASDAQ Computer Index.
The period shown commences on September 27, 2013, the first day our Class A common stock was listed on the New York Stock Exchange, and ends on December 31, 2016, the end of our lastPrior to fiscal
year. The graph assumes $100 was invested at the close of market on September 27, 2013 in the Class A common stock of RingCentral, Inc., or on September 30, 2013year 2018, we were included in the Russell 2000 Index and
have historically included a comparison with the
Nasdaq ComputerRussell 2000 Index here. During fiscal year 2018, we moved to the Russell 1000 Index. As such, we have determined that the Russell 1000 Index is the more appropriate index going forward. For this transitional year, both the Russell 1000 Index and
assumesthe Russell 2000 Index are reflected in the following graph, but we do not expect to include the Russell 2000 Index in future years. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of
any dividends.all dividends) from December 31, 2014 to December 31, 2019. The stock price performance on the following graph is not intended to forecast or be indicative of future stock price performance of our Class A common stock.
ITEMITEM 6.
| SELECTED CONSOLIDATED FINANCIAL DATA |
The
consolidated statements of operations data and the consolidated balance sheets data are derived from our auditedfollowing selected consolidated financial statements and
data should be read together with
the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the related notes included elsewhere in this
filing.Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results in any future period.
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
| (in thousands, except per share amounts) | |
Consolidated Statements of Operations | | | | | | | | | | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | | | | |
Software subscriptions | $ | 355,850 | | | $ | 271,245 | | | $ | 200,098 | | | $ | 145,995 | | | $ | 105,693 | |
Other | | 23,874 | | | | 24,983 | | | | 19,789 | | | | 14,510 | | | | 8,833 | |
Total revenues | | 379,724 | | | | 296,228 | | | | 219,887 | | | | 160,505 | | | | 114,526 | |
Cost of revenues | | | | | | | | | | | | | | | | | | | |
Software subscriptions (1) | | 73,470 | | | | 66,354 | | | | 58,673 | | | | 47,230 | | | | 36,215 | |
Other | | 18,741 | | | | 20,917 | | | | 18,100 | | | | 14,289 | | | | 8,688 | |
Total cost of revenues | | 92,211 | | | | 87,271 | | | | 76,773 | | | | 61,519 | | | | 44,903 | |
Gross profit | | 287,513 | | | | 208,957 | | | | 143,114 | | | | 98,986 | | | | 69,623 | |
Operating expenses | | | | | | | | | | | | | | | | | | | |
Research and development (1) | | 65,514 | | | | 52,924 | | | | 44,582 | | | | 33,399 | | | | 24,450 | |
Sales and marketing (1) | | 192,497 | | | | 139,851 | | | | 104,827 | | | | 72,336 | | | | 54,566 | |
General and administrative (1) | | 55,454 | | | | 47,114 | | | | 38,910 | | | | 34,284 | | | | 24,434 | |
Total operating expenses | | 313,465 | | | | 239,889 | | | | 188,319 | | | | 140,019 | | | | 103,450 | |
Loss from operations | | (25,952 | ) | | | (30,932 | ) | | | (45,205 | ) | | | (41,033 | ) | | | (33,827 | ) |
Other income (expense), net | | | | | | | | | | | | | | | | | | | |
Interest expense | | (746 | ) | | | (1,123 | ) | | | (2,007 | ) | | | (5,384 | ) | | | (1,503 | ) |
Other income (expense), net | | (2,375 | ) | | | (1,307 | ) | | | (1,031 | ) | | | 274 | | | | 32 | |
Other income (expense), net | | (3,121 | ) | | | (2,430 | ) | | | (3,038 | ) | | | (5,110 | ) | | | (1,471 | ) |
Loss before provision (benefit) for income taxes | | (29,073 | ) | | | (33,362 | ) | | | (48,243 | ) | | | (46,143 | ) | | | (35,298 | ) |
Provision (benefit) for income taxes | | 236 | | | | (1,263 | ) | | | 97 | | | | (45 | ) | | | 92 | |
Net loss | $ | (29,309 | ) | | $ | (32,099 | ) | | $ | (48,340 | ) | | $ | (46,098 | ) | | $ | (35,390 | ) |
Net loss per common share | | | | | | | | | | | | | | | | | | | |
Basic and diluted | $ | (0.40 | ) | | $ | (0.46 | ) | | $ | (0.72 | ) | | $ | (1.39 | ) | | $ | (1.58 | ) |
Weighted-average number of shares used in computing net loss per share | | | | | | | | | | | | | | | | | | | |
Basic and diluted | | 72,994 | | | | 70,069 | | | | 66,818 | | | | 33,155 | | | | 22,353 | |
(1)
| Share-based compensation expense is included in our results of operations as follows (in thousands):
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share amounts) |
| Consolidated Statements of Operations | | | | | | | | | |
| Revenues | | | | | | | | | |
| Subscriptions | $ | 817,811 |
| | $ | 612,888 |
| | $ | 465,254 |
| | $ | 356,562 |
| | $ | 271,245 |
|
| Other | 85,047 |
| | 60,736 |
| | 38,363 |
| | 23,874 |
| | 24,983 |
|
| Total revenues | 902,858 |
| | 673,624 |
| | 503,617 |
| | 380,436 |
| | 296,228 |
|
| Loss from operations | (45,675 | ) | | (16,436 | ) | | (5,338 | ) | | (12,868 | ) | | (30,932 | ) |
| Net loss | $ | (53,607 | ) | | $ | (26,203 | ) | | $ | (4,204 | ) | | $ | (16,225 | ) | | $ | (32,099 | ) |
| Net loss per common share | | | | | | | | | |
| Basic and diluted | (0.64 | ) | | (0.33 | ) | | (0.06 | ) | | (0.22 | ) | | (0.46 | ) |
| Weighted-average number of shares used in computing net loss per share | | | | | | | | | |
| Basic and diluted | 83,130 |
| | 79,500 |
| | 76,281 |
| | 72,994 |
| | 70,069 |
|
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Cost of revenues | $ | 3,165 | | | $ | 2,054 | | | $ | 1,294 | | | $ | 539 | | | $ | 235 | |
Research and development | | 7,296 | | | | 5,387 | | | | 3,343 | | | | 1,495 | | | | 837 | |
Sales and marketing | | 10,902 | | | | 7,200 | | | | 5,260 | | | | 1,313 | | | | 651 | |
General and administrative | | 9,477 | | | | 7,447 | | | | 5,619 | | | | 4,193 | | | | 1,379 | |
Total share-based compensation expense | $ | 30,840 | | | $ | 22,088 | | | $ | 15,516 | | | $ | 7,540 | | | $ | 3,102 | |
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Consolidated Balance Sheet Data (in thousands) | | | | | | | | | |
| Cash and cash equivalents | $ | 343,606 |
| | $ | 566,329 |
| | $ | 181,192 |
| | $ | 160,355 |
| | $ | 137,588 |
|
| Working capital surplus | $ | 254,826 |
| | $ | 508,155 |
| | $ | 139,602 |
| | $ | 100,220 |
| | $ | 90,472 |
|
| Total assets | $ | 1,450,747 |
| | $ | 894,326 |
| | $ | 359,814 |
| | $ | 286,296 |
| | $ | 214,813 |
|
| Deferred revenue | $ | 107,372 |
| | $ | 88,527 |
| | $ | 62,917 |
| | $ | 44,618 |
| | $ | 36,657 |
|
| Debt and financing obligations | $ | 389,718 |
| | $ | 370,324 |
| | $ | — |
| | $ | 15,021 |
| | $ | 19,040 |
|
| Total stockholders' equity | $ | 745,700 |
| | $ | 317,609 |
| | $ | 228,346 |
| | $ | 164,248 |
| | $ | 110,132 |
|
| As of December 31, | |
| 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | |
Consolidated Balance Sheet Data (in thousands) | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 160,355 | | | $ | 137,588 | | | $ | 113,182 | | | $ | 116,378 | | | $ | 37,864 | |
Short-term investments | $ | — | | | $ | — | | | $ | 28,479 | | | $ | — | | | $ | — | |
Working capital surplus (deficit) | $ | 89,911 | | | $ | 90,472 | | | $ | 83,513 | | | $ | 75,005 | | | $ | (484 | ) |
Total assets | $ | 252,629 | | | $ | 214,813 | | | $ | 188,337 | | | $ | 145,185 | | | $ | 63,354 | |
Deferred revenue | $ | 45,159 | | | $ | 36,657 | | | $ | 25,586 | | | $ | 16,552 | | | $ | 11,291 | |
Debt and capital lease obligations | $ | 15,021 | | | $ | 19,040 | | | $ | 25,621 | | | $ | 34,821 | | | $ | 21,079 | |
Convertible preferred stock | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 74,020 | |
Total stockholders' equity | $ | 130,041 | | | $ | 110,132 | | | $ | 96,505 | | | $ | 63,515 | | | $ | 71 | |
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
You should read the
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this
report.Annual Report on Form 10-K. As discussed in the section
titledentitled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ
materiallysignificantly from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include,
but are not limited to, those discussed below and elsewhere in this report, particularly in
the section entitled “Risk
Factors.”Factors” included under Part I, Item1A.
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussion regarding our financial condition and results of operations for fiscal 2018 as compared to fiscal 2017 is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019.
We are a leading provider of software-as-a-service
or SaaS,(“SaaS”) solutions
for the way employeesthat enable businesses to communicate,
collaborate, and
collaborate in business.connect. We believe that our innovative, cloud-based approach disrupts the large market for business communications and collaboration by providing flexible and cost-effective solutions that support distributed workforces, mobile employees, and the proliferation of smart phones and tablets. We enable convenient and effective communications for
our customers,organizations across all their locations
all theirand employees,
all the time, thus enabling
athem to be more productive and
dynamic workforce.We primarily generate revenues by selling software subscriptions of our RingCentral Office, RingCentral Professional, RingCentral Fax, RingCentral Contact Center, and RingCentral Glip offerings. RingCentral Office, which offers an integratedmore responsive to their customers.
Our cloud-based business communications and collaboration solution, is offered at monthly subscription rates, varying by the specific functionalities and services and the number of users. We recently introduced RingCentral Global Office (Global Office) as an expansion of RingCentral Office. Global Office, offered onsolutions are designed to be easy to use, providing a monthly subscription, connects workforcessingle user identity across multiple countries, while reducing complexitylocations and high costs of maintaining multiple, legacy on-premise PBX systems with a single cloud solution. RingCentral Professional is inbound call management for mobile professionals offered at monthly subscription rates that vary based on the desired amount of minutes usagedevices, including smartphones, tablets, PCs and extensions allotted to the plan. RingCentral Fax is offered at monthly subscription rates that vary based on the desired number of pagesdesk phones. Our solutions can be deployed rapidly and phone numbers allotted to the plan. RingCentral Contact Center is a multi-channel hosted contact center solution that integrates with RingCentral Office, offered at a monthly subscription based on three editions with varying featuresconfigured and capabilities. RingCentral Glip is a team messagingmanaged easily. Through our platform, we enable third-party developers and collaboration tool that is made available as a feature to all RingCentral Office customers and as a freemium offering to non-RingCentral users. Seamlessly integrated with RingCentral Office, RingCentral Glip enables greater work productivity and team engagement, and is among the first team messaging tools to integrate a complete Unified Communication as a Service (UCaaS) suite. RingCentral CloudConnect is a service that allows enterprises to leverage their dedicated and private connections to exchange data directly with the RingCentral cloud. Customers use their preferred network service provider to connect to the RingCentral cloud through a private data exchange enabling lower latency, greater network reliability and availability, and added security. Recently, RingCentral introduced Rooms and Rooms Connector to bring a cloud web conferencing solution to meeting rooms for a monthly per license add-on fee. We also offer RingCentral Connect Platform, which is an open platform supported by Application Program Interfaces (APIs) and Software Development Kits (SDKs) that allows developers to integrate our solution with leading business applications or to customize within their own business workflows.
We have a portfolio of cloud-based offerings that are subscription based, made available at different rates varying by the specific functionalities, services, and number of users. We primarily generate revenues from the sale of subscriptions to our offerings.
Our subscription plans have
historically had monthly,
or annual,
contractual terms, although we also have subscription plans withor multi-year contractual
terms, generally with larger customers.terms. We believe that this flexibility in contract duration is important to meet the different needs of our customers.
Generally, most of our fees for subscription plans have been billed in advance via credit card. However, as the size of RingCentral Office customer accounts grow, we expect to bill more customers through commercial invoices with customary payment terms and, accordingly, our level of accounts receivable may increase. We also expect our level of prepayments by larger customers with annual or multi-year contracts to increase and, accordingly, our level of deferred revenue may increase. For the years ended December 31,
2016, 2015,2019, 2018, and
2014, software2017, subscriptions revenues accounted for
90% or more
than 90% of our total revenues. The remainder of our revenues has historically been primarily comprised of product revenues from the sale of pre-configured
office phones.phones and professional services. We do not develop, manufacture, or otherwise touch the delivery of physical phones and offer it as a convenience for a total solution to our customers in connection with subscriptions to our services. We rely on third-party providers to develop and manufacture these devices and fulfillment partners to successfully serve our customers.
In January 2016, we entered into a sales agency agreement with Westcon, a global distributor of communications devices,
We continue to
provide the phones purchased by customers. Under this agreement, we were an agent and received a commission for our services, which primarily included referring sales to Westcon. Westcon provided phones directly to our customers instead of us purchasing phones from third-party vendors and reselling the phones to our customers. We recorded commission revenues for this arrangement because we were the agent for these sales. During the three months ended June 30, 2016, we completed our transition of direct phone sales to Westcon, which excluded our carriers’ phone sales. We did not transition the carrier partners to the agency model as the billing relationships to these customers were through the carriers. In addition, we had sales in which we provided free or significantly discounted phones to our customers for promotional reasons. As our agency arrangement did not allow for these significant discounts, we were the seller to these customers and recognized the related revenues and costs from the sale. This resulted in a mixed hardware engagement model and administrative burden to manage the two models. In December 2016, we terminated the Westcon sales agency agreement and entered into a reseller (direct sale) agreement with Westcon. Effective January 1, 2017, we switched from the agency model to the direct sale model whereby we will no longer serve as an agent for referring phone sales to Westcon and will no longer receive commissions for our services. Under the direct sale model, we will purchase phones directly from Westcon for resale to our customers. Under this model, we will recognize revenues and costs for phone sales as we are the primary obligor for order fulfillment, have latitude in determining pricing, and assume general inventory risk. We expect the shift to the direct sale model to result in increases in our other revenues and the corresponding costs of other revenues, resulting in decreased margin.We make significant upfront investments to acquire customers. Until 2010, we acquired most of our customer subscriptions through direct transactions on our website driven by online marketing channels. Beginning in 2010, in connection with our introduction of RingCentral Office, we established a direct inside sales force. Since then, we have continued investinginvest in our direct inside sales force while also developing indirect sales channels to market our brand and our subscription offerings. Our indirect sales channel consists of a network of over 4,000 sales agents and resellers who are active in sellingsell our solutions. We also sell our solutions and with whom we have direct relationships, including distributors such as Ingram Micro Inc., Tech Data Corporation, and Jenne Inc., as well as carrier partnersthrough carriers including AT&T, Inc. (“AT&T”), TELUS Communications Company (“TELUS”), and BT Group plc (“BT”). In October 2019, we entered into a strategic partnership with Avaya Holdings Corp. ("Avaya"), which includes the introduction of a new solution Avaya Cloud Office by RingCentral ("ACO"), which will be marketed and sold by Avaya and its subsidiaries. In December 2019, we refer to collectivelyentered into a strategic partnerhip with Atos SE ("Atos"), which includes the introduction of a co-branded Unified Communications as resellers. Our network of resellers includes master agents who manage other sales agents and resellers, resulting in an even larger reseller network. a Service ("UCaaS") solution. We intend to continue to foster this network and expand our network with other resellers. We also participate in more traditional forms of media advertising, such as radio and billboard advertising.
Since its launch, our revenue growth has primarily been driven by our flagship RingCentral Office product offering, which has resulted in an increased number of customers, increased average
software subscription revenue per customer, and increased retention of our existing customer and user base. We define a “customer” as one individual billing relationship for the subscription to our services, which generally correlates to one company account per customer.
In the case of our carrier partners, who resell our product to multiple companies, we consider each reseller to be a single customer. We define a user as one person within a customer who has been granted a subscription license to use our services, such that the number of end-users per customer generally correlates to the number of employees within a customer account. As of December 31,
2016,2019, we had customers from a range of industries, including
advertising, financial services,
education, healthcare, legal services,
non-profit organizations, real estate, retail, technology, insurance,
education, waste management, construction,
security services, restaurant, software, solar, automotive dealership, managed care,hospitality, and
publishing. In October of 2013, we launched our United Kingdom (U.K.) operations; however, forstate and local government, among others. For the years ended December 31,
2016, 2015,2019, 2018 and
2014,2017, the vast majority of our total revenues were generated in the U.S. and Canada, although we expect the percentage of our total revenues derived outside of the U.S. and Canada to grow as we
continue to expand internationally.
The growth of our business and our future success depend on many factors, including our ability to expand our customer base to medium-sized and larger customers, continue to innovate, grow revenues from our existing customer base, expand our distribution channels, and scale internationally.
While these areas represent significant opportunities for us, they also pose risks and challenges that we must address in order to sustain the growth of our business and improve our operating results. We have experienced significant growth in recent periods, with total revenues of $379.7 million, $296.2 million, and $219.9 million in the years ended December 31, 2016, 2015 and 2014, respectively, generating year-over-year increases of 28% and 35%, respectively. We have continued to make significant expenditures and investments, including those in sales and marketing, research and development, infrastructure and operations and incurred net losses of $29.3 million, $32.1 million, and $48.3 million in the years ended December 31, 2016, 2015 and 2014, respectively.
In addition to
United States generally accepted accounting principles
or (“U.S.
GAAP,GAAP”) and financial measures such as total revenues, gross margin, and cash flows from operations, we regularly review a number of key business metrics to evaluate growth trends, measure our performance, and make strategic decisions. We discuss revenues and gross margin under “Results of Operations” and cash flow from operations under “Liquidity and Capital Resources.” Other key business metrics are discussed below.
Annualized Exit Monthly Recurring Subscriptions
We believe that our Annualized Exit Monthly Recurring Subscriptions
(ARR)(“ARR”) is a leading indicator of our anticipated subscriptions revenues. We believe that trends in revenue are important to understanding the overall health of our business, and we use these trends in order to formulate financial projections and make strategic business decisions. Our
Annualized Exit Monthly Recurring SubscriptionsARR equals our Monthly Recurring Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the monthly value of all customer
subscriptions in effectrecurring charges at the end of a given month. For example, our Monthly Recurring Subscriptions at December 31,
2016 were $34.52019 was $80.0 million. As such, our
Annualized Exit Monthly Recurring SubscriptionsARR at December 31,
2016 were $414.42019 was $960.1 million compared to
$317.4$725.8 million at December 31,
2015.2018.
RingCentral Office Annualized Exit Monthly Recurring Subscriptions
We calculate our RingCentral Office Annualized Exit Monthly Recurring Subscriptions
(Office ARR)(“Office ARR”) in the same manner as we calculate our
Annualized Exit Monthly Recurring Subscriptions,ARR, except that only customer subscriptions from RingCentral Office
and RingCentral customer engagement solutions customers are included when determining Monthly Recurring Subscriptions for the purposes of calculating this key business metric.
RingCentral Office is our flagship product offering. We believe that trends in revenue with respect to
RingCentral Officethese products are
also important to
the understanding
of the overall health of our business, and we use these trends in order to formulate financial projections and make strategic business decisions. Our
RingCentral Office
Annualized Exit Monthly Recurring SubscriptionsARR at December 31,
2016 were $341.52019 was $876.8 million compared to
$247.4$644.1 million at December 31,
2015.2018.
Net Monthly Subscription Dollar Retention Rate
We believe that our Net Monthly Subscription Dollar Retention Rate provides insight into our ability to retain and grow
software subscriptions revenue, as well as our customers’ potential long-term value to us. We believe that our ability to retain our customers and expand their use of our solutions over time is a leading indicator of the stability of our revenue base and we use these trends in order to formulate financial projections and make strategic business decisions. We define our Net Monthly Subscription Dollar Retention Rate as (i) one plus (ii) the quotient of Dollar Net Change divided by Average
Dollar Monthly Recurring Subscriptions.
We define Dollar Net Change as the quotient of (i) the difference of our Monthly Recurring Subscriptions at the end of a period minus our Monthly Recurring Subscriptions at the beginning of a period minus our Monthly Recurring Subscriptions at the end of the period from new customers we added during the period,
(ii) all divided by
(ii) the number of months in the period. We define our Average Monthly Recurring Subscriptions as the average of the Monthly Recurring Subscriptions at the beginning and end of the measurement period.
For example, if our Monthly Recurring Subscriptions were $118 at the end of a quarterly period and $100 at the beginning of the period, and $20 at the end of the period from new customers we added during the period, then the Dollar Net Change would be equal to ($0.67), or the amount equal to the difference of $118 minus $100 minus $20, all divided by three months. Our Average Monthly Recurring Subscriptions would equal $109, or the sum of $100 plus $118, divided by two. Our Net Monthly Subscription Dollar Retention Rate would then equal 99.4%, or approximately 99%, or one plus the quotient of the Dollar Net Change divided by the Average Monthly Recurring Subscriptions.
Our key business metrics for the five quarterly periods ended December 31,
20162019 were as follows (dollars in millions):
| December 31, 2016 | | | September 30, 2016 | | | June 30, 2016 | | | March 31, 2016 | | | December 31, 2015 | |
Net Monthly Subscription Dollar Retention Rate | >99% | | | >99% | | | >99% | | | >99% | | | >99% | |
Annualized Exit Monthly Recurring Subscriptions | $ | 414.4 | | | $ | 389.5 | | | $ | 364.0 | | | $ | 340.3 | | | $ | 317.4 | |
RingCentral Office Annualized Exit Monthly Recurring Subscriptions | $ | 341.5 | | | $ | 316.8 | | | $ | 291.9 | | | $ | 269.3 | | | $ | 247.4 | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 |
| Net Monthly Subscription Dollar Retention Rate | >99% |
| | >99% |
| | >99% |
| | >99% |
| | >99% |
|
| Annualized Exit Monthly Recurring Subscriptions | $ | 960.1 |
| | $ | 881.4 |
| | $ | 830.8 |
| | $ | 776.7 |
| | $ | 725.8 |
|
RingCentral Office Annualized Exit Monthly
Recurring Subscriptions | $ | 876.8 |
| | $ | 800.3 |
| | $ | 749.2 |
| | $ | 694.0 |
| | $ | 644.1 |
|
Components of Results of Operations
Our revenues for the years presented consisted of
software subscriptions and other revenues. Our
software subscriptions revenue includes all fees billed in connection with subscriptions to our
RingCentral Office, RingCentral Professional, RingCentral Fax, RingCentral Contact Center, and RingCentral Glip.solution offerings. These fees include recurring fixed plan subscription fees, variable usage-based fees for usage in excess of plan limits, recurring administrative cost recovery fees, one-time fees, and other recurring fees related to our subscriptions. We provide our subscriptions to our customers pursuant to contractual arrangements that range in duration
typically from one month to
threefive years. We provide our subscriptions to our customers pursuant to either “click through” online agreements for service terms up to one year or written agreements when the arrangement is expected to be one year or longer. We offer our subscriptions based on the functionalities and services selected by a customer, and generally our subscription arrangements automatically renew for additional periods at the end of the initial subscription term. We believe that this flexibility in contract duration is important to meet the different needs of our customers.
We generally bill our
software subscription fees in advance. We recognize
software subscription revenue over the term of the agreement. Amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our consolidated balance
sheet.During the years presented, we sold our hardware products as a convenience for a total solution to our customers when they subscribe to our services. In January 2016, we entered into a sales agency agreement with Westcon to provide the phones purchased by customers. Under this agreement, we were an agent of Westcon and received a commission for our services, which primarily include referring phone sales to Westcon. Westcon provided phones directly to our customers instead of us purchasing phones from third-party vendors and reselling the phones to customers. Sales of phones that were provided free or significantly discounted to customers were not part of the agency agreement with Westcon. We recognized revenues and costs from these sales as we were the primary obligor and had latitude in determining pricing. Additionally, phone sales from our carrier partners were excluded from the agency model. As a result of the new sales agency model, we replaced the product revenues line in our 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. Product revenue is billed at the time the order is received and recognized when the product has been delivered to the customer.
In December 2016, we terminated the Westcon sales agency agreement and entered into a reseller (direct sale) agreement with Westcon, which was effective January 2017. Under the direct sale model, we will purchase phones directly from Westcon for resale to our customers. Under this model, we will recognize revenues and costs for phone sales as we are the primary obligor for order fulfillment, have latitude in determining pricing, and assume general inventory risk. We expect the shift to the direct sale model to result in increases in our other revenues and the corresponding costs of other revenues, resulting in a decline in margin.
sheets.
We also generate software subscriptions and product revenues through sales of our subscriptions and products by resellers.resellers and carrier partners. When we assume a majority of the business risks associated withcontrol the performance of the contractual obligations, we record the revenues on a gross basis and amounts retained by our resellers are recorded as sales and marketing expenses. Our assumption of such business riskscontrol is evidenced when, among other things, we take responsibility for delivery of the service or products, establish pricing of the arrangement, and assume credit and inventory risk, and are the primary obligor in the arrangement.risk. When a reseller assumes the majority of the business risks associated with the performance of the contractual obligations,these factors, we record the associated revenue at the net amount remitted to us by the reseller. Revenue
“Other revenues” includes product revenues from
resellersthe sale of pre-configured phones, phone rentals, and professional services. Product revenue is recognized when the product has
predominately been
recorded on a gross basis for all periods presented.delivered to the customer. Professional services revenue is recognized as services are delivered.
Cost of Revenues and Gross Margin
Our cost of
software subscriptions revenue primarily consists of fees paid to third-party telecommunications providers, network operations, costs to build out and maintain data centers, including co-location fees for the right to place our servers in data centers
owned by third parties, depreciation of servers and equipment, along with related utilities and maintenance costs, personnel costs associated with customer care and support of the functionality of our platform and data center operations, including share-based compensation expenses, and allocated costs of facilities and information technology.
We define
software subscriptions gross margins as
software subscriptions revenue minus the cost of
software subscriptions revenue expressed as a percentage of
software subscriptions revenue.
We expect our software subscriptions gross margin to increase modestly over time, although it may fluctuate from period to period depending on the above factors including seasonality.Cost of other revenue is comprised primarily of the cost associated with the purchase of phones,
that fell outside of the agency model, cost of professional services, and allocated costs of facilities and information
technology related to the procurement, management, and shipment of phones.technology.
We classify our operating expenses as research and development, sales and marketing, and general and administrative expenses.
Our research and development efforts are focused on developing new and expanded features for our
products,solutions, integrations with distributors and other software platforms, and improvements to our backend architecture. Research and development expenses consist primarily of personnel costs for employees and contractors, including share-based compensation expenses, and allocated costs of facilities and information technology, software tools, and product certification. We expense research and development costs as incurred, except for certain internal-use software development costs that we capitalize. We believe that continued investment in our products is important for our future growth, and we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of these expenses.
Sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel costs for employees and contractors directly associated with our sales and marketing activities including share-based compensation expenses, internet advertising fees, radio and billboard advertising, public relations, commissions paid to employees, resellers and other third parties,
amortization of capitalized sales commissions, trade shows, travel expenses, credit card fees, marketing and promotional activities, amortization of acquired customer relationship intangibles, and allocated costs of facilities and information technology. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future as we expand our sales and marketing efforts domestically and internationally and continue to build our brand, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of these expenses.
General and administrative expenses consist primarily of personnel costs, including share-based compensation expenses, for employees and contractors engaged in infrastructure and administrative activities to support the day-to-day operations of our business. Other significant components of general and administrative expenses include professional service fees, allocated costs of facilities and information technology, cost of compliance with certain
government imposedgovernment-imposed taxes,
and the costs of legal matters, business acquisition costs, and loss contingencies.
We incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future, although these expenses may fluctuate as a percentage of our total revenues from period to period, depending on the timing of these expenses.
Quarterly Revenue Trends
Our software subscriptions revenue is primarily driven by recurring subscription services. Historically, we have acquired more new customers in the first and third quarters of a fiscal year. However, we have seen this trend become less pronounced as our business has grown, sales of RingCentral Office have accounted for a higher percentage of our total revenues, and as we move up-market to target and acquire larger customers.
Quarterly Operating Expenses Trends
Operating expenses are primarily driven by employee-related expenses and by sales and marketing programs, and have been relatively consistent as a percentage of revenues. We experience some seasonality in spending on sales and marketing as a percentage of revenue as we spend relatively less on marketing programs in the third and fourth quarters due to the summer and year-end vacation periods and November and December holidays. However, this trend may not continue as we acquire larger customers.
Results of Operations
The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenues. The historical results presented below are not necessarily indicative of the results that may be expected for any future period (in thousands):
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Revenues | | | | | | | | | | | |
Software subscriptions | $ | 355,850 | | | $ | 271,245 | | | $ | 200,098 | |
Other | | 23,874 | | | | 24,983 | | | | 19,789 | |
Total revenues | | 379,724 | | | | 296,228 | | | | 219,887 | |
Cost of revenues | | | | | | | | | | | |
Software subscriptions | | 73,470 | | | | 66,354 | | | | 58,673 | |
Other | | 18,741 | | | | 20,917 | | | | 18,100 | |
Total cost of revenues | | 92,211 | | | | 87,271 | | | | 76,773 | |
Gross profit | | 287,513 | | | | 208,957 | | | | 143,114 | |
Operating expenses | | | | | | | | | | | |
Research and development | | 65,514 | | | | 52,924 | | | | 44,582 | |
Sales and marketing | | 192,497 | | | | 139,851 | | | | 104,827 | |
General and administrative | | 55,454 | | | | 47,114 | | | | 38,910 | |
Total operating expenses | | 313,465 | | | | 239,889 | | | | 188,319 | |
Loss from operations | | (25,952 | ) | | | (30,932 | ) | | | (45,205 | ) |
Other income (expense), net | | | | | | | | | | | |
Interest expense | | (746 | ) | | | (1,123 | ) | | | (2,007 | ) |
Other income (expense), net | | (2,375 | ) | | | (1,307 | ) | | | (1,031 | ) |
Other income (expense), net | | (3,121 | ) | | | (2,430 | ) | | | (3,038 | ) |
Loss before provision (benefit) for income taxes | | (29,073 | ) | | | (33,362 | ) | | | (48,243 | ) |
Provision (benefit) for income taxes | | 236 | | | | (1,263 | ) | | | 97 | |
Net loss | $ | (29,309 | ) | | $ | (32,099 | ) | | $ | (48,340 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenues | | | | | |
| Subscriptions | $ | 817,811 |
| | $ | 612,888 |
| | $ | 465,254 |
|
| Other | 85,047 |
| | 60,736 |
| | 38,363 |
|
| Total revenues | 902,858 |
| | 673,624 |
| | 503,617 |
|
| Cost of revenues | | | | | |
| Subscriptions | 160,320 |
| | 109,454 |
| | 89,193 |
|
| Other | 70,723 |
| | 47,675 |
| | 32,078 |
|
| Total cost of revenues | 231,043 |
| | 157,129 |
| | 121,271 |
|
| Gross profit | 671,815 |
| | 516,495 |
| | 382,346 |
|
| Operating expenses | | | | | |
| Research and development | 136,363 |
| | 101,042 |
| | 75,148 |
|
| Sales and marketing | 439,100 |
| | 329,116 |
| | 240,223 |
|
| General and administrative | 142,027 |
| | 102,773 |
| | 72,313 |
|
| Total operating expenses | 717,490 |
| | 532,931 |
| | 387,684 |
|
| Loss from operations | (45,675 | ) | | (16,436 | ) | | (5,338 | ) |
| Other income (expense), net | | | | | |
| Interest expense | (20,512 | ) | | (16,102 | ) | | (99 | ) |
| Other income, net | 9,247 |
| | 6,475 |
| | 1,491 |
|
| Other income (expense), net | (11,265 | ) | | (9,627 | ) | | 1,392 |
|
| Loss before income taxes | (56,940 | ) | | (26,063 | ) | | (3,946 | ) |
| Provision for (benefit from) income taxes | (3,333 | ) | | 140 |
| | 258 |
|
| Net loss | $ | (53,607 | ) | | $ | (26,203 | ) | | $ | (4,204 | ) |
Percentage of Total
RevenuesRevenues* | Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Revenues | | | | | | | | | | | |
Software subscriptions | | 94 | % | | | 92 | % | | | 91 | % |
Other | | 6 | | | | 8 | | | | 9 | |
Total revenues | | 100 | | | | 100 | | | | 100 | |
Cost of revenues | | | | | | | | | | | |
Software subscriptions | | 19 | | | | 22 | | | | 27 | |
Other | | 5 | | | | 7 | | | | 8 | |
Total cost of revenues | | 24 | | | | 29 | | | | 35 | |
Gross profit | | 76 | | | | 71 | | | | 65 | |
Operating expenses | | | | | | | | | | | |
Research and development | | 17 | | | | 18 | | | | 20 | |
Sales and marketing | | 51 | | | | 47 | | | | 48 | |
General and administrative | | 15 | | | | 16 | | | | 18 | |
Total operating expenses | | 83 | | | | 81 | | | | 86 | |
Loss from operations | | (7 | ) | | | (10 | ) | | | (21 | ) |
Other income (expense), net | | | | | | | | | | | |
Interest expense | | (0 | ) | | | (0 | ) | | | (1 | ) |
Other income (expense), net | | (1 | ) | | | (0 | ) | | | (0 | ) |
Other income (expense), net | | (1 | ) | | | (0 | ) | | | (1 | ) |
Loss before provision (benefit) for income taxes | | (8 | ) | | | (10 | ) | | | (22 | ) |
Provision (benefit) for income taxes | | (0 | ) | | | (0 | ) | | | (0 | ) |
Net loss | | (8 | %) | | | (10 | %) | | | (22 | %) |
|
| | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenues | | | | | |
| Subscriptions | 91 | % | | 91 | % | | 92 | % |
| Other | 9 |
| | 9 |
| | 8 |
|
| Total revenues | 100 |
| | 100 |
| | 100 |
|
| Cost of revenues | | | | | |
| Subscriptions | 18 |
| | 16 |
| | 18 |
|
| Other | 8 |
| | 7 |
| | 6 |
|
| Total cost of revenues | 26 |
| | 23 |
| | 24 |
|
| Gross profit | 74 |
| | 77 |
| | 76 |
|
| Operating expenses | | | | | |
| Research and development | 15 |
| | 15 |
| | 15 |
|
| Sales and marketing | 49 |
| | 49 |
| | 48 |
|
| General and administrative | 16 |
| | 15 |
| | 14 |
|
| Total operating expenses | 79 |
| | 79 |
| | 77 |
|
| Loss from operations | (5 | ) | | (2 | ) | | (1 | ) |
| Other income (expense), net | | | | | |
| Interest expense | (2 | ) | | (2 | ) | | — |
|
| Other income, net | 1 |
| | 1 |
| | — |
|
| Other income (expense), net | (1 | ) | | (1 | ) | | — |
|
| Loss before income taxes | (6 | ) | | (4 | ) | | (1 | ) |
| Provision for (benefit from) income taxes | — |
| | — |
| | — |
|
| Net loss | (6 | %) | | (4 | %) | | (1 | %) |
* Percentages may not add up due to rounding.
Comparison of Fiscal Years Ended December 31, 2016, 2015,2019, 2018, and 2014:2017:
| | Year Ended | | | | | | | | | | | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | | | December 31, | | | | | | | | | |
(in thousands, except percentages) | | 2016 | | | 2015 | | | $ Change | | | % Change | | | 2015 | | | 2014 | | | $ Change | | | % Change | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software subscriptions | | $ | 355,850 | | | $ | 271,245 | | | $ | 84,605 | | | | 31 | % | | $ | 271,245 | | | $ | 200,098 | | | $ | 71,147 | | | | 36 | % |
Other | | | 23,874 | | | | 24,983 | | | | (1,109 | ) | | | (4 | %) | | | 24,983 | | | | 19,789 | | | | 5,194 | | | | 26 | % |
Total revenues | | $ | 379,724 | | | $ | 296,228 | | | $ | 83,496 | | | | 28 | % | | $ | 296,228 | | | $ | 219,887 | | | $ | 76,341 | | | | 35 | % |
Percentage of revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software subscriptions | | | 94 | % | | | 92 | % | | | | | | | | | | | 92 | % | | | 91 | % | | | | | | | | |
Other | | | 6 | | | | 8 | | | | | | | | | | | | 8 | | | | 9 | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | | | | | | | | | 100 | % | | | 100 | % | | | | | | | | |
Software subscriptions
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | Year ended December 31, |
| (in thousands, except percentages) | | 2019 | | 2018 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| Revenues | | | | | | | | | | | | | | | | |
| Subscriptions | | $ | 817,811 |
| | $ | 612,888 |
| | $ | 204,923 |
| | 33 | % | | $ | 612,888 |
| | $ | 465,254 |
| | $ | 147,634 |
| | 32 | % |
| Other | | 85,047 |
| | 60,736 |
| | 24,311 |
| | 40 | % | | 60,736 |
| | 38,363 |
| | 22,373 |
| | 58 | % |
| Total revenues | | $ | 902,858 |
| | $ | 673,624 |
| | $ | 229,234 |
| | 34 | % | | $ | 673,624 |
| | $ | 503,617 |
| | $ | 170,007 |
| | 34 | % |
| Percentage of revenues | | | | | | | | | | | | | | | | |
| Subscriptions | | 91 | % | | 91 | % | | | | | | 91 | % | | 92 | % | | | | |
| Other | | 9 |
| | 9 |
| | | | | | 9 |
| | 8 |
| | | | |
| Total | | 100 | % | | 100 | % | | | | | | 100 | % | | 100 | % | | | | |
Subscriptions revenue. Software subscriptionsSubscriptions revenue increased by $84.6$204.9 million, and $71.1 million, or 31% and 36%33%, fromduring fiscal years 2015year 2019 as compared to 2016 and from fiscal years 2014 to 2015, respectively.year 2018. The increases from fiscal years 2015 to 2016 and from 2014 to 2015 wereincrease was primarily due toa combination of the acquisition of new customers and upsells of seats and additional offerings to our existing customer base. In addition, our software subscriptions revenues mix contained a higher proportion of RingCentral Office customers for the year ended December 31, 2016 as compared to the prior year, which generally carry a higher monthly subscription rate versus our other product offerings. While the acquisition of new customers and upsells of additional offerings to our existing customer base were the primary reasons for the increase, the short-term trends for user and customer acquisition have varied from period to period as some customers made a small initial user subscription followed by a larger additional user subscription, while other customers purchased a large initial user subscription followed by a smaller additional user subscription. In addition, the period of time between a customer’s initial subscription and the purchase of additional subscriptions varies significantly, ranging from one month to a few years. The overallThis growth in our customer base was primarily driven by increased brand awareness of our products, driven by increasesan increase in our sales and marketing expenditures of 38% and 33% from fiscal years 2015 to 2016 and from fiscal years 2014 to 2015, respectively, which include advertising and sales personnel expenditures that we believe helped to facilitate increased customer acceptance of our products.
Other revenues. In the year ended December 31, 2016, we transitioned to a new distribution partner for delivering phones to our mid-market and enterprise customers as we continue to expand up market, and entered into aincrease in sales agency agreement. Under the agreement, we were an agent and received a commission forthrough our services, which primarily consisted of referring sales to the distribution partner. Under the agency arrangement, we had sales in which we provided free or significantly discounted phones to our customers for promotional reasons. As our agency arrangement did not allow for these significant discounts, we were the seller to these customers and recognized the relatedchannel partners.
Other revenues. Other revenues and costs from the sale. The remainder of our revenues has historically beenare primarily comprised of product revenuesrevenue from the sale of pre-configured office phones. In 2016, we replaced the “product revenues” line item in our consolidated statements of operations with a line item for “other” revenues, which includes commissions earned on sales of phones, from our distribution partner, phone rentals, and professional services, and sales of phones not sold under the sales agency agreement.
services.
Other revenues decreasedrevenue increased by $1.1$24.3 million, or 4% from40%, during fiscal years 2015year 2019 as compared to 2016 fiscal year 2018, primarily due to the shift to the new agency model during 2016increase in product sales and the elimination of the majority of our revenuesprofessional services resulting from the sale of phones. Other revenues increased by $5.2 million or 26% from fiscal years 2014 to 2015 primarily due to increased phone sales driven by theoverall growth of new customers of RingCentral Office that use physical phones.In December 2016, we terminated the sales agency agreement and entered into a reseller (direct sale) agreement with the distribution partner. Effective January 1, 2017, we switched from the agency agreement to the reseller agreement whereby we will no longer serve as an agent for referring phone sales to the distribution partner and will no longer receive commissions for our services. Under the reseller agreement, we will recognize revenues and costs for phone sales as we are the primary obligor for order fulfillment, have latitude in determining pricing, and assume general inventory risk. We expect the shift to the reseller model to result in increases in our other revenues and the corresponding costs of other revenues, resulting in decreased margin.
business.
Cost of Revenues and Gross Margin
| | Year Ended | | | | | | | | | | | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | | | December 31, | | | | | | | | | |
(in thousands, except percentages) | | 2016 | | | 2015 | | | $ Change | | | % Change | | | 2015 | | | 2014 | | | $ Change | | | % Change | |
Cost of revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software subscriptions | | $ | 73,470 | | | $ | 66,354 | | | $ | 7,116 | | | | 11 | % | | $ | 66,354 | | | $ | 58,673 | | | $ | 7,681 | | | | 13 | % |
Other | | | 18,741 | | | | 20,917 | | | | (2,176 | ) | | | (10 | %) | | | 20,917 | | | | 18,100 | | | | 2,817 | | | | 16 | % |
Total cost of revenues | | $ | 92,211 | | | $ | 87,271 | | | $ | 4,940 | | | | 6 | % | | $ | 87,271 | | | $ | 76,773 | | | $ | 10,498 | | | | 14 | % |
Percentage of revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software subscriptions | | | 19 | % | | | 22 | % | | | | | | | | | | | 22 | % | | | 27 | % | | | | | | | | |
Other | | | 5 | % | | | 7 | % | | | | | | | | | | | 7 | % | | | 8 | % | | | | | | | | |
Gross margins | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software subscriptions | | | 79 | % | | | 76 | % | | | | | | | | | | | 76 | % | | | 71 | % | | | | | | | | |
Other | | | 22 | % | | | 16 | % | | | | | | | | | | | 16 | % | | | 9 | % | | | | | | | | |
Total gross margin % | | | 76 | % | | | 71 | % | | | | | | | | | | | 71 | % | | | 65 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | Year ended December 31, |
| (in thousands, except percentages) | | 2019 | | 2018 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| Cost of revenues | | | | | | | | | | | | | | | | |
| Subscriptions | | $ | 160,320 |
| | $ | 109,454 |
| | $ | 50,866 |
| | 46 | % | | $ | 109,454 |
| | $ | 89,193 |
| | $ | 20,261 |
| | 23 | % |
| Other | | 70,723 |
| | 47,675 |
| | 23,048 |
| | 48 | % | | 47,675 |
| | 32,078 |
| | 15,597 |
| | 49 | % |
| Total cost of revenues | | $ | 231,043 |
| | $ | 157,129 |
| | $ | 73,914 |
| | 47 | % | | $ | 157,129 |
| | $ | 121,271 |
| | $ | 35,858 |
| | 30 | % |
| Percentage of revenues | | | | | | | | | | | | | | | | |
| Subscriptions | | 18 | % | | 16 | % | | | | | | 16 | % | | 18 | % | | | | |
| Other | | 8 | % | | 7 | % | | | | | | 7 | % | | 6 | % | | | | |
| Gross margins | | | | | | | | | | | | | | | | |
| Subscriptions | | 80 | % | | 82 | % | | | | | | 82 | % | | 81 | % | | | | |
| Other | | 17 | % | | 22 | % | | | | | | 22 | % | | 16 | % | | | | |
| Total gross margin % | | 74 | % | | 77 | % | | | | | | 77 | % | | 76 | % | | | | |
Subscription cost of revenues and gross margin.Cost of software subscriptions revenues. Cost of software subscriptions revenues increased by $7.1$50.9 million, or 11%46%, fromduring fiscal years 2015year 2019 as compared to 2016 primarily due tofiscal year 2018. Primary drivers of the increase were increases in personnel costs of $3.3 million, service and professional fees of $1.6 million, and third-party costs to support our new products launched in late 2015solution offerings of $1.9 million. The increase in personnel$21.5 million, infrastructure support costs was driven by an increase of 25% in average$19.8 million including amortization expense from acquired intangible assets, and headcount and higherpersonnel and contractor related costs of $9.6 million including share-based compensation expense of $1.0 million.Cost of software subscriptions revenue increased by $7.7 million, or 13%, from fiscal years 2014 to 2015 primarily due to increasesexpense. These factors resulted in personnel costs of $6.0 million and depreciation expense of $0.7 million. a decrease in gross margin.
The increase
in personnel costs was driven by an increase of 16% in average headcount and higher share-based compensation expense of $0.8 million. The higher depreciation charges reflect increased deployment of hardware to enhance our ability to carry our own telecommunications traffic in certain regional markets.The increases in headcount and other expense categories described herein werewas driven primarily by investments in our infrastructure and capacity to improve the availability of our subscription offerings, while also supporting the growth in new customers and increased usage of our subscriptions by our existing customer base.
We expect subscription gross margin to be within a relatively similar range in the future.
CostOther cost of other revenues and gross margin. Cost of other revenues decreasedincreased by $2.2$23.0 million, or 10%48%, fromduring fiscal years 2015year 2019 as compared to 2016.fiscal year 2018. This was primarily due to a decreasethe increase in theservices personnel costs of $11.1 million including share-based compensation expense, cost of product sales of $4.2$10.6 million, which was driven primarily by the shift to the new agency model and was partially offset by an increase in the costoverhead costs of $1.3 million. Other revenues gross margin fluctuates based on timing of completion of professional services of $1.9 million. The increase in the cost of professional services was due to an increase in implementation services.
Cost of other revenue increased by $2.8 million, or 16%, from fiscal years 2014 to 2015 primarily due to increased phone sales driven by the growth in of new customers of RingCentral Office that use physicalprojects and discounting on phones.
Gross margin. Our gross margin was 76%, 71% and 65% for fiscal years 2016, 2015 and 2014, respectively and improved sequentially year over year due to improvements in gross margins for both software subscriptions revenues and other revenues. The sequential improvements in software subscription revenues gross margin were primarily due to economies of scale obtained in our infrastructure, which includes transport costs and customer support expenses, while the sequential improvements in other revenues gross margin were primarily due to the shift in the majority of our phone sales to an agent relationship.
We expect the sequential improvement to continue in software subscription revenues gross margin as we continue to improve and benefit from economies of scale obtained in our infrastructure. Additionally, we expect a decrease in other revenues gross margin due to transitioning from the agency model to the direct sale model effective January 2017.
| | Year Ended | | | | | | | | | | | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | | | December 31, | | | | | | | | | |
(in thousands, except percentages) | | 2016 | | | 2015 | | | $ Change | | | % Change | | | 2015 | | | 2014 | | | $ Change | | | % Change | |
Research and development | | $ | 65,514 | | | $ | 52,924 | | | $ | 12,590 | | | | 24 | % | | $ | 52,924 | | | $ | 44,582 | | | $ | 8,342 | | | | 19 | % |
Percentage of total revenues | | | 17 | % | | | 18 | % | | | | | | | | | | | 18 | % | | | 20 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | Year ended December 31, |
| (in thousands, except percentages) | | 2019 | | 2018 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| Research and development | | $ | 136,363 |
| | $ | 101,042 |
| | $ | 35,321 |
| | 35 | % | | $ | 101,042 |
| | $ | 75,148 |
| | $ | 25,894 |
| | 34 | % |
| Percentage of total revenues | | 15 | % | | 15 | % | | | | | | 15 | % | | 15 | % | | | | |
Research and development expenses increased by
$12.6$35.3 million, or
24%35%,
fromduring fiscal
years 2015year 2019 as compared to
2016fiscal year 2018, primarily due to increases in personnel
and contractor costs of
$12.4$30.3 million and
professional feesoverhead costs to support our research and development efforts of
$1.3 million, which were partially offset by a cost recovery of $0.9$4.8 million.
TheOf the total increase in personnel
and contractor costs,
approximately $20.0 million was primarily
driven by headcount growth and $8.2 million was due to
an increase in average headcount of 18% and higher share-based compensation
expense of $1.9 million.Research and development expenses increased by $8.3 million, or 19%, from fiscal years 2014 to 2015 primarily due to increases in personnel costs of $4.1 million, an impairment charge of $1.3 million related to certain internal use software, professional fees of $0.6 million, and amortization expense of $0.4 million related to intangibles acquired as part of the Glip acquisition, and. The increase in personnel costs was primarily due to an increase in average headcount of 17% and higher share-based compensation expense of $2.0 million.
expense.
The increases in research and development headcount and other expense categories were driven by continued investment in current and future software development projects for our
cloud-basedapplications. Given the continued emphasis and
mobile applications. Wefocus on product innovation, we expect research and development expenses to continue to increase in absolute
dollars as we continue to invest in such development.dollars.
| | Year Ended | | | | | | | | | | | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | | | December 31, | | | | | | | | | |
(in thousands, except percentages) | | 2016 | | | 2015 | | | $ Change | | | % Change | | | 2015 | | | 2014 | | | $ Change | | | % Change | |
Sales and marketing | | $ | 192,497 | | | $ | 139,851 | | | $ | 52,646 | | | | 38 | % | | $ | 139,851 | | | $ | 104,827 | | | $ | 35,024 | | | | 33 | % |
Percentage of total revenues | | | 51 | % | | | 47 | % | | | | | | | | | | | 47 | % | | | 48 | % | | | | | | �� | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | Year ended December 31, |
| (in thousands, except percentages) | | 2019 | | 2018 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| Sales and marketing | | $ | 439,100 |
| | $ | 329,116 |
| | $ | 109,984 |
| | 33 | % | | $ | 329,116 |
| | $ | 240,223 |
| | $ | 88,893 |
| | 37 | % |
| Percentage of total revenues | | 49 | % | | 49 | % | | | | | | 49 | % | | 48 | % | | | | |
Sales and marketing expenses increased by $52.6$110.0 million, or 38%33%, fromduring fiscal years 2015year 2019 as compared to 2016fiscal year 2018, primarily due to increases in personnel and contractor costs of $28.3$45.2 million, indirect channelthird-party commissions of $8.8$27.5 million, amortization of deferred sales commission costs of $10.4 million, costs associated with strategic partnerships and acquisitions of $10.3 million, advertising and marketing costs of $8.6$6.6 million, travel costs of $3.3 million, professional fees of $1.1 million, and overhead costs to support our marketing efforts of $2.5$6.5 million, and travel costs of $2.8 million. TheOf the total increase in personnel and contractor costs, approximately $31.9 million was primarily due to an increase in average headcount of 27%growth and $11.0 million was due to higher share-based compensation expense of $3.7 million.expense.
Sales and marketing expenses increased by $35.0 million, or 33%, from fiscal years 2014 to 2015 primarily due to increases in personnel costs of $16.0 million, indirect channel commissions of $6.2 million, advertising and marketing costs of $9.0 million, travel costs of $1.7 million, and overhead costs to support our marketing efforts of $2.4 million. The increase in personnel costs was primarily due to an increase in average headcount of 19% and higher share-based compensation expense of $1.9 million.
The increases in sales and marketing headcount and other expense categories were necessary to support our growth strategy to acquire new customers with a focus on larger customers, and to establish brand recognition to achieve greater penetration into the North American and U.K.international markets. Additionally, we expect sales and marketing expenses to continue to increase in absolute dollars as we continue to expand our presence in North America, the U.K.,Europe, and other markets.
General and Administrative
| | Year Ended | | | | | | | | | | | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | | | December 31, | | | | | | | | | |
(in thousands, except percentages) | | 2016 | | | 2015 | | | $ Change | | | % Change | | | 2015 | | | 2014 | | | $ Change | | | % Change | |
General and administrative | | $ | 55,454 | | | $ | 47,114 | | | $ | 8,340 | | | | 18 | % | | $ | 47,114 | | | $ | 38,910 | | | $ | 8,204 | | | | 21 | % |
Percentage of total revenues | | | 15 | % | | | 16 | % | | | | | | | | | | | 16 | % | | | 18 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | Year ended December 31, |
| (in thousands, except percentages) | | 2019 | | 2018 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| General and administrative | | $ | 142,027 |
| | $ | 102,773 |
| | $ | 39,254 |
| | 38 | % | | $ | 102,773 |
| | $ | 72,313 |
| | $ | 30,460 |
| | 42 | % |
| Percentage of total revenues | | 16 | % | | 15 | % | | | | | | 15 | % | | 14 | % | | | | |
General and administrative expenses increased by
$8.3$39.3 million, or
18%38%,
fromduring fiscal
years 2015year 2019 as compared to
2016fiscal year 2018, primarily due to increases in personnel
and contractor costs of
$5.7$31.6 million,
business fees and
professional feestaxes of
$2.2 million. The increase in personnel costs was primarily due to an increase in average headcount of 9% and higher share-based compensation expense of $2.0 million.General and administrative expenses increased by $8.2 million, or 21%, from fiscal years 2014 to 2015 primarily due to increases in personnel costs of $4.5$3.5 million, professional fees of $1.8$2.1 million, and acquisition related costs of $0.8$2.4 million, frompartially offset by a decrease in overhead costs of $1.2 million when compared to prior year. Of the acquisition of Glip. Thetotal increase in personnel costsand contractor cost, approximately $19.1 million was primarily driven by headcount growth and $10.3 million was due to an increase in average headcount of 12% and higher share-based compensation expense of $1.8 million.
expense.
We expect general and administrative expenses to continue to increase in absolute dollars as we continue to make additional investments in processes, systems, and personnel to support our anticipated revenue
growth and to comply with our public company reporting obligations.growth.
Other Income (expense), net
| | Year Ended | | | | | | | | | | | Year Ended | | | | | | | | | |
| | December 31, | | | | | | | | | | | December 31, | | | | | | | | | |
(in thousands, except percentages) | | 2016 | | | 2015 | | | $ Change | | | % Change | | | 2015 | | | 2014 | | | $ Change | | | % Change | |
Interest expense | | $ | (746 | ) | | $ | (1,123 | ) | | $ | 377 | | | | (34 | %) | | $ | (1,123 | ) | | $ | (2,007 | ) | | $ | 884 | | | | (44 | %) |
Other income (expense), net | | | (2,375 | ) | | | (1,307 | ) | | | (1,068 | ) | | | 82 | % | | | (1,307 | ) | | | (1,031 | ) | | | (276 | ) | | | 27 | % |
Other income (expense), net | | $ | (3,121 | ) | | $ | (2,430 | ) | | $ | (691 | ) | | | 28 | % | | $ | (2,430 | ) | | $ | (3,038 | ) | | $ | 608 | | | | (20 | %) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended December 31, | | Year ended December 31, |
| (in thousands, except percentages) | | 2019 | | 2018 | | $ Change | | % Change | | 2018 | | 2017 | | $ Change | | % Change |
| Interest expense | | $ | (20,512 | ) | | $ | (16,102 | ) | | $ | (4,410 | ) | | 27 | % | | $ | (16,102 | ) | | $ | (99 | ) | | $ | (16,003 | ) | | nm |
| Other income, net | | 9,247 |
| | 6,475 |
| | 2,772 |
| | 43 | % | | 6,475 |
| | 1,491 |
| | 4,984 |
| | nm |
| Other income (expense), net | | $ | (11,265 | ) | | $ | (9,627 | ) | | $ | (1,638 | ) | | 17 | % | | $ | (9,627 | ) | | $ | 1,392 |
| | $ | (11,019 | ) | | nm |
nm - not meaningful
Other expense, net increased by $0.7$1.6 million or 28%during fiscal year 2019 as compared to fiscal year 2018, primarily driven by an increase in costs associated with strategic partnerships and acquisitions of $10.6 million, interest expense of $4.4 million resulting from the amortization of debt discount and issuance costs of our 0% convertible senior notes due 2023 (“Notes”), offset in part by $8.3 million non-cash gains recognized from our long-term investments, increase of $3.0 million in interest income earned on our cash and cash equivalents, and gain on foreign exchange of $1.6 million.
Net loss
Net loss increased by $27.4 million during fiscal
years 2015 to 2016 primarilyyear 2019, mainly due to
foreign exchange losses driven by the significant decline in the British pound relative to the US dollar.Otherhigher share-based compensation expense decreased by $0.6 million, or 20%, from fiscal years 2014 to 2015 primarily due to lower interest expense as a result of correspondingly lower balances of debt outstanding. Specifically, at December 31, 2015 and 2014, there was $18.6$33.3 million and $24.6non-recurring acquisitions and strategic partnership related expenses of $24.1 million, of total debt outstanding, respectively.
offset by growth in continuing operations, as discussed above.
Liquidity and Capital Resources
As of December 31, 20162019 and 2015,2018, we had $160.4 million and $137.6 million, respectively, of cash and cash equivalents. Since our initial public offering in 2013equivalents of $343.6 million and our follow-on offering in early 2014, we have financed$566.3 million, respectively. We finance our operations primarily through sales to our customers and a majority of our customers are billed monthly. For customers with annual or multi-year contracts and those who opt for annual invoicing, we generally invoice only one annual period in advance and all invoicing occurs at the start of the respective subscription period. Revenue is deferred for such advanced billings. We also finance our operations from proceeds from issuance of stock under our stock plans, and proceeds from issuance of debt. We believe that our operations along withand existing liquidity sources and available borrowings under our SVB Agreement will satisfy our cash requirements for at least the next 12 months.
Generally, 77% of our billings, including carrier partner billings, are collected through credit card payments received at the beginning of each subscription period, which is monthly for the majority of our customers. As we continue to move up market, the number and size of customers with annual or multi-year contracts is increasing and those who opt for annual invoicing is also increasing. We generally invoice only one annual period in advance and all invoicing occurs at the start of the respective subscription period. Therefore, a source of our cash provided by operating activities is our deferred revenue, which is included within our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of invoiced fees for our software subscriptions, which we recognize as revenue ratably over the term of agreement. As of December 31, 2016 and 2015, we had deferred revenue of $45.2 million and $36.7 million, respectively.
As of December 31, 2016, the carrying value of our debt totaled $14.8 million, which was subsequently repaid in full in February 2017 as discussed in Note 17 of the Notes to the Consolidated Financial Statements and Supplementary Data included in Part II, Item 8 of this Annual Report on Form 10-K. The balance consisted of $4.0 million in the 2013 Term Loan and $10.8 million under the revolving line of credit, which collectively were payable under the SVB Agreement. As of December 31, 2016, the available borrowing capacity of the revolving line of credit was $4.2 million. We had pledged substantially all of our assets, excluding intellectual property, as collateral to secure our obligations under the SVB Agreement. The SVB Agreement contained customary negative covenants that limit our 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 contained customary affirmative covenants, as well as financial covenants that required us to (i) maintain minimum cash balances of $10.0 million with SVB, as defined in the agreement, and (ii) maintain minimum EBITDA levels, as determined in accordance with the SVB Agreement. We were in compliance with all covenants under the SVB Agreement as of December 31, 2016.
Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support customer growth, international expansion,acquisitions and expansions, sales and marketing, research and development, litigation, increased general and administrative expenses to support the anticipated growth in our operations, and capital equipment required to support our growing headcount and in support of our co-location data center facilities. Our capital expenditures in future periods are expected to grow in line with our business. To the extent that existing cashWe continually evaluate our capital needs and cash equivalents are not sufficient to fund our future operations, we may needdecide to raise additional fundscapital to fund the growth of our business, to further strengthen our balance sheet, or for general corporate purposes through public or private equity offerings or through additional debt financing. Although we currently are not a party to any agreement and do not have any understanding with any third parties with respect to potentialWe also may in the future make investments in or acquisitions of,acquire businesses or technologies we may enter into these types of arrangements in the future, whichthat could also require us to seek additional equity or debt financing. Additional financing sourcesAccess to additional capital may not be available, or on terms favorable to us or at all.
terms.
The table below
for the periods indicated, provides selected cash flow information
for the periods indicated (in thousands):
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Net cash provided by (used in) operating activities | $ | 29,708 | | | $ | 5,086 | | | $ | (11,430 | ) |
Net cash provided by (used in) investing activities | | (16,398 | ) | | | 6,366 | | | | (46,661 | ) |
Net cash provided by financing activities | | 9,330 | | | | 12,637 | | | | 54,787 | |
Effect of exchange rate changes | | 127 | | | | 317 | | | | 108 | |
Net increase (decrease) in cash and cash equivalents | $ | 22,767 | | | $ | 24,406 | | | $ | (3,196 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net cash provided by operating activities | $ | 64,846 |
| | $ | 72,130 |
| | $ | 41,165 |
|
| Net cash used in investing activities | (296,780 | ) | | (83,448 | ) | | (26,387 | ) |
| Net cash provided by financing activities | 9,042 |
| | 397,255 |
| | 6,783 |
|
| Effect of exchange rate changes | 169 |
| | (800 | ) | | (724 | ) |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | (222,723 | ) | | $ | 385,137 |
| | $ | 20,837 |
|
Net Cash Provided by
(Used in) Operating Activities
Cash provided by operating activities is influenced by
the timing of customer collections, as well as the amount and timing of disbursements to our vendors, the amount of cash we invest in personnel, marketing, and infrastructure costs to support the anticipated growth of our business,
and the increase in the number of
customers using our cloud-based software, the amount and timing of customer collections, as well as the amount and timing of disbursements to our vendors. As we continue to invest in personnel and infrastructure to support the anticipated growth of our business, we expect to continue to use cash in our operating activities.customers.
Net cash provided by operating activities was
$29.7$64.8 million for the year ended December 31,
2016 primarily resulting from2019. This was driven by net loss of $53.6 million adjusted for impacts of non-cash adjustments of
$49.3$205.5 million,
and an increase of $9.7 million in operating assets and liabilitiespartially offset by
funding a net
losscash used for working capital of
$29.3 million. The $49.3$87.0 million
of non-cash adjustmentsdriven primarily
consisted of $30.8 million in share-based compensation, $14.7 million in depreciation and amortization, $2.6 million in foreign currency remeasurement loss recognized on certain receivables denominated in currencies other than the functional currency, and $0.6 million in bad debt expense. The $9.7 million increase in cash resulting from changes in operating assets and liabilities was primarily driven by
the timing of cash payments to vendors and cash receipts and prepayments from customers and carriers.
Net cash provided by operating activities was $5.1 million for the year ended December 31, 2015 primarily resulting fromThe non-cash adjustments resulted primarily from $101.4 million of $37.9 million offset by funding a net loss of $32.1 million and a decrease of $0.7 million in operating assets and liabilities. Theshare-based compensation, $37.9 million of non-cash adjustments primarily consisted of $22.1 million in share-based compensation, $13.5 million in depreciation and amortization, $0.8$30.1 million in foreign currency remeasurement loss recognized on certain receivables denominated in currencies other than the functional currency, amortization of deferred sales commissions costs, $20.3 million amortization of debt discount and a $1.3 million impairment charge for certain internal use software offset by a $1.4 million non-cash benefit itemissuance costs related to the Glip acquisition. Due to the Glip acquisition, a deferred tax liability was established for the book-tax basis differenceour convertible notes, and $3.4 million loss and other related to acquired intangibles. The net deferred tax liability from acquisitions provided an additional source of income to support the realizability of our pre-existing deferred tax asset and as a result, we released a portion of the valuation allowance that was established in the previous year and recorded a one-time tax benefit of $1.4 million for the year ended December 31, 2015.
costs on investments.
Net cash provided by operating activities for the year ended December 31,
2016 increased2019, decreased by
$24.6$7.3 million as compared to the
respective period of the prior year
primarily due to a reduction in our net loss of $2.8 million, an increase in non-cash adjustments of $11.4 million, and an increase in changes in operating assets and liabilities of $10.4 million. The $10.4 million increase in cashended December 31, 2018. This change reflects working capital benefits resulting from
changes in operating assetspayments and
liabilities was primarily driven by thecollections timing,
as well as approximately $37.0 million of
cashone-time payments
to vendors and cash receipts and prepaymentsstemming from
customers and carriers. our recent partnerships.
Net Cash
Provided by (Used in)Used in Investing Activities
Our primary investing activities have consisted of
our long-term investments, business acquisitions and purchase of intellectual properties, and capital expenditures
including costs incurred related toand internal-use
software, that are necessary to support our increasing customer base and headcount levels in all functions of our business.software. As our business grows, we expect our capital expenditures to continue to increase.
Net cash used in investing activities was
approximately $16.4$296.8 million for the year ended December 31,
2016 primarily due2019. This was driven by our $135.6 million purchase of long-term investments, $89.1 million cash paid to
$14.2acquire intellectual property, $44.3 million in
purchases of property and equipment and $2.2 million ofcapital expenditures including personnel-related costs associated with
the development of internal-use
software. Net cash provided by investing activities was $6.4 million for the year ended December 31, 2015 primarily due to $28.1 million in proceeds from the maturity of available-for-sale short-term investments partially offset by $17.1 million in purchases of property and equipment and capitalized internal-use software, and the $4.7$27.9 million net cash consideration portion paid for theour acquisition of Glip.
Connect First, Inc.
Net cash used in investing activities for the year ended December 31,
20162019 increased by
$22.8$213.3 million as compared to the
respective period of the prior year
ended December 31, 2018, primarily due to
a reductionour $135.6 million purchase of
$28.2long-term investments, an increase of $70.6 million in
proceeds from the maturity of available-for-sale securities and restricted investments that were received in 2015, partially offset by reductions of $4.7 million in payments made in 2015cash paid for the
Glip acquisition
of intangible assets, and
$0.7 million in purchases of property and equipment and personnel-related costs associated with the development of internal-use software.higher capital expenditures during 2019.
Net Cash Provided by Financing Activities
Our primary financing activities have consisted of raising proceeds through the issuance of stock under our stock plans and
borrowings under the SVB Agreement. issuance of our Notes.
Net cash provided by financing activities was approximately
$9.3$9.0 million for the year ended December 31,
20162019, primarily
due to $15.1resulting from $15.2 million in proceeds from the issuance of shares in connection with our stock plans,
including the issuancenet of
shares under our ESPP,taxes paid. This was partially offset by
thepayments of $5.2 million of contingent consideration associated with acquisitions, and repayment of
$4.0 million for debt, including capital lease paymentsour financing obligation of
$0.3 million, and the holdback payment of $1.5 million related to the Glip acquisition as discussed in Note 6 of the Notes to the Consolidated Financial Statements and Supplementary Data included in Part II, Item 8 of this Annual Report on Form 10-K. Net cash provided by financing activities was $12.6 million for the year ended December 31, 2015 primarily due to $19.5 million in proceeds from issuance of stock in connection with our stock plans, including the issuance of shares under our ESPP, partially offset by $6.7 million in repayment of debt and capital lease obligations.
$0.9 million.
Net cash provided by financing activities for the year ended December 31, 20162019, decreased by $3.3$388.2 million as compared to the respective period of the prior year ended December 31, 2018, primarily due to the holdback payment of $1.5 million related to the Glip acquisition and a reduction of $4.4 million in proceeds from the issuance of sharesour Notes issued in connection with our stock plans, which were partially offset by reduced debt repayments of $2.4 million driven by an early repayment of debt in March 2015.2018.
We have generally signed
monthly and annualnew customers to contracts
that vary in length, from month-to-month to multi-year terms for our subscriptions. The timing of invoicing to our customers is a negotiated term and thus varies among our subscription contracts.
For multiple-year contracts, it is common to invoicePayment terms are generally billed either monthly or on an
initial amount at contract signing followed by subsequent annual
invoices.basis. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice, which constitute backlog. Until such time as these amounts are invoiced, we do not recognize them as revenues, unearned revenues or elsewhere in our consolidated financial statements.
Accordingly,Given the variability in our contract length, we believe that
fluctuations in backlog
areis not a reliable indicator of future revenues and we do not utilize backlog as a key management metric internally.
Deferred revenue primarily consists of the unearned portion of invoiced fees for our
software subscriptions, which we recognize as revenue in accordance with our revenue recognition policy.
As we continue to move up market, the number of customers whoCustomers with annual or multi-year contracts may opt for
multi-year contracts are increasing along with their related contract values.annual invoicing. For
these customers,
with multi-year contracts, however, we generally invoice only one annual subscription period in advance. Therefore, our deferred revenue balance does not capture the full contract value of such multi-year contracts. Accordingly, we believe that deferred revenue is not a reliable indicator of future revenues and we do not utilize deferred revenue as a key management metric internally.
The following summarizes our contractual obligations as of December 31,
20162019 (in thousands):
| Payments due by period | |
| Less than 1 year | | | 1 to 3 years | | | 3 to 5 years | | | More than 5 years | | | Total | |
Operating lease obligations | $ | 7,281 | | | $ | 13,109 | | | $ | 5,582 | | | $ | — | | | $ | 25,972 | |
Capital lease obligations, including interest | | 185 | | | | — | | | | — | | | | — | | | | 185 | |
Short and long-term debt obligations, including interest | | 14,875 | | | | 314 | | | | — | | | | — | | | | 15,189 | |
Purchase obligations | | 37,424 | | | | 4,206 | | | | — | | | | — | | | | 41,630 | |
Total | $ | 59,765 | | | $ | 17,629 | | | $ | 5,582 | | | $ | — | | | $ | 82,976 | |
As of December 31, 2016, the carrying value of our debt totaled $14.8 million, which was subsequently repaid in full in February 2017 as discussed in Note 17 of the Notes to the Consolidated Financial Statements and Supplementary Data included in Part II, Item 8 of this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | |
| | Payments due by period |
| | Up to
1 year | | 1 to 3 years | | 3 to 5 years | | More than
5 years | | Total |
| Operating lease obligations | 16,164 |
| | 19,812 |
| | 6,551 |
| | 5,883 |
| | 48,410 |
|
| Financing obligations | 2,956 |
| | 5,912 |
| | — |
| | — |
| | 8,868 |
|
| Long-term debt | — |
| | — |
| | 460,000 |
| | — |
| | 460,000 |
|
| Purchase obligations | 55,755 |
| | 16,220 |
| | 7,595 |
| | 17,649 |
| | 97,219 |
|
| Total | 74,875 |
| | 41,944 |
| | 474,146 |
| | 23,532 |
| | 614,497 |
|
Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the normal course of business for which we have not received the goods or services as of December 31, 2016.2019. Although open purchase orders are considered enforceable and legally binding, except for our purchase orders with our inventory suppliers, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. Our purchase orders with our inventory suppliers are non-cancellable. In addition, we have other
obligations for goods and services that we enter into in the normal course of business. These obligations, however, are either not enforceable or legally binding, or are subject to change based on our business decisions. The aggregate of these items represents our estimate of purchase obligations.
Silicon Valley Bank Credit Facility
As of December 31, 2016, our 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, we had one outstanding growth capital term loan (2013 Term Loan) and a revolving line of credit. In February 2017, we repaid the 2013 Term Loan and revolving line of credit in full and terminated the SVB Agreement.
The 2013 Term Loan was borrowed on December 31, 2013 with a principal amount of $15.0 million, which was repayable in 48 equal monthly installments of principal, plus accrued and unpaid interest. Interest was due monthly and accrued at a floating rate based on our 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. We 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 an interest rate of 4.00% based on the prime rate option and cash balance maintained with SVB. As of December 31, 2016, the outstanding principal balance of the 2013 Term Loan was $4.0 million, of which $0.3 million was payable subsequent to December 31, 2017 and was classified as a non-current liability in the accompanying consolidated balance sheet.
The revolving line of credit provided 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 was not expected to limit the amount of borrowings available under the line of credit. Under the line of credit, interest was paid monthly and accrued at a floating rate based on our 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. We 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 an interest rate of 3.75% based on the prime rate option and cash balance maintained with SVB. As of December 31, 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 was classified as a current liability in the consolidated balance sheet as the principal balance was due in August 2017.
We pledged all of our assets, excluding intellectual property, as collateral to secure our obligations under the SVB agreement. The SVB agreement contained customary negative covenants that limit our ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets and merge or consolidate. The SVB agreement also contained customary affirmative covenants, including requirements to, among other things, (i) maintain minimum cash balances representing the greater of $10.0 million or three times our quarterly cash burn rate, as defined in the agreement, and (ii) maintain minimum EBITDA levels, as determined in accordance with the agreement. On March 30, 2016, we adjusted certain financial covenant thresholds to expand our ability to invest in certain foreign subsidiaries and property and equipment. We were in compliance with all covenants under our credit agreement with SVB as of December 31, 2016.
Indemnification Obligations
Certain of our agreements with sales agents, resellers and customers include provisions for indemnification against liabilities if our products infringe a third-party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification provisions and have not accrued any liabilities related to such obligations in the consolidated financial statements as of December 31,
2016.2019.
Contingencies
Legal Proceedings
We are
and may be in the future subject to certain legal proceedings
described below, and from time to time may be involved in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters, and other
litigation matters relating to various claims that arise in the normal course of business.
Defending such proceedingsWe record a provision for a liability when we believe that it is
costlyboth probable that a liability has been incurred, and
can impose a significant burden on management and employees, we may receive unfavorable preliminary or interim rulings in the
course of litigation, and there can be no assurances that favorable final outcomes will be obtained.We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable andamount can be reasonably estimated. We assessSignificant judgment is required to determine both probability and the estimated amount of loss. Such legal proceedings are inherently unpredictable and subject to significant uncertainties, some of which are beyond our potential liability by analyzing specific litigationcontrol. Should any of these estimates and regulatory matters using reasonably available information. We developassumptions change or prove to be incorrect, it could have a significant impact on our views on estimated losses in consultation with insideresults of operations, financial position, and outside counsel, which involves a subjective analysis of potential resultscash flows.
Refer to Note 9 – Commitment and outcomes, assuming various combinations of appropriate litigation and settlement strategies. Legal fees are expensed in the period in which they are incurred. As of December 31, 2016, we did not have any accrued liabilities recorded for such loss contingencies.
On April 21, 2016, Supply Pro Sorbents, LLC (SPS) filed a putative class action against us in the United States District Court for the Northern District of California (Court), alleging common law conversion and violationsContingencies
of the federal Telephone Consumer Protection Act (TCPA) arising from fax cover sheets used by our customers when sending facsimile transmissions over our system (Lawsuit). SPS seeks 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, we 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). The Petition remains pending. On July 8, 2016, we 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 our Petition. On October 7, 2016, the Court granted our motion to dismiss and gave SPS 20 days to amend its complaint. The Court concurrently dismissed our motion to dismiss or stay as moot. SPS filed its amended complaint on October 27, 2016, alleging essentially the same theories and claims. On November 21, 2016, we filed a motion to dismiss the amended complaint, along with a renewed motion to dismiss or stay the case pending resolution of the FCC Petition. The motions to dismiss and to stay the Lawsuit are fully briefed and under submissionnotes to the Court. Discovery has not yet commenced. We intend to vigorously defend ourselves in the Lawsuit. 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 us as of the date of this filing and the rules and regulations applicable to the preparation of our consolidated financial statements it is not possible to provide an estimated amountincluded in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of any such loss or range of loss that may occur.Sales Tax Liability
We regularly increase our sales and marketing activities in various states within the U.S., which may create nexus in those states to collect sales taxesthis Annual Report on sales to customers. Although we are diligent in collecting and remitting such taxes, there is uncertainty as to what constitutes sufficient in state presenceForm 10-K for a state to levy taxes, fees, and surcharges for sales made over the Internet. As of December 31, 2016 and 2015, we recorded a long-term sales tax liability of $3.1 million, and $3.7 million, respectively, based on our best estimate of the probable liability for the loss contingency incurred as of those dates. Our estimate of a probable outcome under the loss contingency is based on analysis of our sales and marketing activities, revenues subject to sales tax, and applicable regulations in each state in each period. No significant adjustments to the long-term sales tax liability have been recognized in the accompanying consolidated financial statements for changes to the assumptions underlying the estimate. However, changes in management’s assumptions may occur in the future as we obtain 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.
Employee Agreements
We have signed various employment agreements with executives and key employees pursuant to which if we terminate their employment without cause or if the employee does so for good reason following a change of control of our company, the employees are entitled to receive certain benefits, including severance payments, accelerated vesting of stock options and restricted stock units (RSUs) and continued COBRA coverage. As of December 31, 2016, no triggering events which would cause these provisions to become effective have occurred. Therefore, no liabilities have been recorded for these agreements in the consolidated financial statements.
additional information.
Off-Balance Sheet Arrangements
Through December 31,
2016,2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. or U.S. GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. In other cases, management’s judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs, and expenses, and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue Recognition
We derive our revenues from
two sources:Software subscriptions, revenue, which is generated from the sale of subscriptions to our software applications and related services, which have contractual terms typically ranging from one month to three years, and include recurring fixed plan subscription fees, variable usage-based fees for usage in excess of plan limits, recurring administrative cost recovery fees, one-time fees, and other recurring fees related to our subscriptions; and
Other revenue, which is generated from 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,products, and professional implementation services. Effective January 1, 2017, we switched fromSubscriptions revenue is generally recognized over the agency model to the direct sale model whereby we will no longer serve as an agent for referring phone sales to Westcon and we will no longer receive commissions for our services. Under the direct sale model, we will purchase phones directly from Westcon for resale to our customers. Under this model, we will recognize revenues and costs for phone sales as we are the primary obligor for order fulfillment, have latitude in determining pricing, and assume general inventory risk. We expect the shift to the direct sale model to result in increases in our other revenues and the corresponding costsperiod of other revenues, resulting in decreased margin.
We recognize revenues when the following criteria are met:
there is persuasive evidence of an arrangement;
the subscription servicecontract. Subscription contracts typically allow the customers to terminate their services at any time during the first 30 or 60 days of the subscription period and are charged for the term of usage. Upon cancellation during the termination period, customers receive a pro-rata refund for any amounts paid. After the end of the termination period, the contract is being provided to the customer or the product has been delivered;
the amount of fees to be paid bynon-cancellable and the customer is fixed or determinable; and
collectionobligated to pay for the remaining term of the fees is reasonably assured.
Revenue under subscription plans are recognized as follows:
fixed plan subscription and administrative cost recovery fees are recognized on a straight-line basis over their contractual subscription term;
fees for additional minutescontract. For sale of usage in excess of plan limits are recognized over the estimated usage period in a manner that approximates actual usage; and
one-time upfront fees are initially deferred and recognized on a straight-line basis over the estimated average customer life.
Commissionproducts, revenue is recognized when services have been rendered. Product revenuecontrol is billed at the time the order is received and recognized when the phone has been delivered to the customer. Professional servicetransferred. For professional services, revenue is recognized upon completion of performance.
We frequently enter into arrangements with multiple deliverables that generally include services to be provided under the subscription plan and the sale of products used in connection with our software subscriptions. We allocate the consideration to each deliverable in a multiple-element arrangement based upon its relative selling prices. We determine the selling price for each deliverable using vendor-specific objective evidence, or VSOE, of selling price or third-party evidence, or TPE, of selling price, if it exists. If neither VSOE nor TPE of selling price exists for a deliverable, we use our best estimated selling price, or BESP, for that deliverable. Consideration allocated to each deliverable, limited to the amount not contingent on future performance, are then recognized as revenue when the basic revenue recognition criteria are met for the respective deliverable.
We determine VSOE of fair value based on historical standalone sales to customers. In determining VSOE, we require that a substantial majority of the selling prices for a product or software fall within a reasonably narrow pricing range of the median selling price. VSOE exists for all of our software subscription plans. We use BESP as the selling price for our product offerings as we are not able to determine VSOE of fair value or TPE from observable pricing data of standalone sales. We estimate BESP for a product by considering company-specific factors such as pricing strategies, direct product and other costs, bundling and discounting practices and contractually stated prices.
We also generate software subscriptions and product revenues through sales of our software subscriptions and products by resellers. When we assume a majority of the business risks associated with performance of the contractual obligations, we record the revenues on a gross basis and amounts retained by our resellers are recorded as sales and marketing expenses. Our assumption of such business risks is evidenced when, among other things, we take responsibility for delivery of the product or software subscription, establish pricing of the arrangement, assume credit and inventory risk, and are the primary obligor in the arrangement. When a reseller assumes the majority of the business risks associated with the performance of the contractual obligations, we record the associated revenues at the net amount received from the reseller. We recognize revenues from our resellers when the following criteria are met:
persuasive evidence of an arrangement exists through a contract with the customer;
the subscription is being provided to the customer or the product has been delivered;
the amount of fees to be paid by the customer is fixed or determinable; and
the collection of the fees is reasonably assured.
Our deliverables sold through our reseller agreements consist of our software subscriptions and products. We recognize software subscriptions sold through our resellers on a straight-line basis over the period the underlying subscriptions are provided to the end customer. Products sold through resellers are shipped directly to the end customer and are recognized when title transfers to the end customer. Revenue from resellers has predominantly been recorded on a gross basis for all periods presented.
We record 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 our historical experience, current trends and our expectations regarding future experience. We monitor the accuracy of our sales reserve estimates by reviewing actual returns and credits and adjust them for our future expectations to determine the adequacy of our current and future reserve needs. If actual future returns and credits differ from past experience, additional reserves may be required.
We recognize revenue, net of any applicable sales taxes.
Capitalized Internal-Use Software Development Costs
We use significant judgment in determining whether certain internal-use software development costs are capitalized or expensed and over what period the amounts capitalized should be amortized to expense. We capitalize internal-use software development costs related to our SaaS applications that are incurred during the application development stage provided that it is probable the project will be successfully completed and such costs will be recovered from future revenues. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life starting when the underlying project is ready for its intended use, generally three to four years. We evaluate the useful lives of these assets on an annual basis and test for impairment when events or changes in circumstances occur that could impact the recoverability of these assets. We capitalized $2.5 million and $2.1 million, net of impairment, of internal-use software development costs during the fiscal years ended December 31, 2016 and 2015, respectively. The carrying value of internal-use software development costs, net of amortization, was $4.4 million and $2.6 million at December 31, 2016 and 2015, respectively.
Share-Based Compensation
We measure and recognize compensation expense for all stock options, restricted stock unit awards (RSUs) and purchase rights under our employee stock purchase plan (ESPP) granted to our employees and directors, based on the estimated fair value of the award on the grant date. We use the Black-Scholes-Merton option-pricing model to estimate the fair value of stock option awards and purchase rights under our employee stock purchase plan. For RSUs, fair value is based on the adjusted closing price of our Class A common stock on the New York Stock Exchange at the grant date. The fair value is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award on a straight-line basis. We believe that the fair value of stock options and RSUs granted to non-employees is more reliably measured than the fair value of the services received. As such, the fair value of the unvested portion of the options and RSUs granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.
Our option-pricing model which is used to value stock options and purchase rights under our ESPP, requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future.
These assumptions are estimated as follows:
Fair Value of Common Stock. We use the daily adjusted closing stock price of our Class A common stock as reported by the New York Stock Exchange.
Risk-Free Interest Rate. The risk-free interest rate was based on the yield available on U.S. Treasury zero-coupon issues with a term that approximates the expected term of the option or the purchase rights under our ESPP.
Expected Term. The expected term represents the period that option awards are expected to be outstanding. Prior to the fourth quarter of 2014, we did not have sufficient historical information to develop reasonable expectations about future exercise behavior. Therefore, the expected term for options issued to employees was calculated as the mean of the option vesting period and the contractual term (the Simplified Method) as these options were determined to be “plain-vanilla” as defined under current guidance. Beginning with the fourth quarter of 2014, we began incorporating our historical data, assigning a 25% weighting to our historical data and a 75% weighting to the Simplified Method estimate. As time progressed and we generated additional historical data, the weighting of our historical data has increased while the weighting of the Simplified Method data has decreased. Accordingly, in the fourth quarters of 2015 and 2016, our historical data was weighted as 50% and 75%, respectively, while the Simplified Method data was weighted as 50% and 25%, respectively. The expected term for options issued to non-employees is the remaining contractual term.
Volatility. The expected stock price volatility of common stock was derived from the historical volatilities of a peer group of similar publicly traded companies over a period that approximates the expected term of the option. Beginning in the fourth quarter of 2014, we began incorporating our historical volatility assigning a 25% weighting to our historical data and a 75% weighting to the historical volatilities of the peer group of similarly publicly traded companies. As time progressed and we generated additional historical data, the weighting of our historical data has increased while the weighting of the peer group data has decreased. Accordingly, in the fourth quarters of 2015 and 2016, our historical volatility was weighted as 50% and 75%, respectively, while the peer group data was weighted as 50% and 25%, respectively.
Dividend Yield. The expected dividend yield was 0% as we have not declared a cash dividend, nor paid, and do not expect to pay, cash dividends.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented:
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Expected term for employees (in years) | | 4.7 | | | | 4.8 | | | | 4.6 | |
Expected term for non-employees (in years) | | 5.9 | | | | 7.1 | | | | 7.0 | |
Expected volatility | | 47 | % | | | 48 | % | | | 48 | % |
Risk-free interest rate | | 1.12 | % | | | 1.22 | % | | | 1.41 | % |
Expected dividend yield | | 0 | % | | | 0 | % | | | 0 | % |
Grant date fair value of employee options | $ | 6.72 | | | $ | 6.78 | | | $ | 6.16 | |
In addition to assumptions used in the Black-Scholes-Merton option-pricing model, we also estimate a forfeiture rate used in the calculation of the share-based compensation for our equity awards and ESPP. Our forfeiture rate is generally based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our share-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the share-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in the consolidated statements of operations.
We will continue to use judgment in evaluating the assumptions related to our share-based compensation on a prospective basis. As we continue to accumulate additional data related to the acquisition and trading of our Class A common stock, we may have refinements to our estimates, which could materially impact our future share-based compensation expense.
Recent Accounting Pronouncements
For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements, see Note 1 to the consolidated financial statements
included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, which is incorporated
herein by
reference herein.reference.
ITEM 7A.
| ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
|
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Risk
Our functional currency
The majority of our
foreign subsidiaries is generally the local currency. Most of our sales
and contracts are denominated in U.S. dollars, and therefore our net revenue is not currently subject to significant foreign currency risk.
As part of our international operations, we charge customers in British Pounds, European Union (“EU”) Euro, Canadian Dollars and Australian Dollars, among others. However, this impact has not been significant in 2019. Our operating expenses are
generally denominated in the currencies of the countries in which our operations are located, which are primarily in the U.S.,
and to a lesser extent in Canada,
Europe, and Asia-Pacific. The functional currency of our foreign subsidiaries is generally the
Philippines, Russia, Ukraine, the U.K., Switzerland, the Netherlands, China, Ireland, and Singapore. In 2016, we formed wholly owned subsidiaries in Australia, Italy, Japan, Spain, and Brazil.local currency. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign
currency exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency
risk or other derivative financial instruments. In 2016, we entered into long-term intercompany loan agreements with our U.K. subsidiary, resulting in the foreign currency transaction gains and losses generated on remeasurement of our intercompany balances with the U.K. subsidiary being reported in other comprehensive income rather than through net loss.risk. During fiscal
2016, the effect of2019, a hypothetical 10% change in foreign currency exchange rates applicable to our business would
not have had
ana material impact
of approximately $4.5 million on our consolidated financial statements.
During fiscal 2015, the effect of a hypothetical 10% change inAs our international operations continue to expand, risks associated with fluctuating foreign currency
exchange rates
applicablemay increase. We will continue to
reassess our
business would have had an impact of approximately $4.6 million on our consolidated financial statements.approach to managing these risks.
Interest Rate
SensitivityWeand Investments Risks
As of December 31, 2019, we had cash and cash equivalents of $160.4$343.6 million, and $137.6 million asa majority of December 31, 2016 and December 31, 2015, respectively.which are held in money-market funds. We hold our cash and cash equivalents for working capital purposes. Our cash andDeclines in interest rates would reduce future interest income. During fiscal year 2019, a hypothetical 10% increase or decrease in overall interest rates would not have had a material on impact our interest income. The carrying amount of our cash equivalents are held in cash and short-term money market funds.reasonably approximates fair values. Due to the short-term nature of these instruments,our money-market funds, we believe that we do not have any material exposure to changes in interest rates will not have a material impact on the fair value of our investment portfolio ascash equivalents.
As of December 31, 2019, we had $386.9 million outstanding of our 0% convertible senior notes due 2023 (the "Notes"). We carry the Notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only. The Notes have a
result ofzero percent fixed annual interest rate and, therefore, we have no economic exposure to changes in interest rates.
The fair value of the Notes is exposed to interest rate risk. Generally, the fair value of our fixed interest rate Notes will increase as interest rates decline and decrease as interest rates increase. In addition, the fair values of the Notes are affected by our stock price. The fair value of the Notes will generally increase as our common stock price increases and will generally decrease as our common stock price decrease in value.
As of December 31,
2016 and 2015,2019, we had
approximately $14.8 millionlong term investments in convertible and
$18.6redeemable preferred stock of $132.2 million. These equity investments are subject to market related risks that could decrease or increase the fair value of our holdings. These equity investments are adjusted to fair value based on market inputs at the balance sheet date, which are subject to market-related risks that could decrease or increase the fair value of our holdings. A fluctuation in the investee's stock price could have an adverse impact on the fair value of our investment. A hypothetical adverse stock price change of 10% could have resulted in a potential decrease of up to $7 million in
current and long-term debt, respectively, with variable interest rate components. A hypothetical 10% change in interest rates during anythe fair-value of the periods presented would not have had a material impact on our financial statements.investment as of December 31, 2019.
| |
| ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
To the Stockholders and Board of Directors
and Stockholders Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of RingCentral, Inc. and subsidiaries (the Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016.2019, and the related notes (collectively, the consolidated financial statements). We also have audited RingCentral, Inc.’sthe Company’s internal control over financial reporting as of December 31, 2016,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). RingCentral,Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Connect First, Inc. on January 14, 2019, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, Connect First, Inc.’s internal control over financial reporting associated with approximately 3% of consolidated total assets and approximately 1% of consolidated total revenues included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company as of December 31, 2019 also excluded an evaluation of the internal control over financial reporting of Connect First, Inc.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic 842, Leases.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Controls over Financial
Reporting.Reporting appearing in Item 9A. Our responsibility is to express an opinion on
thesethe Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
supportingregarding the amounts and disclosures in the
consolidated financial
statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
andas well as evaluating the overall
presentation of the consolidated financial
statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion,
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements referredthat was communicated or required to above present fairly,be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in all material respects,any way our opinion on the consolidated financial positionstatements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of RingCentral, Inc.Audit Evidence Over Subscriptions Revenue
As discussed in Note 1 to the consolidated financial statements, and subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the yearsdisclosed in the three-year periodconsolidated statements of operations, the Company recorded $902.9 million of total revenues for the year ended December 31, 2016,2019, of which $817.8 million related to subscriptions. There are high volumes of subscription transactions processed across multiple information technology (IT) systems.
We identified the evaluation of audit evidence over subscriptions revenue as a critical audit matter. This matter required especially subjective auditor judgment because of the number of IT applications involved in conformitythe subscriptions revenue recognition process. This matter also included determining the nature and extent of audit evidence obtained over subscriptions revenue, and the need to involve IT professionals to assist with U.S. generally accepted accounting principles. Alsothe performance of certain procedures.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s subscriptions revenue process, including associated IT controls. We applied auditor judgment to determine the nature and extent of procedures to be performed over subscriptions revenue, including the determination of the IT applications subject to testing. We assessed the recorded subscriptions revenue by selecting transactions and comparing the amounts recognized for consistency with underlying documentation, including contracts with customers. We also involved IT professionals with specialized skills and knowledge, who assisted in our opinion, RingCentral Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issuedtesting certain IT applications that are used by the CommitteeCompany in its subscriptions revenue recognition process. In addition, we evaluated the overall sufficiency of Sponsoring Organizations of the Treadway Commission (COSO)audit evidence obtained over subscriptions revenue. We have served as the Company’s auditor since 2010.
February 27, 201726, 2020
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value per share)
| December 31, | | | December 31, | |
| 2016 | | | 2015 | |
Assets | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | $ | 160,355 | | | $ | 137,588 | |
Accounts receivable, net | | 30,243 | | | | 19,163 | |
Inventory | | 63 | | | | 2,317 | |
Prepaid expenses and other current assets | | 15,250 | | | | 11,978 | |
Total current assets | | 205,911 | | | | 171,046 | |
Property and equipment, net | | 31,994 | | | | 28,160 | |
Goodwill | | 9,393 | | | | 9,393 | |
Acquired intangibles, net | | 2,244 | | | | 3,266 | |
Other assets | | 3,087 | | | | 2,948 | |
Total assets | $ | 252,629 | | | $ | 214,813 | |
Liabilities and Stockholders' Equity | | | | | | | |
Current liabilities | | | | | | | |
Accounts payable | $ | 7,810 | | | $ | 5,196 | |
Accrued liabilities | | 48,322 | | | | 34,702 | |
Current portion of capital lease obligation | | 181 | | | | 269 | |
Current portion of long-term debt | | 14,528 | | | | 3,750 | |
Deferred revenue | | 45,159 | | | | 36,657 | |
Total current liabilities | | 116,000 | | | | 80,574 | |
Long-term debt | | 312 | | | | 14,840 | |
Sales tax liability | | 3,077 | | | | 3,670 | |
Capital lease obligation | | — | | | | 181 | |
Other long-term liabilities | | 3,199 | | | | 5,416 | |
Total liabilities | | 122,588 | | | | 104,681 | |
| | | | | | | |
Commitments and contingencies (Note 8) | | | | | | | |
| | | | | | | |
Stockholders' equity: | | | | | | | |
Class A common stock, $0.0001 par value; 1,000,000 shares authorized at December 31, 2016 and 2015; 61,292 and 58,480 shares issued and outstanding at December 31, 2016 and 2015 | | 6 | | | | 6 | |
Class B common stock, $0.0001 par value; 250,000 shares authorized at December 31, 2016 and 2015; 13,091 and 13,483 shares issued and outstanding at December 31, 2016 and 2015 | | 1 | | | | 1 | |
Additional paid-in capital | | 366,800 | | | | 319,792 | |
Accumulated other comprehensive income | | 2,737 | | | | 527 | |
Accumulated deficit | | (239,503 | ) | | | (210,194 | ) |
Total stockholders' equity | $ | 130,041 | | | $ | 110,132 | |
Total liabilities and stockholders' equity | $ | 252,629 | | | $ | 214,813 | |
|
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 343,606 |
| | $ | 566,329 |
|
| Accounts receivable, net | 129,990 |
| | 94,375 |
|
| Deferred and prepaid sales commission costs | 36,589 |
| | 23,038 |
|
| Prepaid expenses and other current assets | 25,354 |
| | 23,772 |
|
| Total current assets | 535,539 |
| | 707,514 |
|
| Property and equipment, net | 89,230 |
| | 70,205 |
|
| Operating lease right-of-use-assets | 39,269 |
| | — |
|
| Long-term investments | 132,188 |
| | — |
|
| Deferred and prepaid sales commission costs, non-current | 462,344 |
| | 55,735 |
|
| Goodwill | 55,278 |
| | 31,238 |
|
| Acquired intangibles, net | 127,338 |
| | 19,480 |
|
| Other assets | 9,561 |
| | 10,154 |
|
| Total assets | $ | 1,450,747 |
| | $ | 894,326 |
|
| Liabilities and Stockholders' Equity | | | |
| Current liabilities | | | |
| Accounts payable | $ | 34,612 |
| | $ | 10,145 |
|
| Accrued liabilities | 138,729 |
| | 100,687 |
|
| Deferred revenue | 107,372 |
| | 88,527 |
|
| Total current liabilities | 280,713 |
| | 199,359 |
|
| Convertible senior notes, net | 386,889 |
| | 366,552 |
|
| Operating lease liabilities | 28,516 |
| | — |
|
| Other long-term liabilities | 8,929 |
| | 10,806 |
|
| Total liabilities | 705,047 |
| | 576,717 |
|
| Commitments and contingencies (Note 9) |
|
| |
|
|
| | | | |
| Stockholders' equity | | | |
| Class A common stock, $0.0001 par value; 1,000,000 shares authorized at December 31, 2019 and 2018; 75,901 and 69,445 shares issued and outstanding at December 31, 2019 and 2018 | 8 |
| | 7 |
|
| Class B common stock, $0.0001 par value; 250,000 shares authorized at December 31, 2019 and 2018; 11,039 and 11,601 shares issued and outstanding at December 31, 2019 and 2018 | 1 |
| | 1 |
|
| Additional paid-in capital | 1,033,053 |
| | 551,078 |
|
| Accumulated other comprehensive income | 1,948 |
| | 2,226 |
|
| Accumulated deficit | (289,310 | ) | | (235,703 | ) |
| Total stockholders' equity | 745,700 |
| | 317,609 |
|
| Total liabilities and stockholders' equity | $ | 1,450,747 |
| | $ | 894,326 |
|
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Revenues | | | | | | | | | | | |
Software subscriptions | $ | 355,850 | | | $ | 271,245 | | | $ | 200,098 | |
Other | | 23,874 | | | | 24,983 | | | | 19,789 | |
Total revenues | | 379,724 | | | | 296,228 | | | | 219,887 | |
Cost of revenues | | | | | | | | | | | |
Software subscriptions | | 73,470 | | | | 66,354 | | | | 58,673 | |
Other | | 18,741 | | | | 20,917 | | | | 18,100 | |
Total cost of revenues | | 92,211 | | | | 87,271 | | | | 76,773 | |
Gross profit | | 287,513 | | | | 208,957 | | | | 143,114 | |
Operating expenses | | | | | | | | | | | |
Research and development | | 65,514 | | | | 52,924 | | | | 44,582 | |
Sales and marketing | | 192,497 | | | | 139,851 | | | | 104,827 | |
General and administrative | | 55,454 | | | | 47,114 | | | | 38,910 | |
Total operating expenses | | 313,465 | | | | 239,889 | | | | 188,319 | |
Loss from operations | | (25,952 | ) | | | (30,932 | ) | | | (45,205 | ) |
Other income (expense), net | | | | | | | | | | | |
Interest expense | | (746 | ) | | | (1,123 | ) | | | (2,007 | ) |
Other income (expense), net | | (2,375 | ) | | | (1,307 | ) | | | (1,031 | ) |
Other income (expense), net | | (3,121 | ) | | | (2,430 | ) | | | (3,038 | ) |
Loss before provision (benefit) for income taxes | | (29,073 | ) | | | (33,362 | ) | | | (48,243 | ) |
Provision (benefit) for income taxes | | 236 | | | | (1,263 | ) | | | 97 | |
Net loss | $ | (29,309 | ) | | $ | (32,099 | ) | | $ | (48,340 | ) |
Net loss per common share | | | | | | | | | | | |
Basic and diluted | $ | (0.40 | ) | | $ | (0.46 | ) | | $ | (0.72 | ) |
Weighted-average number of shares used in computing net loss per share | | | | | | | | | | | |
Basic and diluted | | 72,994 | | | | 70,069 | | | | 66,818 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenues | | | | | |
| Subscriptions | $ | 817,811 |
| | $ | 612,888 |
| | $ | 465,254 |
|
| Other | 85,047 |
| | 60,736 |
| | 38,363 |
|
| Total revenues | 902,858 |
| | 673,624 |
| | 503,617 |
|
| Cost of revenues | | | | | |
| Subscriptions | 160,320 |
| | 109,454 |
| | 89,193 |
|
| Other | 70,723 |
| | 47,675 |
| | 32,078 |
|
| Total cost of revenues | 231,043 |
| | 157,129 |
| | 121,271 |
|
| Gross profit | 671,815 |
| | 516,495 |
| | 382,346 |
|
| Operating expenses | | | | | |
| Research and development | 136,363 |
| | 101,042 |
| | 75,148 |
|
| Sales and marketing | 439,100 |
| | 329,116 |
| | 240,223 |
|
| General and administrative | 142,027 |
| | 102,773 |
| | 72,313 |
|
| Total operating expenses | 717,490 |
| | 532,931 |
| | 387,684 |
|
| Loss from operations | (45,675 | ) | | (16,436 | ) | | (5,338 | ) |
| Other income (expense), net | | | | | |
| Interest expense | (20,512 | ) | | (16,102 | ) | | (99 | ) |
| Other income, net | 9,247 |
| | 6,475 |
| | 1,491 |
|
| Other income (expense), net | (11,265 | ) | | (9,627 | ) | | 1,392 |
|
| Loss before income taxes | (56,940 | ) | | (26,063 | ) | | (3,946 | ) |
| Provision for (benefit from) income taxes | (3,333 | ) | | 140 |
| | 258 |
|
| Net loss | $ | (53,607 | ) | | $ | (26,203 | ) | | $ | (4,204 | ) |
| Net loss per common share | | | | | |
| Basic and diluted | $ | (0.64 | ) | | $ | (0.33 | ) | | $ | (0.06 | ) |
| Weighted-average number of shares used in computing net loss per share | | | | | |
| Basic and diluted | 83,130 |
| | 79,500 |
| | 76,281 |
|
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Net loss | $ | (29,309 | ) | | $ | (32,099 | ) | | $ | (48,340 | ) |
Other comprehensive income/(loss) | | | | | | | | | | | |
Foreign currency translation adjustments, net | | 2,210 | | | | 561 | | | | 276 | |
Unrealized gain (loss) on available-for-sale securities | | — | | | | 217 | | | | (217 | ) |
Comprehensive loss | $ | (27,099 | ) | | $ | (31,321 | ) | | $ | (48,281 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net loss | $ | (53,607 | ) | | $ | (26,203 | ) | | $ | (4,204 | ) |
| Other comprehensive income (loss) | | | | | |
| Foreign currency translation adjustments, net | (278 | ) | | (772 | ) | | 261 |
|
| Comprehensive loss | $ | (53,885 | ) | | $ | (26,975 | ) | | $ | (3,943 | ) |
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | Accumulated | | | | | | | | | |
| | | | | | | | | Additional | | | Other | | | | | | | Total | |
| Common stock | | | Paid-in | | | Comprehensive | | | Accumulated | | | Stockholders' | |
| Shares | | | Amount | | | Capital | | | Loss | | | Deficit | | | Equity | |
Balance as of December 31, 2013 | | 62,244 | | | $ | 6 | | | $ | 193,574 | | | $ | (310 | ) | | $ | (129,755 | ) | | $ | 63,515 | |
Issuance of common stock in connection with Secondary Offering (net of issuance costs of $1,050) | | 2,792 | | | | — | | | | 56,117 | | | | — | | | | — | | | | 56,117 | |
Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans | | 3,523 | | | | 1 | | | | 9,637 | | | | — | | | | — | | | | 9,638 | |
Share-based compensation | | — | | | | — | | | | 15,516 | | | | — | | | | — | | | | 15,516 | |
Changes in comprehensive loss | | — | | | | — | | | | — | | | | 59 | | | | — | | | | 59 | |
Net loss | | — | | | | — | | | | — | | | | — | | | | (48,340 | ) | | | (48,340 | ) |
Balance as of December 31, 2014 | | 68,559 | | | $ | 7 | | | $ | 274,844 | | | $ | (251 | ) | | $ | (178,095 | ) | | $ | 96,505 | |
Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans | | 3,181 | | | | — | | | | 19,413 | | | | — | | | | — | | | | 19,413 | |
Issuance of shares of business acquisition | | 223 | | | | — | | | | 3,447 | | | | — | | | | — | | | | 3,447 | |
Share-based compensation | | — | | | | — | | | | 22,088 | | | | — | | | | — | | | | 22,088 | |
Changes in comprehensive loss | | — | | | | — | | | | — | | | | 778 | | | | — | | | | 778 | |
Net loss | | — | | | | — | | | | — | | | | — | | | | (32,099 | ) | | | (32,099 | ) |
Balance as of December 31, 2015 | | 71,963 | | | $ | 7 | | | $ | 319,792 | | | $ | 527 | | | $ | (210,194 | ) | | $ | 110,132 | |
Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans | | 2,374 | | | | — | | | | 14,849 | | | | — | | | | — | | | | 14,849 | |
Issuance of common stock for achievement of Glip related matters | | 46 | | | | — | | | | 1,080 | | | | — | | | | — | | | | 1,080 | |
Share-based compensation | | — | | | | — | | | | 31,079 | | | | — | | | | — | | | | 31,079 | |
Changes in comprehensive loss | | — | | | | — | | | | — | | | | 2,210 | | | | — | | | | 2,210 | |
Net loss | | — | | | | — | | | | — | | | | — | | | | (29,309 | ) | | | (29,309 | ) |
Balance as of December 31, 2016 | | 74,383 | | | $ | 7 | | | $ | 366,800 | | | $ | 2,737 | | | $ | (239,503 | ) | | $ | 130,041 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders' Equity |
| | Common stock | | | | |
| | Shares | | Amount | | | | |
| Balance as of December 31, 2016 | 74,383 |
| | $ | 7 |
| | $ | 366,800 |
| | $ | 2,737 |
| | $ | (205,296 | ) | | $ | 164,248 |
|
| Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans, net of tax withholdings | 3,594 |
| | 1 |
| | 21,803 |
| | — |
| | — |
| | 21,804 |
|
| Issuance of common stock for achievement of Glip related matters | 77 |
| | — |
| | 3,560 |
| | — |
| | — |
| | 3,560 |
|
| Share-based compensation | — |
| | — |
| | 42,677 |
| | — |
| | — |
| | 42,677 |
|
| Changes in comprehensive loss | — |
| | — |
| | — |
| | 261 |
| | — |
| | 261 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (4,204 | ) | | (4,204 | ) |
| Balance as of December 31, 2017 | 78,054 |
| | $ | 8 |
| | $ | 434,840 |
| | $ | 2,998 |
| | $ | (209,500 | ) | | $ | 228,346 |
|
| Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans, net of tax withholdings | 3,231 |
| | — |
| | 13,449 |
| | — |
| | — |
| | 13,449 |
|
| Shares repurchased | (239 | ) | | — |
| | (15,000 | ) | | — |
| | — |
| | (15,000 | ) |
| Share-based compensation | — |
| | — |
| | 68,876 |
| | — |
| | — |
| | 68,876 |
|
| Equity component of convertible senior notes, net of issuance cost | — |
| | — |
| | 98,823 |
| | — |
| | — |
| | 98,823 |
|
| Purchase of capped calls | — |
| | — |
| | (49,910 | ) | | — |
| | — |
| | (49,910 | ) |
| Changes in comprehensive loss | — |
| | — |
| | — |
| | (772 | ) | | — |
| | (772 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (26,203 | ) | | (26,203 | ) |
| Balance as of December 31, 2018 | 81,046 |
| | $ | 8 |
| | $ | 551,078 |
| | $ | 2,226 |
| | $ | (235,703 | ) | | $ | 317,609 |
|
| Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans, net of tax withholdings | 3,723 |
| | 1 |
| | 15,160 |
| | — |
| | — |
| | 15,161 |
|
| Issuance of common stock in connection with investments | 2,171 |
| | — |
| | 361,000 |
| | — |
| | — |
| | 361,000 |
|
| Share-based compensation | — |
| | — |
| | 105,815 |
| | — |
| | — |
| | 105,815 |
|
| Changes in comprehensive loss | — |
| | — |
| | — |
| | (278 | ) | | — |
| | (278 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (53,607 | ) | | (53,607 | ) |
| Balance as of December 31, 2019 | 86,940 |
| | $ | 9 |
| | $ | 1,033,053 |
| | $ | 1,948 |
| | $ | (289,310 | ) | | $ | 745,700 |
|
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Cash flows from operating activities | | | | | | | | | | | |
Net loss | $ | (29,309 | ) | | $ | (32,099 | ) | | $ | (48,340 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities | | | | | | | | | | | |
Depreciation and amortization | | 14,663 | | | | 13,467 | | | | 10,378 | |
Share-based compensation | | 30,840 | | | | 22,088 | | | | 15,516 | |
Foreign currency remeasurement loss | | 2,615 | | | | 843 | | | | 648 | |
Tax benefit from release of valuation allowance | | — | | | | (1,411 | ) | | | — | |
Impairment of fixed assets | | — | | | | 1,317 | | | | — | |
Non-cash interest and other expense related to debt | | — | | | | 156 | | | | 259 | |
Net accretion of discount and amortization of premium on available-for-sale securities | | — | | | | 616 | | | | — | |
Provision for bad debt | | 648 | | | | 411 | | | | 40 | |
Deferred income tax | | (36 | ) | | | (8 | ) | | | (35 | ) |
Others | | 583 | | | | 416 | | | | 100 | |
Changes in assets and liabilities | | | | | | | | | | | |
Accounts receivable | | (11,728 | ) | | | (11,923 | ) | | | (4,646 | ) |
Inventory | | 2,254 | | | | (606 | ) | | | 401 | |
Prepaid expenses and other current assets | | (3,272 | ) | | | (3,636 | ) | | | (3,553 | ) |
Other assets | | 76 | | | | (422 | ) | | | (1,660 | ) |
Accounts payable | | 1,516 | | | | 1,591 | | | | (510 | ) |
Accrued liabilities | | 15,165 | | | | 2,354 | | | | 9,054 | |
Deferred revenue | | 8,502 | | | | 11,071 | | | | 9,034 | |
Other liabilities | | (2,809 | ) | | | 861 | | | | 1,884 | |
Net cash provided by (used in) operating activities | | 29,708 | | | | 5,086 | | | | (11,430 | ) |
Cash flows from investing activities | | | | | | | | | | | |
Purchases of property and equipment | | (14,236 | ) | | | (14,631 | ) | | | (17,267 | ) |
Capitalized internal-use software | | (2,162 | ) | | | (2,513 | ) | | | (698 | ) |
Cash paid for business combination, net of cash acquired | | — | | | | (4,670 | ) | | | — | |
Restricted investments | | — | | | | 100 | | | | — | |
Proceeds from the maturity of available-for-sale securities | | — | | | | 28,080 | | | | — | |
Purchases of available-for-sale securities | | — | | | | — | | | | (28,696 | ) |
Net cash provided by (used in) investing activities | | (16,398 | ) | | | 6,366 | | | | (46,661 | ) |
Cash flows from financing activities | | | | | | | | | | | |
Proceeds from issuance of stock in connection with stock plans | | 15,104 | | | | 19,524 | | | | 9,487 | |
Payment of holdback from Glip acquisition | | (1,500 | ) | | | — | | | | — | |
Repayment of debt | | (3,750 | ) | | | (6,142 | ) | | | (9,909 | ) |
Repayment of capital lease obligations | | (269 | ) | | | (594 | ) | | | (698 | ) |
Taxes paid related to net share settlement of equity awards | | (255 | ) | | | (151 | ) | | | (41 | ) |
Net proceeds from public offerings of common stock | | — | | | | — | | | | 57,167 | |
Payment of offering costs | | — | | | | — | | | | (1,219 | ) |
Net cash provided by financing activities | | 9,330 | | | | 12,637 | | | | 54,787 | |
Effect of exchange rate changes on cash and cash equivalents | | 127 | | | | 317 | | | | 108 | |
Net increase (decrease) in cash and cash equivalents | | 22,767 | | | | 24,406 | | | | (3,196 | ) |
Cash and cash equivalents | | | | | | | | | | | |
Beginning of period | | 137,588 | | | | 113,182 | | | | 116,378 | |
End of period | $ | 160,355 | | | $ | 137,588 | | | $ | 113,182 | |
Supplemental disclosure of cash flow data | | | | | | | | | | | |
Cash paid for interest | $ | 711 | | | $ | 1,893 | | | $ | 1,267 | |
Cash paid for income taxes | $ | 229 | | | $ | 100 | | | $ | 96 | |
Non-cash investing and financing activities | | | | | | | | | | | |
Issuance of common stock for business combination | $ | — | | | $ | 3,447 | | | $ | — | |
Change in liability for unvested exercised options | $ | 3 | | | $ | 38 | | | $ | 47 | |
Equipment and capitalized internal-use software purchased and unpaid at period end | $ | 2,152 | | | $ | 719 | | | $ | 1,013 | |
Issuance of common stock for achievement of Glip related matters | $ | 1,080 | | | $ | — | | | $ | — | |
Change in unrealized gain (loss) on available-for-sale securities | $ | — | | | $ | 217 | | | $ | (217 | ) |
Equipment acquired under capital lease | $ | — | | | $ | — | | | $ | 1,149 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities | | | | | |
| Net loss | $ | (53,607 | ) | | $ | (26,203 | ) | | $ | (4,204 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 37,870 |
| | 23,273 |
| | 16,214 |
|
| Share-based compensation | 101,354 |
| | 68,088 |
| | 42,060 |
|
| Amortization of deferred sales commission cost | 30,134 |
| | 19,754 |
| | 12,623 |
|
| Amortization of debt discount and issuance cost | 20,337 |
| | 15,918 |
| | — |
|
| Reduction of operating lease right-of-use assets | 13,256 |
| | — |
| | — |
|
| Loss (gain) and other related costs on investments | 3,369 |
| | — |
| | — |
|
| Foreign currency remeasurement (gain) loss | (105 | ) | | 951 |
| | (666 | ) |
| Provision for bad debt | 2,949 |
| | 3,091 |
| | 1,674 |
|
| Deferred income taxes | (737 | ) | | (303 | ) | | (47 | ) |
| Tax benefit from release of valuation allowance | (3,210 | ) | | — |
| | — |
|
| Other | 240 |
| | 614 |
| | 181 |
|
| Changes in assets and liabilities: | | | | | |
| Accounts receivable | (37,163 | ) | | (47,877 | ) | | (17,903 | ) |
| Deferred and prepaid sales commission costs | (102,303 | ) | | (45,232 | ) | | (32,469 | ) |
| Prepaid expenses and other current assets | (1,575 | ) | | (342 | ) | | (6,199 | ) |
| Other assets | 764 |
| | 279 |
| | 1,533 |
|
| Accounts payable | 21,753 |
| | 2,783 |
| | 176 |
|
| Accrued liabilities | 27,095 |
| | 33,695 |
| | 9,918 |
|
| Deferred revenue | 18,845 |
| | 24,780 |
| | 18,298 |
|
| Operating lease liabilities | (13,830 | ) | | — |
| | — |
|
| Other liabilities | (590 | ) | | (1,139 | ) | | (24 | ) |
| Net cash provided by operating activities | 64,846 |
| | 72,130 |
| | 41,165 |
|
| Cash flows from investing activities | | | | | |
| Purchases of property and equipment | (27,767 | ) | | (27,123 | ) | | (19,497 | ) |
| Capitalized internal-use software | (16,526 | ) | | (11,421 | ) | | (7,420 | ) |
| Cash paid for business combination, net of cash acquired | (27,870 | ) | | (26,434 | ) | | — |
|
| Purchases of long-term investments | (135,557 | ) | | — |
| | — |
|
| Cash paid for acquisition of intangible assets | (89,060 | ) | | (18,470 | ) | | — |
|
| Restricted investments | — |
| | — |
| | 530 |
|
| Net cash used in investing activities | (296,780 | ) | | (83,448 | ) | | (26,387 | ) |
| 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 | 29,827 |
| | 20,621 |
| | 25,495 |
|
| Taxes paid related to net share settlement of equity awards | (14,666 | ) | | (7,172 | ) | | (3,691 | ) |
| Payment of contingent consideration for business combination | (5,176 | ) | | — |
| | — |
|
| Repayment of financing obligations | (943 | ) | | (741 | ) | | (181 | ) |
| Repayment of debt | — |
| | — |
| | (14,840 | ) |
| Net cash provided by financing activities | 9,042 |
| | 397,255 |
| | 6,783 |
|
| Effect of exchange rate changes | 169 |
| | (800 | ) | | (724 | ) |
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (222,723 | ) | | 385,137 |
| | 20,837 |
|
| Cash, cash equivalents, and restricted cash | | | | | |
| Beginning of year | 566,329 |
| | 181,192 |
| | 160,355 |
|
| End of year | $ | 343,606 |
| | $ | 566,329 |
| | $ | 181,192 |
|
| Supplemental disclosure of cash flow data: | | | | | |
| Cash paid for interest | $ | 189 |
| | $ | 40 |
| | $ | 116 |
|
| Cash paid for income taxes, net of refunds | $ | 996 |
| | $ | 433 |
| | $ | 216 |
|
| Non-cash investing and financing activities | | | | | |
| Cash held for future indemnity claims and other potential future payments | $ | 7,148 |
| | $ | 971 |
| | $ | — |
|
| Equipment and capitalized internal-use software purchased and unpaid at period end | $ | 5,215 |
| | $ | 4,785 |
| | $ | 1,699 |
|
| Common stock issued for acquisition of intangible assets | $ | 16,450 |
| | $ | — |
| | $ | — |
|
| Common stock issued for prepaid and deferred sales commission cost | $ | 345,000 |
| | $ | — |
| | $ | — |
|
| Reclassification from intangible assets to prepaid services | $ | — |
| | $ | 8,223 |
| | $ | — |
|
| Equipment acquired under financing obligations | $ | — |
| | $ | 4,513 |
| | $ | — |
|
| Earnout related matters, including issuance of common stock for milestone achievements | $ | — |
| | $ | 5,375 |
| | $ | 3,560 |
|
See accompanying notes to consolidated financial statements
68
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Summary of Significant Accounting Policies
RingCentral, Inc. (the
Company)“Company”) is a provider of software-as-a-service
(SaaS)(“SaaS”) solutions
for business communicationsthat enables businesses to communicate, collaborate and
collaboration.connect. The Company was incorporated in California in 1999 and was reincorporated in Delaware on September 26,
2014.Public Offerings
On October 2, 2013, the Company completed an initial public offering (IPO) and sold 8,625,000 shares of Class A common stock to the public, including the underwriters’ overallotment option of 1,125,000 shares of Class A common stock and 80,000 shares of Class A common stock sold by selling stockholders, at a price of $13.00 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-190815) (the Initial Registration Statement). The Company received aggregate proceeds of $103.3 million from the IPO, net of underwriters’ discounts and commissions, but before deduction of offering expenses of approximately $3.9 million.
On March 11, 2014, the Company completed a secondary public offering and sold 7,991,551 shares of Class A common stock to the public, including 791,551 of the underwriters’ overallotment option and 5,200,000 shares of Class A common stock sold by selling stockholders, at a price of $21.50 per share. The offer and sale of all of the shares in the secondary public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-194132) (Secondary Registration Statement). The Company received aggregate proceeds of $57.2 million from the secondary public offering, net of underwriters’ discounts and commissions, but before deduction of offering expenses of approximately $1.1 million.
The Company did not receive any proceeds from the sale of shares by the selling stockholders.
2013.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles
(GAAP)in the United States of America (“U.S. GAAP”) and include the consolidated accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of
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
consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by management affect revenues, the allowance for doubtful accounts,
inventory reserves,valuation of long-term investments, deferred sales commission costs, goodwill,
useful lives of intangible assets, 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.
The functional currency of the Company’s foreign subsidiaries is generally the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as part of a separate component of stockholders’ equity and reported in the statements of comprehensive loss. Foreign currency transaction gains and losses are included in net loss for the period. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate during the period. Equity transactions are translated using historical exchange rates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value.
69
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
Allowance for Doubtful Accounts
For the years ended December 31,
20162019 and
2015,2018, a significant portion of revenues were realized from credit card transactions while the remaining revenues generated accounts receivable.
The portion of revenues billed to customers through invoices with payment terms has increased year over year. The Company determines provisions based on historical loss patterns, the number of days that billings are past due, and an evaluation of the potential risk of loss associated with delinquent accounts.
Below is a summary of the changes in allowance for doubtful accounts for the years ended December 31,
2016, 20152019, 2018 and
20142017 (in thousands):
| Balance at beginning of year | | | Provision, net of recoveries | | | Write-offs | | | Balance at end of year | | |
Year ended December 31, 2016 | | | | | | | | | | | | | | | | |
| | | | Balance at beginning of year | | Provision, net of recoveries | | Write-offs | | Balance at end of year |
| Year ended December 31, 2019 | | | | | | | | |
Allowance for doubtful accounts | $ | 377 | | | $ | 648 | | | $ | 591 | | | $ | 434 | | $ | 2,506 |
| | $ | 2,949 |
| | $ | 3,097 |
| | $ | 2,358 |
|
Year ended December 31, 2015 | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018 | | | | | | | | |
Allowance for doubtful accounts | $ | 125 | | | $ | 411 | | | $ | 159 | | | $ | 377 | | $ | 712 |
| | $ | 3,091 |
| | $ | 1,297 |
| | $ | 2,506 |
|
Year ended December 31, 2014 | | | | | | | | | | | | | | | | |
| Year ended December 31, 2017 | | | | | | | | |
Allowance for doubtful accounts | $ | 139 | | | $ | 40 | | | $ | 54 | | | $ | 125 | | $ | 434 |
| | $ | 1,674 |
| | $ | 1,396 |
| | $ | 712 |
|
Inventory
The Company’s inventory consists primarily
Long-Term Investments
Long-term investments consist of phones held at third parties. Inventory is stated atconvertible and redeemable preferred securities in which the lower of cost computed onCompany does not have a first-in, first-out basis,controlling interest or market value. Inventory write-downssignificant influence. These investments are recorded whenat fair value using both observable and unobservable inputs and the costvaluation requires judgment. These investments are reported at fair value in long-term investments in the Consolidated Balance Sheets. All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net in the Consolidated Statement of inventory exceeds its net realizable value and establishes a new cost basis for the inventory. On a quarterly and annual basis, the Company analyzes inventory on a part by part basis in comparison to forecasted demand to identify potential excess and obsolescence issues, and adjusts carrying amounts to estimated net realizable value accordingly.Operations.
Internal-Use Software Development Costs
The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage, provided that management with the relevant authority authorizes and commits to the funding of the project, it is probable the project will be completed, and the software will be used to perform the function intended. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized internal-use software development costs are included in property and equipment and are amortized on a straight-line basis over their estimated useful lives.
For the years ended December 31,
20162019 and
2015,2018, the Company capitalized
$2.5$18.5 million and
$2.1$11.7 million, net of impairment, of internal-use software development costs, respectively. The carrying value of internal-use software development costs was
$4.4$35.6 million and
$2.6$22.2 million at December 31,
20162019 and
2015,2018, respectively.
Property and Equipment, net
Property and equipment, net is stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is calculated on a straight-line basis over the estimated useful lives of those assets as follows:
|
| |
| Computer hardware and software | 3 to 5 years | | | | |
Internal-use software development costs | 3 to 45 years | | | | |
Furniture and fixtures | 1 to 5 years | | | | |
Leasehold improvements | Shorter of the estimated lease term or useful life |
The Company evaluates the recoverability of property and equipment
and intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets or asset groups may not be recoverable. Recoverability of these assets or asset groups is measured by comparing the carrying amounts of such assets or asset groups to the future undiscounted cash flows that such assets or asset groups are expected to generate. If this evaluation indicates that the carrying amount of the assets or asset groups is not recoverable, the carrying amount of such assets or asset groups is reduced to its estimated fair value.
Maintenance and repairs are charged to expense as incurred.
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RINGCENTRAL, INC.
Notes
Leases
Effective January 1, 2019, the Company adopted the requirements of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) ("Topic 842"), issued by the Financial Accounting Standards Board (“FASB”), as discussed in Note 2.
The Company determines if a contract is a lease or contains a lease at the inception of the contract and reassesses that conclusion if the contract is modified. All leases are assessed for classification as an operating lease or a finance lease. Operating lease right-of-use (“ROU”) assets are presented separately on the Company's Consolidated Balance Sheet. Operating lease liabilities are separated into a current portion, included within accrued liabilities on the Company's Consolidated Balance Sheet, and a non-current portion included within operating lease liabilities on the Company's Consolidated Balance Sheet. The Company does not have significant finance lease ROU assets or liabilities. ROU assets represent the Company's right to
Consolidated Financial StatementsConcentrationsuse an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. The Company does not obtain and control its right to use the identified asset until the lease commencement date.
The Company’s lease liabilities are recognized at the applicable lease commencement date based on the present value of
Credit Riskthe lease payments required to be paid over the lease term. Because the rate implicit in the lease is not readily determinable, the Company generally uses an incremental borrowing rate to discount the lease payments to present value. The estimated incremental borrowing rate is derived from information available at the lease commencement date. The Company factors in publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. The Company's ROU assets are also recognized at the applicable lease commencement date. The ROU asset equals the carrying amount of the related lease liability, adjusted for any lease payments made prior to lease commencement and
Significant Customerslease incentives provided by the lessor. Variable lease payments are expensed as incurred and do not factor into the measurement of the applicable ROU asset or lease liability.
The term of the Company's leases equal the non-cancellable period of the lease, including any rent-free periods provided by the lessor, and also include options to renew or extend the lease (including by not terminating the lease) that the Company is reasonably certain to exercise. The Company establishes the term of each lease at lease commencement and reassesses that term in subsequent periods when one of the triggering events outlined in Topic 842 occurs. Operating lease cost for lease payments is recognized on a straight-line basis over the lease term.
The Company's lease contracts often include lease and non-lease components. For facility leases, the Company has elected the practical expedient offered by the standard to not separate lease from non-lease components and accounts for them as a single lease component. For the Company's other contracts that include leases, the Company accounts for the lease and non-lease components separately.
The Company has elected, for all classes of underlying assets, not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less. Lease cost for short-term leases is recognized on a straight-line basis over the lease term. Additionally, for certain facility leases, the Company applies a portfolio approach, whereby it effectively accounts for the operating lease ROU assets and liabilities for multiple leases as a single unit of account because the accounting effect of doing so is not material.
Goodwill and Intangible Assets
Goodwill is tested for impairment at the reporting unit level at a minimum on an annual basis or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The Company conducted its annual impairment test of goodwill in the fourth quarter of 2019 and 2018 and determined that no adjustment to the carrying value of goodwill was required.
Intangible assets consist of purchased customer relationships and developed technology. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from two to five years. No residual value is estimated for intangible assets.
Concentrations
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits. The Company’s accounts receivable are primarily derived from sales by resellers and to larger direct customers. The Company
performs ongoing credit evaluations of its resellers and does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts for estimated potential credit losses. At December 31,
20162019 and
2015, AT&T, one2018, and for the years then ended, none of
ourthe Company’s customers accounted for more than 10% of total accounts receivable, total revenues, or subscription revenues. For the year ended December 31, 2017, 1 of the Company’s resellers accounted for
30% and 39% of the Company’s total accounts receivable, respectively. For the years ended December 31, 2016, 2015, and 2014, AT&T accounted for 14%, 13%, and 12%11% of the Company’s total revenues, and
13%, 12%
, and 11% of the Company’s
software subscription
revenues, respectively.revenues.
During the years ended December 31,
2016, 20152019, 2018 and
2014,2017, the Company contracted a significant portion of its software development efforts from third-party vendors located in Russia and Ukraine. A cessation of services provided by these vendors could result in a disruption to the Company’s research and development efforts.
The Company’sCompany derives its revenues consist primarily from subscriptions, sale of software subscriptionsproducts, and other revenues. 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;
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:
Subscriptions revenue
Subscriptions revenue is generated from fees that provide customers access to one or more of the Company’s software subscriptions revenue includes all fees billed in connection with subscriptionsapplications and related services. These arrangements have contractual terms typically ranging from one month to the Company’s RingCentral Office, RingCentral Professional, RingCentral Fax, RingCentral Contact Center,five years and RingCentral Glip products. These software subscription fees include recurring fixed plan subscription fees and variable usage-based fees for usage in excess of plan limits, recurring administrative cost recovery fees, one-time fees, and other recurring feeslimits.
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
our subscriptions. The Company provides its subscriptions pursuant to contractual arrangements that range in duration from one month to three years. The Company’s subscription fees are generally billed in advance directly to customer credit cards or via invoices issued to larger customers. The Company’s other revenues consist of 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.The Company recognizes revenue when the following criteria are met:
there is persuasive evidence of an arrangement;
the subscription is being provided to the customer or the product has been delivered;
the amount of fees to be paid by the customer is fixed or determinable; and
the collection of the fees is reasonably assured.
Revenue under subscription plans are recognized as follows:
fixed plan subscription and administrative cost recovery fees are recognizedover time on a straight-line basis over their respective contractual subscription terms;
feesFees for additional minutes of usage in excess of plan limits are recognized overdeemed to be variable consideration that meet the estimated usage period in a manner that approximates actual usage; and
one-time upfront feesallocation exception for variable consideration as they are initially deferred and recognized on a straight-line basis over the estimated average customer life.
Commission revenue is recognized when services have been rendered. Product revenue is billed at the time the order is received and recognized when the phone has been deliveredspecific to the customer. Professional service revenue is recognized upon completion of performance.
month that the usage occurs.
The
Company enters into arrangements with multiple-elements that generally includeCompany’s subscription contracts typically allow the customers to terminate their services
to be provided underwithin the
subscription planfirst 30 or 60 days and
receive a refund for any amounts paid. After the
sale of products used in connection with the Company’s subscriptions. The Company allocates the consideration to each deliverable in a multiple-deliverable arrangement based upon its relative selling prices. The Company determines the selling price using vendor-specific objective evidence (VSOE) for its subscription plans and best estimated selling price (BESP) for its product offerings. Consideration allocated to each deliverable, limited to the amount not contingent on future performance, is then recognized to revenue when the basic revenue recognition criteria are met for the respective deliverable.The Company determines VSOE based on historical standalone sales to customers. In determining VSOE, the Company requires that a substantial majorityend of the selling prices fall within a reasonably narrow pricing range. VSOE exists for all oftermination period, the
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RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
Company’s subscription plans. The Company uses BESP as the selling price for its product offerings as the Company contract is not able to determine VSOE of fair value from standalone sales or third-party evidence of selling price (TPE). The Company estimates BESP for a product by considering company-specific factors such as pricing objectives, direct productnon-cancellable and other costs, bundling and discounting practices, and contractually stated prices.
A portion of the Company’s software subscriptions and product revenues are generated through sales by resellers. When the Company assumes a majority of the business risks associated with performance of the contractual obligations, it records these revenues at the gross amount paid by the customer with amounts retained by the resellers recognized as sales and marketing expense. The Company’s assumption of such business risks is evidenced when, among other things, it takes responsibility for delivery of the product or subscription, is involved in establishing pricing of the arrangement, assumes credit and inventory risk, and is the primary obligor in the arrangement. When a reseller assumes the majority of the business risks associated with the performance of the contractual obligations, the Company records the associated revenue at the net amount received from the reseller. The Company recognizes revenue from resellers when the following criteria are met:
persuasive evidence of an arrangement exists through a contract with the customer;
the subscription is being provided to the customer or the product has been delivered;
the amount of fees to be paid by the customer is fixed or determinable; and
obligated to pay for the collectionremaining term of the fees is reasonably assured.
The Company’s deliverables sold through its reseller agreements consistcontract. Accordingly, the Company considers the non-cancellable term of the Company’s software subscriptionscontract to begin after the expiration of the termination period.
The Company has service-level agreements with customers warranting defined levels of uptime reliability and
products. Subscriptions sold through resellersperformance 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
recognized onsubject to adjustment or refund representing a
straight-line basis over the period the subscriptions are provided to the end customer. Phones sold through resellers are shipped directly to the end customer and are recognized when title transfers to the end customer. Revenue from resellers has predominantly been recorded on a gross basis for all periods presented.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.
Customer billings related The Company monitors the accuracy of its sales reserve estimates by reviewing actual returns and credits and adjusts them for its future expectations to taxes imposed bydetermine the adequacy of its current and remittedfuture reserve needs. If actual future returns and credits differ from past experience, additional reserves may be required.
Other revenue
Other revenue includes revenue generated from sale of pre-configured phones, professional implementation services, and phone rentals.
Phone revenue is recognized upon transfer of control to
governmental authorities on revenue-producing transactions are reported on a net basis. When such remitted taxes exceed the
amount billed to customers,customer which is generally upon shipment from the
cost is included in general and administrative expenses.Amounts billed in excessCompany’s or its designated agents' warehouse. The amount of revenue recognized for products is adjusted for expected returns, which are estimated based on historical data.
The Company offers professional services to 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 the Company’s professional services contracts are on a fixed price basis and revenue is recognized when services are delivered.
Principal vs. Agent
A portion of the Company’s subscriptions and product revenues are generated through sales by resellers and carrier partners. When the Company controls the performance of contractual obligations to the customer, it records these revenues at the gross amount paid by the customer with amounts retained by the resellers recognized as sales and marketing expense. The Company assesses control of goods or services when it is primarily responsible for fulfilling the promise to provide the good or service, has inventory risk and has discretion in establishing the price. When a reseller assumes the majority of these factors in assessing control, the Company records the associated revenue at the net amount received from the reseller.
Deferred and prepaid sales commission costs
The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel and resellers, who sell the Company’s 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.
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
are reported as deferred revenue onof benefit taking into consideration the
consolidated balance sheet. The Company’s deferred revenue consists primarilyexpected subscription term and expected renewal periods of
unearned revenue on annual and monthly subscription plans.Duringits customer contracts, the year ended December 31, 2014, the Company received one-time up-front payments for implementation services to be performed in connectionduration of its relationships with its carrier agreements with BTcustomers considering historical and TELUS. These amounts are being amortized on a straight-line basis over their respective initial contractual terms beginning in 2015. The BTexpected customer retention, technology and TELUS arrangements have initial contractual terms of three to five years, which approximates the estimated average customer life of each respective agreement. Accordingly, the portion of these one-time up-front payments that is expected to be earned after December 31, 2017, or $0.4 million,other factors. Amortization expense is included as a component of other long-term liabilitiesin sales and marketing expenses in the consolidated balance sheets.
accompanying Consolidated Statement of Operations.
Cost of
software subscriptions revenue primarily consists of costs of network capacity purchased from third-party telecommunications providers, network operations, costs to build out and maintain data centers, including co-location fees for the right to place the Company’s servers in data centers owned by third-parties, depreciation of the servers and equipment, along with related utilities and maintenance costs, personnel costs associated with customer care and support of the functionality of the Company’s platform and data center operations, including share-based compensation expenses, and allocated costs of facilities and information technology. Cost of
software subscriptions revenue is expensed as incurred.
Cost of other revenue is comprised primarily of the cost associated with purchased phones,
that fell outside of the agency model, shipping costs, costs of professional services, and allocated costs of facilities and information technology related to the procurement, management and shipment of phones. Cost of other revenue is expensed in the period product is delivered to the customer.
72
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
Share-based compensation expense resulting from options, restricted stock units
(RSUs)(“RSUs”),
performance-based awards, and employee stock purchase plan
(ESPP)(“ESPP”) rights granted is measured as the grant date fair value of the award and is
generally 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,
and 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.
CompensationFor 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
stock options and RSUs grantedperformance-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
non-employeesbe earned is
revalued, or marked to market, as of each reporting date untilrecognized in the
stock options and RSUsperiod those estimates are
vested.revised. Compensation expense is recognized net of estimated forfeiture activity, which is based on historical forfeiture rates.
Research and development expenses consist primarily of third-party contractor costs, personnel costs, technology license expenses, and depreciation associated with research and development equipment. Research and development costs are expensed as incurred.
Advertising costs, which include various forms of e-commerce such as search engine marketing, search engine optimization and online display advertising, as well as more traditional forms of media advertising such as radio and billboards, are expensed as incurred and were
$41.6$59.9 million,
$34.3$58.3 million, and
$27.1$42.4 million for the years ended December 31,
2016, 20152019, 2018 and
2014,2017, respectively.
Commissions
Commissions consist
Convertible Debt
The Company bifurcates the debt and equity (the contingently convertible feature) components of
variable compensation earned by sales personnel and third-party resellers. Sales commissions associated with the acquisition ofits convertible debt instruments in a
new customer contract are recognized as sales and marketing expensemanner that reflects its nonconvertible debt borrowing rate at the time
of issuance. The equity components of the
customer has entered into a binding agreement.convertible debt instruments are recorded within stockholders’ equity with an allocated issuance discount. The debt issuance discount is amortized to interest expense in the Consolidated Statement of Operations using the effective interest method over the expected term of the convertible debt.
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. The Company records a valuation allowance to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized. As of December 31,
2016,2019, except for deferred tax assets associated with its
subsidiariessubsidiary in
the Netherlands and China, the Company recorded a full valuation allowance against all other net deferred tax assets due to its history of operating losses. The Company classifies interest and penalties on unrecognized tax benefits as income tax expense.
The Company has determined the chief executive officer is the chief operating decision maker. The Company’s chief executive officer reviews financial information presented on a consolidated basis for purposes of assessing performance and making decisions on how to allocate resources. Accordingly, the Company has determined that it operates in a single reportable segment.
Certain of the Company’s agreements with resellers and customers include provisions for indemnification against liabilities if its subscriptions infringe upon a third-party’s intellectual property rights. At least quarterly, the Company assesses the status of any significant matters and its potential financial statement exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount or the range of loss can be estimated, the Company accrues a liability for the estimated loss. The Company has not incurred any material costs as a result of such indemnification
provisions and theprovisions. The Company has not accrued any
material liabilities related to such obligations
in the consolidated financial statements as of December 31,
2016 or 2015.73
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
2019 and 2018.
Recent Accounting Pronouncements
Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace numerous requirements in U.S. GAAP and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. In July 2015,June 2018, the FASB approvedissued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the deferral ofDisclosure Requirements for Fair Value Measurements, which expands the new standard's effective date by one year. Thedisclosure requirements for Level 3 fair value measurements and expands disclosures for entities that calculate net assets value. This new standard is effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.The Company is currently evaluating the potential changes from adopting the new standard on its financial statements and disclosures. The Company is in the process of implementing appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under the new standard. Based on this evaluation, the Company will adopt the requirements of the new standard in the first quarter of 2018 and anticipates using the modified retrospective transition method. Additionally, as the Company continues to assess the new standard along with industry trends and internal progress, the Company may adjust its implementation plan accordingly.
Under the new standard, the Company expects to capitalize certain sales commission costs and in some cases recognize revenue earlier for subscription plans with free periods and products sold at discounts. The impact of adopting the new standard on the Company’s total revenues is not expected to be material. However, the Company anticipates the most significant impacts of adopting the new standard primarily relates to the deferral of sales commissions, which previously were expensed as incurred and to the incremental disclosure requirements. Under the new standard, certain commissions will be capitalized and amortized over the expected period of benefit.
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 forCompany's interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The standard must be adopted using a modified retrospective approach for all leases that existed or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the timing of adoptionJanuary 1, 2020, and the impact that the standard will have on its consolidated financial statements and related disclosures.
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 AugustJune 2016, the FASB issued ASU 2016-15, ClassificationNo. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Certain Cash Receipts and Cash PaymentsCredit Losses on Financial Instruments, which clarifiesmodifies the presentation and classification in the statementmeasurement of cash flows. The guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice forexpected credit losses on certain cash receipts and cash payments. Thefinancial instruments.
This new standard is effective for
the Company's interim and annual reporting periods beginning
after December 15, 2017, with earlyJanuary 1, 2020, and earlier adoption
is 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,December 2019, the FASB issued ASU 2016-16, Intra-Entity TransfersNo. 2019-12, Accounting Standards Update (Topic 740): Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members 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.a consolidated group. The standardASU is effective for calendar year-end public entities on January 1, 2021. Entities may early adopt the ASU in any interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.period for which financial statements have not yet been issued (or made available for issuance). The Company has not yet adopted the new guidance and is currently analyzing the tax impact, but does not anticipate any material impacts upon adoption.
Note 2. Impact of Recently Adopted Accounting Pronouncements
On January 1, 2019, the Company adopted Topic 842, which requires recognition of ROU assets and lease liabilities for most leases on the Company’s Consolidated Balance Sheet. The Company adopted Topic 842 using a modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11. As a result, the processCompany was not required to adjust its comparative periods' financial information for effects of evaluating the impactstandard or make the new required lease disclosures for the periods before the date of adoption (i.e., January 1, 2019). The Company elected the package of practical expedients which allowed the Company not to reassess (1) whether existing or expired contracts, as of the adoption date, contain leases, (2) the lease classification for existing leases, and (3) whether existing initial direct costs meet the new definition. The Company also elected the practical expedient to not separate lease and non-lease components for its facility leases, and to not recognize ROU assets and liabilities for short-term leases.
The standard had an impact on the Company’s Consolidated Balance Sheet but did not have a significant impact on its
consolidated financial statements and related disclosures. In November 2016, the FASB issued ASU 2016-18, RestrictedConsolidated Statement of Operations or Cash, which clarifies the presentation of restricted cash and restricted cash equivalents in the statements of cash flows. Flows. The standard requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts presentedimpact on the statementsCompany's Consolidated Balance Sheet was the recognition of cash flows. The standard is effectiveROU assets and lease liabilities for interim and annual reporting periods beginning after December 15, 2017 using a
74
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
retrospective adoption method, with early adoption permitted. operating leases.
The adoption of this
amendment is not expected to have a material impact onnew standard at January 1, 2019, resulted in the
Company’s consolidated financial statements or disclosures.Reclassification
Certain immaterial items previously reported have been reclassified to conform tofollowing changes:
assets increased by $33.5 million, representing the
current year’s reporting presentation.recognition of ROU assets; and
liabilities increased by $33.5 million, primarily representing the recognition of lease liabilities.
Note
2. Agency Agreement with Westcon GroupIn January 2016, the3. Revenues and Cost of Revenue
Disaggregation of revenue
The following table provides information about disaggregated revenue by primary geographical markets:
|
| | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Primary geographical markets | | | | | |
| North America | 93 | % | | 95 | % | | 96 | % |
| Others | 7 | % | | 5 | % | | 4 | % |
| Total revenues | 100 | % | | 100 | % | | 100 | % |
The Company
entered into a sales agency agreement with Westcon Group, Inc. (Westcon)derived over 90%,
a global distributorand approximately 88% and 84% 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. Commissionsubscription revenues from
the arrangement are recorded as the Company is the agentRingCentral Office product 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.
During the three months ended June 30, 2016, the Company completed its transition of direct phone sales to Westcon, which excluded carriers’ phone sales. The Company did not transition the carrier partners to the agency model as the billing relationships to these customers are through the carriers.
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 costs from these sales as the Company is the primary obligor and has latitude in determining pricing.
In December 2016, the Company terminated the sales agency agreement and entered into a reseller (direct sale) agreement with Westcon. Effective January 1, 2017, the Company will switch from the agency agreement to the reseller agreement whereby the Company will no longer serve as an agent for referring phone sales to Westcon and will no longer receive commissions for its services. Under the reseller agreement, the Company will purchase phones directly from Westcon for resale to customers. Revenues and costs for sales under the reseller agreement will be recognized as the Company is the primary obligor for order fulfillment, has latitude in determining pricing, and will assume general inventory risk.
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, the Company replaced the costs of product revenues line in its consolidated statements of operations with a line called costs of other revenues, which includes the costs for the above items.
For the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.
Deferred revenue
During the majorityyear ended December 31, 2019, the Company recognized revenue of other$88.3 million 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 December 31, 2019 that has not yet been recognized was approximately $0.9 billion. This excludes contracts with an original expected length of less than one year. Of these remaining performance obligations, the Company expects to recognize revenue of 55% of this balance over the next 12 months and 45% thereafter.
Other revenues consistedand cost of revenues
Other revenues are primarily comprised of product revenuesrevenue from salesthe sale of pre-configured phones, that fell outside the sales agency agreement with Westcon. Accordingly, to provide a comparison of product revenuesprofessional services, and product cost of revenues prior to and subsequent to the change in presentation, productphone rentals. Product revenues were $13.3$42.9 million $23.3, $34.4 million, and $19.2$26.0 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. Product costCost of product revenues were $15.8$40.0 million, $20.3$30.9 million, and $17.9$25.0 million for the years ended December 31, 2016, 2015,2019, 2018 and 2014,2017, respectively.75
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
Note 4. Financial Statement Components
Cash and cash equivalents consisted of the following (in thousands):
| | December 31, | | | December 31, | | | | | | |
| 2016 | | | 2015 | | December 31,
2019 | | December 31,
2018 |
Cash | $ | 40,908 | | | $ | 18,522 | | $ | 46,295 |
| | $ | 80,457 |
|
Money market funds | | 119,447 | | | | 119,066 | | 297,311 |
| | 485,872 |
|
Total cash and cash equivalents | $ | 160,355 | | | $ | 137,588 | | $ | 343,606 |
| | $ | 566,329 |
|
The Company has no restricted cash balance as of December 31, 2019. The Company had an immaterial restricted cash balance, included in the cash balances above, as of December 31, 2018.
Accounts receivable, net consisted of the following (in thousands):
| December 31, | | | December 31, | |
| 2016 | | | 2015 | |
Accounts receivable | $ | 26,731 | | | $ | 15,509 | |
Unbilled accounts receivable | | 3,946 | | | | 4,031 | |
Allowance for doubtful accounts | | (434 | ) | | | (377 | ) |
Accounts receivable, net | $ | 30,243 | | | $ | 19,163 | |
|
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| Accounts receivable | $ | 114,745 |
| | $ | 82,740 |
|
| Unbilled accounts receivable | 17,603 |
| | 14,141 |
|
| Allowance for doubtful accounts | (2,358 | ) | | (2,506 | ) |
| Accounts receivable, net | $ | 129,990 |
| | $ | 94,375 |
|
Prepaid expenses and other current assets consisted of the following (in thousands):
|
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| Prepaid expenses | $ | 16,249 |
| | $ | 14,805 |
|
| Inventory | 401 |
| | 199 |
|
| Other current assets | 8,704 |
| | 8,768 |
|
| Total prepaid expenses and other current assets | $ | 25,354 |
| | $ | 23,772 |
|
Property and equipment, net consisted of the following (in thousands):
| | December 31, | | | December 31, | | | | | | |
| 2016 | | | 2015 | | December 31,
2019 | | December 31,
2018 |
Computer hardware and software | $ | 61,546 | | | $ | 49,774 | | $ | 120,841 |
| | $ | 103,766 |
|
Internal-use software development costs | | 9,931 | | | | 7,432 | | 48,419 |
| | 29,886 |
|
Furniture and fixtures | | 4,508 | | | | 3,610 | | 7,690 |
| | 5,896 |
|
Leasehold improvements | | 2,596 | | | | 2,412 | | 11,327 |
| | 6,863 |
|
Property and equipment, gross | | 78,581 | | | | 63,228 | | 188,277 |
| | 146,411 |
|
Less: accumulated depreciation and amortization | | (46,587 | ) | | | (35,068 | ) | (99,047 | ) | | (76,206 | ) |
Property and equipment, net | $ | 31,994 | | | $ | 28,160 | | $ | 89,230 |
| | $ | 70,205 |
|
Total depreciation and amortization expense related to property and equipment was
$13.6$27.2 million,
$12.9$18.9 million, and
$10.4$15.4 million for the
fiscal years ended December 31,
2016, 20152019, 2018 and
2014,2017, respectively.
The carrying value of goodwill is as follows (in thousands):
|
| | | |
| | December 31,
2019 |
| Balance at December 31, 2018 | $ | 31,238 |
|
| Connect First acquisition | 24,465 |
|
| Foreign currency translation adjustments | (425 | ) |
| Balance at December 31, 2019 | $ | 55,278 |
|
The carrying values of intangible assets are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2019 | | December 31, 2018 |
| | Estimated Lives | | Cost | | Accumulated Amortization | | Acquired Intangibles, Net | | Cost | | Accumulated Amortization | | Acquired Intangibles, Net |
| Customer relationships | 2 to 5 years | | $ | 21,245 |
| | $ | 8,178 |
| | $ | 13,067 |
| | $ | 20,121 |
| | $ | 4,460 |
| | $ | 15,661 |
|
| Developed technology | 3 to 5 years | | 123,547 |
| | 9,276 |
| | 114,271 |
| | 6,098 |
| | 2,279 |
| | 3,819 |
|
| Total acquired intangible assets | | | $ | 144,792 |
| | $ | 17,454 |
| | $ | 127,338 |
| | $ | 26,219 |
| | $ | 6,739 |
| | $ | 19,480 |
|
Amortization expense from acquired intangible assets for the years ended December 31, 2019, 2018 and 2017 was $10.7 million, $4.4 million and $0.8 million, respectively. Amortization of developed technology is included in cost of revenues expenses and amortization of customer relationships is included in sales and marketing expenses in the consolidated statements of operations. As of December 31, 2019, the weighted-average amortization period for developed technology is approximately 3.9 years and for customer relationships is approximately 2.8 years.
Estimated amortization expense for acquired intangible assets for the following five fiscal years and thereafter is as follows (in thousands):
|
| | | |
| 2020 | $ | 34,274 |
|
| 2021 | 34,016 |
|
| 2022 | 28,416 |
|
| 2023 | 16,477 |
|
| 2024 and thereafter | 14,155 |
|
| Total estimated amortization expense | $ | 127,338 |
|
Accrued liabilities consisted of the following (in thousands):
| | December 31, | | | December 31, | | | | | | |
| 2016 | | | 2015 | | December 31,
2019 | | December 31,
2018 |
Accrued compensation and benefits | $ | 14,041 | | | $ | 10,128 | | $ | 30,541 |
| | $ | 20,932 |
|
Accrued sales, use, and telecom related taxes | | 7,220 | | | | 5,243 | | 25,757 |
| | 19,609 |
|
Accrued marketing | | 5,082 | | | | 3,930 | | 17,505 |
| | 12,291 |
|
| Operating lease liabilities, short-term | | 14,249 |
| | — |
|
Other accrued expenses | | 21,979 | | | | 15,401 | | 50,677 |
| | 47,855 |
|
Total accrued liabilities | $ | 48,322 | | | $ | 34,702 | | $ | 138,729 |
| | $ | 100,687 |
|
76
RINGCENTRAL, INC.
Notes
Deferred and Prepaid Sales Commission Costs
Amortization expense for the deferred and prepaid sales commission costs for the years ended December 31, 2019, 2018 and 2017 were $30.1 million, $19.8 million and $12.6 million, respectively. There was 0 impairment loss in relation to Consolidated Financial Statementsthe costs capitalized for the periods presented.
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, in addition to its long-term investments 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 observableObservable inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities.
|
| |
| Level 2: | Valuations based on observable inputs other than Level 1Other 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 unobservableUnobservable 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 | | | | | | | | | | | | | |
| December 31, 2016 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Cash equivalents: | | | | | | | | | | | | | | | |
Money market funds | $ | 119,447 | | | $ | 119,447 | | | $ | — | | | $ | — | |
Other assets: | | | | | | | | | | | | | | | |
Certificates of deposit | $ | 530 | | | $ | — | | | $ | 530 | | | $ | — | |
| | Balance at | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | | (Level 1) | | | (Level 2) | | | (Level 3) | | Fair Value at December 31, 2019 | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents: | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | $ | 119,066 | | | $ | 119,066 | | | $ | — | | | $ | — | | $ | 297,311 |
| | $ | 297,311 |
| | $ | — |
| | $ | — |
|
Other assets: | | | | | | | | | | | | | | | | |
Certificates of deposit | $ | 530 | | | $ | — | | | $ | 530 | | | $ | — | | |
| Noncurrent assets: | | | | | | | | |
| Long-term investments | | 132,188 |
| | — |
| | — |
| | 132,188 |
|
|
| | | | | | | | | | | | | | | |
| | Fair Value at December 31, 2018 | | Level 1 | | Level 2 | | Level 3 |
| Cash equivalents: | | | | | | | |
| Money market funds | $ | 485,872 |
| | $ | 485,872 |
| | $ | — |
| | $ | — |
|
| Noncurrent assets: | | | | | | | |
| Long-term investments | — |
| | — |
| | — |
| | — |
|
The Company’s other financial instruments, including accounts receivable, accounts payable, and other current liabilities, are carried at cost, which approximates
fair valuefair-value due to the relatively short maturity of those instruments.
At
Convertible Senior Notes
As of December 31, 2016 and 2015, the Company estimated2019, the fair value of its debt using an expected presentthe 0% convertible senior notes due 2023 (the “Notes”) was approximately $929.2 million. The fair value technique, which iswas determined based on observablethe quoted price for the Notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
Long-Term Investments
As of December 31, 2019, the fair value of the Company's long-term investments in convertible and redeemable preferred stock was $132.2 million. The Company classifies its long-term investments as Level 3 in the fair value hierarchy based on the nature of the fair value inputs using interest rates currently availableand judgment involved in the valuation process. These investments are reported at fair value in long-term investments in the Consolidated Balance Sheets. During fiscal year 2019, the Company's total unrealized gains (losses) recorded in other income (expense), net, was $6.6 million.
Note 6. Business Combinations, Strategic Partnerships, and Asset Acquisitions
2019 Business Combination
Connect First Acquisition
On January 14, 2019, the Company acquired the equity interests of Connect First, Inc. (“Connect First”), a cloud-based outbound/blended customer engagement platform for midsize and enterprise companies. The acquisition complements the Company’s current Customer Engagement portfolio to companiesprovide differentiated customer experiences.
The total purchase price of similar credit standing for similar termsapproximately $36.4 million consisted of cash of $29.3 million and remaining maturities,$7.1 million held to cover indemnity claims made by the Company after the closing date. In connection with the acquisition, the Company granted $4.0 million in restricted stock units, which vest over four years.
The allocation of the purchase price of the assets acquired and considering its own credit risk. liabilities assumed based on their estimated fair values was as follows (in thousands):
|
| | | |
| Cash and cash equivalents | $ | 1,427 |
|
| Other tangible assets acquired | 2,266 |
|
| Acquired intangible assets | 13,300 |
|
| Goodwill | 24,465 |
|
| Total assets acquired | 41,458 |
|
| Liabilities assumed | (5,013 | ) |
| Total consideration | $ | 36,445 |
|
The amortizable intangible assets have a weighted average useful life of three years. The purchase price exceeded the estimated fair value of the Company’s currenttangible and non-current debt obligations was $14.9identifiable intangible assets and liabilities acquired and, as a result of the allocation, the Company recorded goodwill of $24.5 million, at December 31, 2016, comparedwhich is 0t deductible for tax purposes. The goodwill recognized is attributable primarily to contributions of the entity's technology to the overall corporate strategy, enhancements to the Company's contact center product offerings, and assembled workforce of the acquired business.
2019 Strategic Partnerships and Asset Purchases
In October 2019, the Company entered into certain agreements for a strategic partnership with Avaya Holdings Corp. (“Avaya”) and its carryingsubsidiaries, including Avaya Inc. In connection with the strategic partnership, the Company purchased $125.0 million aggregate principal amount of $14.83% convertible and redeemable preferred stock, with a conversion price of $16.00 per share, representing an approximately 6% position in Avaya on an as-converted basis. The Company also paid Avaya $345.0 million in the Company's common stock, predominantly for future commissions, which was capitalized and will be amortized over the expected benefit period. The transaction closed on October 31, 2019. The investment in preferred securities in which the Company does not have a controlling interest or significant influence are measured at fair value with changes recorded through other income (expense) in the Consolidated Statement of Operations. The advance payment represents prepayment for cost to obtain contracts with customers. The Company also purchased intellectual property rights, which have been capitalized as an intangible asset and will be amortized over the useful life of three years.
In the fourth quarter of 2019, the Company also entered into a commercial agreement with another unrelated strategic partner for a one-time upfront consideration towards acquisition of certain intellectual property rights and commercial arrangement. Under the commercial agreement the Company's strategic partner shall be engaged as its agent in marketing and sale of its product, which represents advance payment for cost to obtain contracts with customers.
In addition to the above transactions, the Company also separately entered into arrangements with unrelated third parties to acquire intellectual property rights during the fourth quarter of 2019.
In connection with the above transactions, the Company recorded in aggregate $105.5 million in acquired intangible assets relating to developed technology on the Consolidated Balance Sheet, which will be amortized over their respective useful life of three to five years. The Company also recorded $371.1 million as deferred and prepaid sales commission costs representing cost to obtain contracts with customers. The prepaid assets will be amortized over their useful life based on the pattern of benefit since they are considered to be incremental customer acquisition costs.
2018 Business Combination
Dimelo Acquisition
On October 22, 2018, the Company acquired Dimelo SA (“Dimelo”), a cloud-based digital customer engagement platform. The acquisition expanded the Company’s platform and enabled its customers to manage all their digital customer interactions through a single platform. The total purchase price of approximately $36.1 million consisted of cash of $30.7 million and the acquisition date fair value of contingent consideration of $5.4 million. In connection with the acquisition, the Company has agreed to grant $3.3 million in restricted stock units that date. vest over four years.
The contingent consideration was based on the achievement of specified performance targets through the end of the second quarter of 2019. The Company settled the contingent consideration in the fourth quarter of 2019 for approximately $7.0 million.
The allocation of the purchase price of the assets acquired and liabilities assumed based on their estimated fair values was as follows (in thousands):
|
| | | |
| Cash and cash equivalents | $ | 4,225 |
|
| Other tangible assets acquired | 3,289 |
|
| Acquired intangible assets | 12,208 |
|
| Goodwill | 21,995 |
|
| Total assets acquired | 41,717 |
|
| Liabilities assumed | (5,646 | ) |
| Total consideration | $ | 36,071 |
|
The amortizable intangible assets have a weighted average useful life of five years. The purchase price exceeded the estimated fair value of the
Company’s currenttangible 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 consolidated balance sheets, the Company’s currentidentifiable intangible assets and non-current debt would be classified in Level 2liabilities acquired and, as a result of the fair value hierarchy.Note 6. Business Combinations
In June 2015,allocation, the Company recorded goodwill of $22.0 million in connection with this transaction, which is not deductible for tax purposes. The goodwill recognized is attributable primarily to the contributions of the entity's technology to the overall corporate strategy and assembled workforce of the acquired business.
2018 Acquired Customer Base
On January 16, 2018, 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 objectivefrom AT&T the existing customer base of the
acquisitionRingCentral Office@Hand solution, which was
to extend the Company’s platformpreviously sold by
adding team messaging and collaboration services such as calendar, project management, and document sharing. The considerationAT&T, for
the acquisition, net of cash acquired, which also included the fair value of contingent consideration payable upon achievement of certain earn out milestones and the fair value of common stock issuable to the sellers, was $11.9 million. Of the 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. 77
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
The consideration exchanged consisted of the following (in thousands):
Cash, net of cash acquired | $ | 4,670 | |
Common stock issued (223,190 shares) | | 3,447 | |
Holdback based on standard representations and warranties | | 1,500 | |
Total initial consideration | | 9,617 | |
Milestone based earn out | | 2,289 | |
Total consideration | $ | 11,906 | |
The $3.4 milliona total fair value of the 223,190 unregistered common shares issued as partpurchase consideration of $24.0 million, of which $20.0 million was cash payment upon closing of the consideration paidtransaction. The transaction was accounted for Glip ($3.8 million beforeas an asset acquisition. Subsequently on August 31, 2018, the Company and AT&T entered into a $0.4 million discount duerevised agreement through June 30, 2024, under which AT&T resumed reselling RingCentral solutions to a 6-month restriction of resale as a result of SEC Rule 144 for issuance of unregistered shares) was determined onits customers and will obtain control over the basis of the five day weighted average closing market price of the Company’s common shares preceding the acquisition date.
non-transitioned customer base. The initial fair value of the milestone based earn out liability was determinedcustomer base that transitioned to the Company is reflected as a customer relationship asset of approximately $10.0 million, to be $2.3 million using various estimates, including probabilitiesamortized over the expected useful life of success and discount rates. During the year ended December 31, 2016,five years.
Note 7. Convertible Senior Notes
In March 2018, the Company issued 45,893$460.0 million aggregate principal amount of 0% convertible senior notes due 2023 in a private placement, including the exercise in full of the over-allotment options of the initial purchasers. The Notes are senior unsecured obligations of the Company and do not bear regular interest, and the principal amount of the Notes does not accrete. The Notes may bear special interest under specified circumstances as outlined in the indenture governing the Notes (the “Indenture”) or if the Notes are not freely tradeable as required by the Indenture. The Notes will mature on March 15, 2023, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $449.5 million.
Each $1,000 principal amount of the Notes is initially convertible into 12.2782 shares of the Company’s Class A common stock par value $0.0001 (“Class A Common Stock”), which is equivalent to an initial conversion price of approximately $81.45 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change or a redemption period, each as defined in the Indenture, the Company will, in certain circumstances, increase the conversion rate by a number of
additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.
The Notes will be convertible at certain times and upon the occurrence of certain events in the future. Further, on or after December 15, 2022, until the close of business on the scheduled trading day immediately preceding the maturity date, holders of the Notes may convert all or a portion of their Notes regardless of these conditions.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Class A Common Stock, or a combination of cash and shares of Class A Common Stock, at the Company’s election. It is the Company’s current intent to settle certain milestones achieved. Based on the completionprincipal amount of milestones forthe Notes with cash.
During the quarter ended December 31, 2019, the stock price condition allowing holders of the Notes to convert was met. As a result, holders have the option to convert their Notes at any time during the fiscal quarter ending March 31, 2020. There were no conversions of the Notes during the year ended December 31, 20162019. The Notes may be convertible thereafter if one or more of the conversion conditions specified in the Indenture is satisfied during future measurement periods.
The Company may redeem the Notes, at its option, on or after September 20, 2020, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid special interest to, but excluding the estimated probabilityredemption date, subject to certain conditions. No sinking fund is provided for the Notes. Upon the occurrence of completinga fundamental change (as defined in the remaining milestones,Indenture) prior to the estimatedmaturity date, holders may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid special interest to, but excluding, the fundamental change repurchase date.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $101.1 million and was determined by deducting the fair value of the
milestone based earn out liability
is $1.9 million at December 31, 2016 and is classified as a current liability incomponent from the
consolidated balance sheets as settlement will occur in 2017. At December 31, 2015, the estimated fairpar value of the
milestone based earn outNotes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability
component over its carrying amount (“debt discount”) is
$2.4 million and is classified as a current and non-current liability inamortized to interest expense at an effective interest rate over the
consolidated balance sheets.Additionally, under thecontractual 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 employeesNotes.
The net carrying amount of the
Company, which are accounted for as a post-combination expense. At December 31, 2016, the contingent payment liability
is $1.4 million and is classified as a current liability in the consolidated balance sheets as settlement will occur in 2017. At December 31, 2015, the contingent payment liability is $0.6 million and is classified as a non-current liability in the consolidated balance sheets.The following table summarizes the fair value of assets acquired ascomponent of the date of acquisitionNotes was as follows (in thousands):
Cash and cash equivalents | $ | 74 | |
Acquired intangible assets | | 3,850 | |
Goodwill | | 7,982 | |
Net assets acquired | $ | 11,906 | |
|
| | | |
| | December 31, 2019 |
| Principal | $ | 460,000 |
|
| Unamortized discount | (67,350 | ) |
| Unamortized issuance cost | (5,761 | ) |
| Net carrying amount | $ | 386,889 |
|
The
Company has includednet carrying amount of the
financial resultsequity component of
Glip, which were not material, in the
consolidated statements of operations from the date of acquisition. The goodwill balance is primarily attributed to the assembled workforce and expanded market opportunities when integrating Glip’s cloud messaging and collaboration technology with the Company’s other offerings. The goodwill balance is not deductible for U.S. income tax purposes.Notes was as follows (in thousands):
|
| | | |
| | December 31, 2019 |
| Proceeds allocated to the conversion option (debt discount) | $ | 101,141 |
|
| Issuance cost | (2,318 | ) |
| Net carrying amount | $ | 98,823 |
|
The following table sets forth the fairinterest expense recognized related to the Notes (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Amortization of debt discount | $ | 18,920 |
| | $ | 14,872 |
| | $ | — |
|
| Amortization of debt issuance cost | 1,417 |
| | 1,046 |
| | — |
|
| Total interest expense related to the Notes | $ | 20,337 |
| | $ | 15,918 |
| | $ | — |
|
In connection with the offering of the Notes, the Company entered into privately-negotiated capped call transactions with certain counterparties (the “Capped Calls”). The Capped Calls each have an initial strike price of approximately $81.45 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $119.035 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 5.6 million shares of Class A Common Stock. The Capped Calls are generally intended to reduce or offset the potential dilution to the Class A Common Stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The Capped Calls settle in components commencing January 13, 2023 with the last component expiring on March 13, 2023. The Capped Calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including changes in law, insolvency filings, and hedging disruptions. The Capped Call transactions are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $49.9 million incurred to purchase the Capped Call transactions was recorded as a reduction to additional paid-in capital on the Company's Consolidated Balance Sheets.
Note 8. Leases
The Company primarily leases facilities for office and datacenter space under non-cancelable operating leases for its U.S. and international locations. As of December 31, 2019, non-cancelable leases expire on various dates between 2020 and 2029.
Generally, the non-cancelable leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The Company has the right to exercise or forego the lease renewal options. The lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As of December 31, 2019, the components of
identifiable acquired intangible assets (in thousands)leases and
their estimated useful lives (in years) as of the date of acquisition: | Fair Value | | | Estimated Useful Life |
Customer relationships | $ | 840 | | | 2 years |
Developed technology | | 3,010 | | | 5 years |
Total identifiable acquired intangible assets subject to amortization | $ | 3,850 | | | |
The amount recorded for developed technology represents the estimated fair value of Glip’s cloud messaging and collaboration technology. The amount recorded for customer relationships represents the fair value of the underlying relationships with Glip customers.
78
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
The carrying values of intangible assets at December 31, 2016 and 2015lease costs are as follows (in thousands):
| | | | | | December 31, 2016 | | | December 31, 2015 | |
| Estimated Lives | | Cost | | Accumulated Amortization | | | Acquired Intangibles, Net | | | Accumulated Amortization | | | Acquired Intangibles, Net | |
Customer relationships | 2 years | | $ | 840 | | $ | 660 | | | $ | 180 | | | $ | 240 | | | $ | 600 | |
Developed technology | 5 years | | | 3,010 | | | 946 | | | | 2,064 | | | | 344 | | | | 2,666 | |
Total acquired intangible assets | | | $ | 3,850 | | $ | 1,606 | | | $ | 2,244 | | | $ | 584 | | | $ | 3,266 | |
|
| | | |
| | December 31, 2019 |
| Operating leases | |
| Operating lease right-of-use assets | $ | 39,269 |
|
| | |
| Accrued liabilities | $ | 14,249 |
|
| Operating lease liabilities | 28,516 |
|
| Total operating lease liabilities | $ | 42,765 |
|
Amortization
|
| | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 |
| Lease Cost | | | |
| Operating lease cost (a) | $ | 17,584 |
| | $ | — |
|
(a) Includes short-term leases and variable lease costs, which are immaterial.
The Company recognized rent expense from acquired intangible assetson operating lease facilities of $6.9 million and $5.5 million for the years ended December 31, 20162018 and 2015 was $1.1 million and $0.6 million, respectively. Amortization2017.
Maturities of developed technology is included in research and development expenses and amortizationoperating lease liabilities as of customer relationships is included in sales and marketing expensesDecember 31, 2019 are presented in the consolidated statementstable below (in thousands):
|
| | | |
| Year Ending December 31, | |
| 2020 | $ | 16,164 |
|
| 2021 | 12,162 |
|
| 2022 | 7,650 |
|
| 2023 | 5,197 |
|
| 2024 | 1,354 |
|
| 2025 onwards | 5,883 |
|
| Total future minimum lease payments | 48,410 |
|
| Less: Imputed interest | (5,645 | ) |
| Present value of lease liabilities | $ | 42,765 |
|
Other supplemental information as of operations. December 31, 2019 is as follows (in thousand):
|
| | |
| December 31, 2019 |
| Lease Term and Discount Rate | |
| Weighted-average remaining operating lease term (years) | 4.2 |
|
| Weighted-average operating lease discount rate | 5 | % |
|
| | | |
| | Year ended December 31, 2019 |
| Supplemental Cash Flow Information | |
| Operating cash flows resulting from operating leases: | |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 15,709 |
|
| | |
| New ROU assets obtained in exchange of lease liabilities: | |
| Operating leases | $ | 18,584 |
|
As of December 31,
2016, the weighted-average amortization periods for customer relationships and developed technology are approximately 0.4 years and 3.4 years, respectively.Estimated amortization expense for acquired intangible assets for the following five fiscal years and thereafter is as follows (in thousands):
2017 | | | | $ | 782 | |
2018 | | | | | 602 | |
2019 | | | | | 602 | |
2020 | | | | | 258 | |
2021 | | | | | — | |
Total estimated amortization expense | | | | $ | 2,244 | |
Note 7. Debt
As of December 31, 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,2019, the Company has one outstanding growth capital term loan (2013 Term Loan)additional operating leases of approximately $2.0 million that have not yet commenced 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 basedas such, have not yet been recognized 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 amendedConsolidated Balance Sheet. These operating leases are expected 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 4.00% based on the prime rate option and cash balance maintained with SVB. As of December 31, 2016, the outstanding principal balance of the 2013 Term Loan was $4.0 million, of which $0.3 million is payable subsequent to December 31, 2017 and is classified as a non-current liabilitycommence in the accompanying consolidated balance sheet.
The revolving linefirst quarter of credit provides for a maximum borrowing of2020 with lease terms 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 3.75% based on the prime rate option and cash balance maintained with SVB. As of December 31, 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 consolidated balance sheet as the principal balance is due in August 2017.
79
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
The Company has pledged all of its assets, excluding intellectual property, as collateral to secure its obligations under the SVB agreement. The SVB agreement contains customary negative covenants that limit the Company’s ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets and merge or consolidate. The SVB agreement also contains customary affirmative covenants, including requirements to, among other things, (i) maintain minimum cash balances representing the greater of $10.0 million or three times the Company’s quarterly cash burn rate, as defined in the agreement, and (ii) maintain minimum EBITDA levels, as determined in accordance with the agreement. On March 30, 2016, the Company adjusted certain financial covenant thresholds 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 December 31, 2016.
As of December 31, 2016, future debt principal payments are scheduled as follows (in thousands):
years.2017 | $ | 14,528 | |
2018 | | 312 | |
Total future repayments of debt | $ | 14,840 | |
Note
8.9. Commitments and Contingencies
Leases
Legal Matters
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. As of December 31, 2016, non-cancelable leases expire on various dates between 2017 and 2021 and require the following future minimum lease payments by year (in thousands): | Capital Leases | | | Operating Leases | |
Year ending December 31, | | | | | | | |
2017 | $ | 185 | | | $ | 7,281 | |
2018 | | — | | | | 7,164 | |
2019 | | — | | | | 5,945 | |
2020 | | — | | | | 3,451 | |
2021 | | — | | | | 2,131 | |
Total future minimum lease payments | $ | 185 | | | $ | 25,972 | |
Less: amount representing interest | | (4 | ) | | | | |
Total capital lease obligation | $ | 181 | | | | | |
Property and equipment recorded under capital leases consisted of the following (in thousands):
| December 31, | |
| 2016 | | | 2015 | |
Property and equipment acquired under capital lease | $ | 3,149 | | | $ | 3,149 | |
Less: accumulated amortization | | (2,600 | ) | | | (2,212 | ) |
Property and equipment acquired under capital lease, net | $ | 549 | | | $ | 937 | |
Operating leases for certain office facilities include scheduled periods of abatement and escalation of rental payments. The Company recognizes rent expense on a straight-line basis for all operating lease arrangements with the difference between required lease payments and rent expense recorded as deferred rent. Total rent expense was $4.5 million, $4.0 million, and $2.2 million for the fiscal years ended December 31, 2016, 2015 and 2014, respectively.
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RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
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 December 31, 2016 and 2015, the Company recorded a long-term sales tax liability of $3.1 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 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,certain legal proceedings described below, and applicable regulationsfrom time to time may be involved in each state in each period. No significant adjustmentsa variety of claims, lawsuits, investigations, and proceedings relating to the long-term sales tax liability have been recognizedcontractual disputes, intellectual property rights, employment matters, regulatory compliance matters, and other litigation matters relating to various claims that arise in the accompanying 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 monthsnormal course of $6.0 million and $4.4 million as of December 31, 2016 and 2015, respectively, which is included in accrued liabilities in the consolidated balance sheet.
Legal Matters
business.
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. Actual claims could settle or be adjudicated against the Company in the future for materially different amounts than the Company has accrued due to the inherently unpredictable nature of litigation. Legal fees are expensed in the period in which they are incurred.
On April 21, 2016, Supply Pro Sorbents, LLC (SPS)November 17, 2017, Joann Hurley (“Hurley”), filed a second amended complaint in an ongoing putative class action lawsuit pending in the United States District Court for the Southern District of West Virginia, adding the Company as a named defendant and alleging that the Company and other defendants violated the Telephone Consumer Protection Act (“TCPA”) and regulations promulgated thereunder by allegedly using an automated telephone dialing system to deliver prerecorded political messages to Hurley, an incumbent running for reelection, and others. Hurley alternatively alleged that the Company was vicariously liable for the actions of the other co-defendants. Hurley seeks statutory, compensatory, consequential, incidental and punitive damages, costs, and attorneys’ fees in connection with her claims. The Company was served with the second amended complaint on January 4, 2018. On March 23, 2018, the Company filed a motion to dismiss the complaint for lack of standing and failure to sufficiently state a claim on which relief may be granted. Hurley filed her opposition brief on April 6, 2018, and the Company filed its reply brief on April 13, 2018. On October 4, 2018, the district court issued its memorandum and opinion order granting in part and denying in part the Company’s motion to dismiss. The district court dismissed Hurley’s vicarious liability claim but allowed Hurley’s TCPA claim to proceed. The Company filed its answer and affirmative defenses to the second amended complaint on October 18, 2018. Plaintiff filed a motion to certify a class on July 9, 2019. The Company and another defendant filed oppositions to the motion, which have been fully briefed and is pending decision by the court. Discovery closed on October 25, 2019. The Company filed a motion for summary judgment on November 14, 2019. The plaintiff opposed the motion, which has been fully briefed and is pending decision by the court. The parties mediated the case before a private mediator on January 23, 2020, at which time a tentative settlement was achieved. The settlement will need to be approved by the court. Meanwhile, the court has issued an order holding the case in abeyance pending approval of the settlement. The Consolidated Financial Statements include an accrual for the estimated loss that is expected to occur.
Patent Infringement Matter
On April 25, 2017, Uniloc USA, Inc. and Uniloc Luxembourg, S.A. (together, “Uniloc”) filed in the U.S. District Court for the Eastern District of Texas two actions against the Company
inalleging infringement of U.S. Patent Nos. 7,804,948; 7,853,000; and 8,571,194 by RingCentral’s Glip unified communications application. The plaintiffs seek a declaration that the Company has infringed the patents, damages according to proof, injunctive relief, as well as their costs, attorney’s fees, expenses and interest. On October 9, 2017, the Company filed a motion to dismiss or transfer requesting that the case be transferred to the United States District Court for the Northern District of
California (Court), alleging common law conversion and violations ofCalifornia. In response to 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 seeks 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, themotion, plaintiffs filed a first amended complaint on October 24, 2017. 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). The Petition remains pending. On July 8, 2016, the Company filed a motion to dismiss the Lawsuit in its entirety, along with a collateralrenewed motion to dismiss or
transfer on November 15, 2017. Although briefing on that motion has been completed, the motion has not yet been decided. On February 5, 2018, Uniloc moved to stay the
Lawsuitlitigation pending
a ruling by the
FCC onresolution of certain third-party inter partes review proceedings (“IPRs”) before the
Company’s Petition.United States Patent and Trademark Office. On
October 7, 2016,February 9, 2018, the
Court grantedcourt stayed the
Company’s motionlitigation pending resolution of the IPRs without prejudice to
dismiss and gave SPS 20 days to amend its complaint. The Court concurrently dismissedor waiver of the Company’s motion to dismiss or
stay as moot. SPS filedtransfer. This litigation is still in its
amended complaint on October 27, 2016, alleging the same theories and claims. On November 21, 2016, the Company filed a motion to dismiss the amended complaint, along with a renewed motion to dismiss or stay the case pending resolution of the FCC Petition. The motions to dismiss and to stay the Lawsuit are fully briefed and under submission to the Court. Discovery has not yet commenced. The Company intends to vigorously defend itself in the Lawsuit. Litigation is inherently uncertain, however, and it is too early in this proceeding to predict the outcome of this Lawsuit.earliest stages. 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
consolidated financial statements,Consolidated Financial Statements, it is not possible to provide an estimated amount of any such loss or range of loss that may occur.
The Company intends to vigorously defend against this lawsuit.
Other matter
On June 14, 2019, the Company filed suit in the Superior Court of California, County of Alameda, against Bright Pattern, Inc. and 2 of its officers, alleging that the defendants negotiated a potential acquisition of Bright Pattern by RingCentral fraudulently and in bad faith. The Company seeks its costs incurred in negotiating under the Letter of Intent ("LOI") that the parties entered into and damages for lost opportunity as a result of forgoing another acquisition opportunity, and attorneys’ fees and costs. On August 26, 2019, Bright Pattern filed a cross-complaint against the Company and 2 of its executive officers alleging breach of the LOI as well as tort claims arising from the Company's allegedly inducing Bright Pattern to enter into the LOI and subsequent extensions while allegedly misstating the timeframe for the proposed transaction. As
damages, Bright Pattern seeks audit fees it allegedly incurred, a $5 million break-up fee, its alleged “cash burn” during the negotiations, and unspecified lost opportunity damages. The Company filed a demurrer to Bright Pattern’s amended cross-complaint, as well as a related motion to strike. This litigation is still in early stages. Based on the information known by the Company as of
December 31, 2015, there were no significant ongoing legal mattersthe date of this filing and the
rules and regulations applicable to the preparation of the Company’s Consolidated Financial Statements, it is not possible to provide an estimated amount of any loss or range of loss that may occur. The Company
did not have any accrued liabilities recorded for such loss contingencies.intends to vigorously prosecute and defend this lawsuit.
The Company has signed various employment agreements with executives and key employees pursuant to which if the Company terminates their employment without cause or if the employee terminates his or her employment for good reason following
a change of control of the Company, the employees are entitled to receive certain benefits, including severance payments, accelerated vesting of stock options and RSUs and continued COBRA coverage. As of December 31,
2016,2019, no triggering events which would cause these provisions to become effective have occurred. Therefore, no liabilities have been recorded for these agreements in the consolidated financial statements.
81
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
Note
9.10. Stockholders’ Equity
In connection with the Company’s initial public offering
(IPO)(“IPO”), the Company reincorporated in Delaware on September 26, 2013. The Delaware certificate of incorporation provides for two classes of common stock: Class A and Class B common stock, both with a par value of $0.0001 per share. In addition, the certificate of incorporation authorizes shares of undesignated preferred stock with a par value of $0.0001 per share. The terms of preferred stock are described below.
The board of directors may, without further action by the stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 100,000,000 shares of preferred stock in one or more series and authorizes their issuance. These rights, preferences, and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of the Class A and Class B common stock. As of December 31, 20162019 and 2015,2018, there were 100,000,000 shares of preferred stock authorized and no0 shares issued or outstanding. Class A and Class B Common Stock
The Company has authorized 1,000,000,000 and 250,000,000 shares of Class A common stock and Class B common stock for issuance. Holders of Class A common stock and Class B common stock have identical rights for matters submitted to a vote of the Company’s stockholders. Holders of Class A common stock are entitled to one1 vote per share of Class A common stock and holders of Class B common stock are entitled to 10 votes per share of Class B common stock. Holders of shares of Class A common stock and Class B common stock vote together as a single class on all matters (including the election of directors) except for specific circumstances that would adversely affect the powers, preferences, or rights of a particular class of common stock. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, holders of Class A and Class B common stock share equally, identically and ratably, on a per share basis, with respect to any dividend or distribution of cash, property or shares of the Company’s capital stock. Holders of Class A and Class B common stock also share equally, identically, and ratably in all assets remaining after the payment of any liabilities and liquidation preferences and any accrued or declared but unpaid dividends, if any, with respect to any outstanding preferred stock at the time. Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock. In addition, each share of Class B common stock will convert automatically to Class A common stock upon: (i) the date specified by an affirmative vote or written consent of holders of at least 67% of the outstanding shares of Class B common stock, or (ii) the seven yearyears anniversary of the closing date of the IPOinitial public offering (October 2, 2020). Shares of Class A common stock reserved for future issuance were as follows (in thousands):
|
| | |
| December 31, 2016 | 2019 |
Preferred stock | 100,000 | 100,000
|
|
Class B common stock | 11,039 | 13,091
|
|
2013 Employee stock purchase plan | 3,919 | 2,292
|
|
2013 Equity incentive plan: | | | |
Outstanding options and restricted stock unit awards | 5,505 | 10,938
|
|
Available for future grants | 15,529 | 8,703
|
|
| 135,992 | 135,024
|
|
As of December 31, 2016 and 2015, there were 0 and 2,330 shares of common stock outstanding related to the early exercise of non-vested options subject to repurchase at the original exercise price by the Company upon termination of service by an employee.
82
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
Note
10.11. Share-Based Compensation
A summary of share-based compensation expense recognized in the Company’s
consolidated statementsConsolidated Statements of
operationsOperations is as follows (in thousands):
| | | Year Ended December, 31 | | Year ended December 31, |
| 2016 | | | 2015 | | | 2014 | | 2019 | | 2018 | | 2017 |
Cost of revenues | $ | 3,165 | | | $ | 2,054 | | | $ | 1,294 | | $ | 8,741 |
| | $ | 4,982 |
| | $ | 3,735 |
|
Research and development | | 7,296 | | | | 5,387 | | | | 3,343 | | 23,132 |
| | 14,975 |
| | 9,550 |
|
Sales and marketing | | 10,902 | | | | 7,200 | | | | 5,260 | | 38,325 |
| | 27,324 |
| | 16,015 |
|
General and administrative | | 9,477 | | | | 7,447 | | | | 5,619 | | 31,156 |
| | 20,807 |
| | 12,760 |
|
Total share-based compensation expense | $ | 30,840 | | | $ | 22,088 | | | $ | 15,516 | | $ | 101,354 |
| | $ | 68,088 |
| | $ | 42,060 |
|
A summary of share-based compensation expense by award type is as follows (in thousands):
| | | Year Ended December, 31 | | Year ended December 31, |
| 2016 | | | 2015 | | | 2014 | | 2019 | | 2018 | | 2017 |
Options | $ | 9,626 | | | $ | 11,170 | | | $ | 10,323 | | $ | 986 |
| | $ | 3,433 |
| | $ | 6,803 |
|
Employee stock purchase plan rights | | 1,737 | | | | 1,365 | | | | 1,628 | | 4,176 |
| | 3,094 |
| | 2,177 |
|
Restricted stock units | | 19,477 | | | | 9,553 | | | | 3,565 | | 96,192 |
| | 61,561 |
| | 33,080 |
|
Total share-based compensation expense | $ | 30,840 | | | $ | 22,088 | | | $ | 15,516 | | $ | 101,354 |
| | $ | 68,088 |
| | $ | 42,060 |
|
In September 2013, the Board adopted and the Company’s stockholders approved the 2013 Equity Incentive Plan
(2013 Plan)(“2013 Plan”), which became effective on September 26, 2013. In connection with the adoption of the 2013 Plan, the Company terminated the 2010 Equity Incentive Plan
(2010 Plan)(“2010 Plan”), under which stock options had been granted prior to September 26, 2013. The 2010 Plan was established in September 2010, when the 2003 Equity Incentive Plan
(2003 Plan)(“2003 Plan”) was terminated. After the termination of the 2003 and 2010 Plans, no additional options were granted under these plans; however, options previously granted under these plans will continue to be governed by these plans and will be exercisable into shares of Class B common stock. In addition, options authorized to be granted under the 2003 and 2010 Plans, including forfeitures of previously granted awards, are authorized for grant under the 2013 Plan.
A total of 6,200,000 shares of Class A common stock
have beenwere originally reserved for issuance under the 2013 Plan. The 2013 Plan includes an annual increase on the first day of each fiscal year beginning in 2014, equal to the least of: (i) 6,200,000 shares of Class A common stock; (ii) 5% of the outstanding shares of all classes of common stock as of the last day of the Company’s immediately preceding fiscal year; or (iii) such other amount as the board of directors may determine. During the year ended December 31,
2016,2019, a total of
3,598,1224,052,295 shares of Class A common stock were added to the 2013 Plan in connection with the annual automatic increase provision. As of December 31,
2016,2019, a total of
8,702,55815,528,723 shares remain available for grant under the 2013 Plan.
The plans permit the grant of stock options and other share-based awards, such as restricted stock units, to employees, officers, directors, and consultants by the board of directors. Option awards are generally granted with an exercise price equal to the fair market value of the Company’s Class A common stock at the date of grant. Option awards generally vest according to a graded vesting schedule based on four years of continuous service.
On January 29, 2014, the board of directors approved an amendment to decrease the contractual term of all equity awards issued from the 2013 Plan from 10 years to 7 years for all awards granted after January 29, 2014. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the option agreement) and early exercise of options prior to vesting (subject to the Company’s repurchase right).
83
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
A summary of option activity under all of the
Company’s equity incentive plans at December 31,
20162019 and changes during the
periodsperiod then ended is presented in the following table:
| | | | | | | | | Weighted- | | | | | | |
| Number of | | | Weighted- | | | Average | | | Aggregate | | | | | | | | | |
| Options | | | Average | | | Contractual | | | Intrinsic | | Number of Options Outstanding (in thousands) | | Weighted- Average Exercise Price Per Share | | Weighted- Average Contractual Term (in Years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding | | | Exercise Price | | | Term | | | Value | | |
| (in thousands) | | | Per Share | | | (in Years) | | | (in thousands) | | |
Outstanding at December 31, 2013 | | 11,156 | | | $ | 5.87 | | | | 7.7 | | | $ | 139,484 | | |
| Outstanding at December 31, 2016 | | 7,384 |
| | $ | 10.59 |
| | 5.3 | | $ | 74,065 |
|
Granted | | 1,302 | | | | 15.12 | | | | | | | | | | 25 |
| | 23.99 |
| | |
Exercised | | (2,673 | ) | | | 1.97 | | | | | | | | | | (1,722 | ) | | 10.39 |
| | |
Canceled/Forfeited | | (627 | ) | | | 7.19 | | | | | | | | | | (401 | ) | | 16.04 |
| | |
Outstanding at December 31, 2014 | | 9,158 | | | $ | 8.23 | | | | 7.2 | | | $ | 61,367 | | |
| Outstanding at December 31, 2017 | | 5,286 |
| | $ | 10.30 |
| | 4.2 | | $ | 201,480 |
|
Granted | | 1,881 | | | | 16.35 | | | | | | | | | | — |
| | — |
| | |
Exercised | | (2,323 | ) | | | 6.82 | | | | | | | | | | (1,138 | ) | | 8.17 |
| | |
Canceled/Forfeited | | (668 | ) | | | 11.42 | | | | | | | | | | (17 | ) | | 18.79 |
| | |
Outstanding at December 31, 2015 | | 8,048 | | | $ | 10.27 | | | | 6.2 | | | $ | 107,091 | | |
| Outstanding at December 31, 2018 | | 4,131 |
| | $ | 10.86 |
| | 3.3 | | $ | 295,921 |
|
Granted | | 547 | | | | 16.53 | | | | | | | | | | — |
| | — |
| | |
Exercised | | (962 | ) | | | 10.01 | | | | | | | | | | (1,742 | ) | | 8.53 |
| | |
Canceled/Forfeited | | (249 | ) | | | 15.50 | | | | | | | | | | (132 | ) | | 2.73 |
| | |
Outstanding at December 31, 2016 | | 7,384 | | | $ | 10.59 | | | | 5.3 | | | $ | 74,065 | | |
Vested and expected to vest as of December 31, 2016 | | 7,083 | | | $ | 10.36 | | | | 5.3 | | | $ | 72,684 | | |
Exercisable as of December 31, 2016 | | 5,359 | | | $ | 8.68 | | | | 5.1 | | | $ | 63,893 | | |
| Outstanding at December 31, 2019 | | 2,257 |
| | $ | 13.13 |
| | 2.5 | | $ | 351,428 |
|
| Vested and expected to vest as of December 31, 2019 | | 2,259 |
| | $ | 13.13 |
| | 2.5 | | $ | 351,362 |
|
| Excercisable as of December 31, 2019 | | 2,243 |
| | $ | 13.10 |
| | 2.5 | | $ | 349,002 |
|
There were 0 options granted for the year ended December 31, 2019 and 2018. The total intrinsic
valuesvalue of options exercised during
the yearsyear ended
December31, 2016, 2015,December 31, 2019, 2018 and
20142017 were
as follows (in thousands):$215.5 million, $74.6 million, and $41.2 million, respectively. | Year Ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Total intrinsic value of options exercised | $ | 10,718 | | | $ | 28,336 | | | $ | 41,454 | |
Valuation Assumptions
The Company estimated the fair values of each option awarded on the date of grant using the Black-Scholes-Merton option-pricing model, which requires inputs including the fair value of common stock, expected term, expected volatility, risk-free interest rate, and dividend yield.
Fair Value of Common Stock
The Company uses the daily adjusted closing stock price of its Class A common stock as reported by the New York Stock Exchange.
Expected Term
The expected term represents the period that option awards are expected to be outstanding. Prior to the fourth quarter of 2014, the Company did not have sufficient historical information to develop reasonable expectations about future exercise behavior. Therefore, the expected term for options issued to employees was calculated as the mean of the option vesting period and the contractual term (the Simplified Method) as these options were determined to be “plain-vanilla” as defined under current guidance. Beginning with the fourth quarter of 2014, the Company began incorporating its own historical data, assigning a 25% weighting to the Company’s historical data and a 75% weighting to the Simplified Method estimate. As time progressed and the Company generated additional historical data, the weighting of the Company’s historical data has increased while the weighting of the Simplified Method data has decreased. Accordingly, in the fourth quarters of 2015 and 2016, the Company’s historical data was weighted as 50% and 75%, respectively, while the Simplified Method data was weighted as 50% and 25%, respectively. The expected term for options issued to non-employees is the remaining contractual term.
84
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
Expected Volatility
The expected stock price volatility of common stock was derived from the historical volatilities of a peer group of similar publicly traded companies over a period that approximates the expected term of the option. Beginning in the fourth quarter of 2014, the Company incorporated its own historical volatility assigning a 25% weighting to the Company’s historical data and a 75% weighting to the historical volatilities of the peer group of similarly publicly traded companies. As time progressed and the Company generated additional historical data, the weighting of the Company’s historical data has increased while the weighting of the peer group data has decreased. Accordingly, in the fourth quarters of 2015 and 2016, the Company’s historical volatility was weighted as 50% and 75%, respectively, while the peer group data was weighted as 50% and 25%, respectively.
Risk-Free Interest Rate
The risk-free interest rate was based on the yield available on U.S. Treasury zero-coupon issues with a term that approximates the expected term of the option.
Expected Dividend Yield
The expected dividend yield was 0% as the Company has not declared, nor paid, and does not expect to pay cash dividends.
The weighted-average assumptions used in the option-pricing model and the resulting grant date fair value of stock options granted in
the periods presented2017 were as follows:
| | | Year ended December 31, | | Year Ended |
| 2016 | | | 2015 | | | 2014 | | December 31, 2017 |
Expected term for employees (in years) | | 4.7 | | | | 4.8 | | | | 4.6 | | 4.4 |
|
Expected term for non-employees (in years) | | 5.9 | | | | 7.1 | | | | 7.0 | | 4.6 |
|
Expected volatility | | 47 | % | | | 48 | % | | | 48 | % | 44 | % |
Risk-free interest rate | | 1.12 | % | | | 1.22 | % | | | 1.41 | % | 1.78 | % |
Expected dividend yield | | 0 | % | | | 0 | % | | | 0 | % | 0 | % |
Grant date fair value of employee options | $ | 6.72 | | | $ | 6.78 | | | $ | 6.16 | | $ | 9.08 |
|
As of December 31,
20162019 and
2015,2018, there was
approximately $11.0 millionan immaterial amount and
$19.6$1.0 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to
non-vested stock option grants, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of approximately
2.00.3 years and
2.50.8 years, respectively.
Employee Stock Purchase Plan
The
Company's Employee Stock Purchase Plan
(ESPP)(“ESPP”) allows eligible employees to purchase shares of the Company’s Class A common stock at a discounted price, through payroll deductions of up to the lesser of 15% of their eligible compensation or the IRS allowable limit per calendar year. A participant may purchase a maximum of 3,000 shares during an offering period. The offering periods are for a period of six months and generally start on the first trading day on or after May
11th13th and November
11th13th of each year. At the end of the offering period, the purchase price is set at the lower of: (i) 90% of the fair value of the Company’s common stock at the beginning of the six month offering period and (ii) 90% of the fair value of the Company’s Class A common stock at the end of the six month offering period.
The ESPP provides for annual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year beginning in fiscal 2014, equal to the least of: (i) 1% of the outstanding shares of all classes of common stock on the last day of the immediately preceding year; (ii) 1,250,000 shares; or (iii) such other amount as may be determined by the board of directors. During the year ended December 31,
2016,2019, a total of
719,624810,459 shares of Class A common stock were added to the ESPP Plan in connection with the annual increase provision. At December 31,
2016,2019, a total of
2,291,5803,918,712 shares were available for issuance under the ESPP.
85
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
The weighted-average assumptions used to value ESPP rights under the Black-Scholes-Merton option-pricing model and the resulting offering grant date fair value of ESPP rights granted in the periods presented were as follows:
| | | Year ended December 31, | | Year ended December 31, |
| 2016 | | | 2015 | | | 2014 | | 2019 | | 2018 | | 2017 |
Expected term (in years) | | 0.5 | | | | 0.5 | | | | 0.5 | | 0.5 |
| | 0.5 |
| | 0.5 |
|
Expected volatility | | 41 | % | | | 42 | % | | | 50 | % | 47 | % | | 42 | % | | 34 | % |
Risk-free interest rate | | 0.50 | % | | | 0.25 | % | | | 0.07 | % | 2.01 | % | | 2.31 | % | | 1.20 | % |
Expected dividend yield | | 0 | % | | | 0 | % | | | 0 | % | 0 | % | | 0 | % | | 0 | % |
Offering grant date fair value of ESPP rights | $ | 5.29 | | | $ | 5.05 | | | $ | 3.93 | | $ | 33.66 |
| | $ | 18.07 |
| | $ | 9.52 |
|
| | | | | | | | | | | | |
As of December 31,
20162019 and
2015,2018, there was approximately
$0.7$2.3 million and
$1.1$1.5 million of unrecognized share-based compensation expense,
net of estimated forfeitures, related to
outstanding ESPP,
rights, which will be recognized on a straight-line basis over the remaining
weighted averageweighted-average vesting periods of approximately 0.4 years,
and 0.4 years, respectively.
The 2013 Plan provides for the issuance of RSUs to employees,
directors, and consultants. RSUs issued under the 2013 Plan generally vest over four years. A summary of activity of RSUs under the 2013 Plan at December 31,
20162019 and changes during the periods then ended is presented in the following table:
| Number of | | | Weighted- | | | Aggregate | | |
| RSUs | | | Average | | | Intrinsic | | | | | | | |
| Outstanding | | | Grant Date Fair | | | Value | | Number of RSUs Outstanding (in thousands) | | Weighted- Average Grant Date Fair Value Per Share | | Aggregate Intrinsic Value (in thousands) |
| (in thousands) | | | Value Per Share | | | (in thousands) | | |
Outstanding at December 31, 2013 | | 68 | | | $ | 17.22 | | | $ | 1,251 | | |
| Outstanding at December 31, 2016 | | 3,554 |
| | $ | 18.01 |
| | $ | 73,261 |
|
Granted | | 1,915 | | | | 15.08 | | | | | | 3,005 |
| | 30.20 |
| | |
Released | | (110 | ) | | | 16.82 | | | | | | (1,680 | ) | | 19.54 |
| | |
Canceled/Forfeited | | (134 | ) | | | 17.43 | | | | | | (598 | ) | | 20.91 |
| | |
Outstanding at December 31, 2014 | | 1,739 | | | $ | 14.87 | | | $ | 25,617 | | |
| Outstanding at December 31, 2017 | | 4,281 |
| | $ | 25.51 |
| | $ | 207,197 |
|
Granted | | 1,365 | | | | 18.09 | | | | | | 1,746 |
| | 67.64 |
| | |
Released | | (571 | ) | | | 15.45 | | | | | | (1,971 | ) | | 30.50 |
| | |
Canceled/Forfeited | | (245 | ) | | | 15.10 | | | | | | (495 | ) | | 34.99 |
| | |
Outstanding at December 31, 2015 | | 2,288 | | | $ | 16.63 | | | $ | 53,972 | | |
| Outstanding at December 31, 2018 | | 3,561 |
| | $ | 42.09 |
| | $ | 293,523 |
|
Granted | | 2,798 | | | | 18.65 | | | | | | 2,069 |
| | 122.35 |
| | |
Released | | (1,096 | ) | | | 16.77 | | | | | | (1,906 | ) | | 50.99 |
| | |
Canceled/Forfeited | | (436 | ) | | | 17.92 | | | | | | (475 | ) | | 60.38 |
| | |
Outstanding at December 31, 2016 | | 3,554 | | | $ | 18.01 | | | $ | 73,261 | | |
| Outstanding at December 31, 2019 | | 3,249 |
| | $ | 85.39 |
| | $ | 548,145 |
|
As of December 31,
20162019 and
2015,2018, there was a total of
$46.9$198.3 million and
$35.2$107.9 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to RSUs, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of approximately
2.82.3 years and
3.02.4 years, respectively.
86
RINGCENTRAL, INC.
Notes
Bonus Plan
In December 2017, the Company's board of directors (the "Board") adopted the Selective 2018 Key Employee Equity Bonus Plan (the "2018 KEEB Plan”), which became effective on January 1, 2018, and in December 2018, the Board adopted the Selective 2019 Key Employee Equity Bonus Plan (the "2019 KEEB Plan" and together with the 2018 KEEB Plan the "KEEB Plans"), which became effective on January 1, 2019. Both of the KEEB Plans allow the recipients to
Consolidated Financial Statementsearn fully vested shares of the Company’s Class A Common Stock upon the achievement of quarterly service and performance conditions. During the year
ended December 31, 2019 and 2018, 0.1 million and 0.1 million RSUs were issued under the KEEB Plans, respectively. The total requisite service period of each quarterly award is approximately 0.4 years.
The unrecognized share-based compensation expense was approximately $1.0 million, which will be recognized over the remaining service period of 0.1 years. The shares issued under the KEEB Plans will be issued from the reserve of shares available for issuance under the 2013 Plan.
Note
11.12. Income Taxes
The
Net loss before provision
(benefit) for
(benefit from) income taxes consisted of the following (in thousands):
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Current | | | | | | | | | | | |
Federal | $ | — | | | $ | — | | | $ | — | |
State | | 63 | | | | 71 | | | | 18 | |
Foreign | | 209 | | | | 85 | | | | 114 | |
Total current | | 272 | | | | 156 | | | | 132 | |
Deferred | | | | | | | | | | | |
Federal | $ | — | | | $ | (1,312 | ) | | $ | — | |
State | | — | | | | (99 | ) | | | — | |
Foreign | | (36 | ) | | | (8 | ) | | | (35 | ) |
Total deferred | | (36 | ) | | | (1,419 | ) | | | (35 | ) |
Total income tax provision (benefit) | $ | 236 | | | $ | (1,263 | ) | | $ | 97 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| United States | $ | (64,822 | ) | | $ | (29,584 | ) | | $ | (5,883 | ) |
| International | 7,882 |
| | 3,521 |
| | 1,937 |
|
| Total net loss before provision for (benefit from) income taxes | $ | (56,940 | ) | | $ | (26,063 | ) | | $ | (3,946 | ) |
Net loss before
The provision
(benefit) for
(benefit from) income taxes consisted of the following (in thousands):
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
United States | $ | (27,908 | ) | | $ | (28,870 | ) | | $ | (50,065 | ) |
International | | (1,165 | ) | | | (4,492 | ) | | | 1,822 | |
Total net loss before benefit for income taxes | $ | (29,073 | ) | | $ | (33,362 | ) | | $ | (48,243 | ) |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Current | | | | | |
| Federal | $ | — |
| | $ | — |
| | $ | — |
|
| State | 150 |
| | 61 |
| | 49 |
|
| Foreign | 464 |
| | 382 |
| | 256 |
|
| Total current | $ | 614 |
| | $ | 443 |
| | $ | 305 |
|
| Deferred | | | | | |
| Federal | $ | (2,765 | ) | | $ | — |
| | $ | — |
|
| State | (445 | ) | | — |
| | — |
|
| Foreign | (737 | ) | | (303 | ) | | (47 | ) |
| Total deferred | (3,947 | ) | | (303 | ) | | (47 | ) |
| Total income tax provision | $ | (3,333 | ) | | $ | 140 |
| | $ | 258 |
|
The provision
(benefit) for
(benefit from) income tax differed from the amounts computed by applying the U.S. federal income tax rate
of 34% to pretax loss as a result of the following (in thousands):
| Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Federal tax benefit at statutory rate | $ | (9,885 | ) | | $ | (11,343 | ) | | $ | (16,403 | ) |
State tax, net of federal provision (benefit) | | 28 | | | | (34 | ) | | | 12 | |
Research and development credits | | (745 | ) | | | (667 | ) | | | (654 | ) |
Share-based compensation | | 960 | | | | 1,086 | | | | 1,836 | |
Other permanent differences | | 600 | | | | 325 | | | | 211 | |
Foreign tax rate differential | | (225 | ) | | | (80 | ) | | | (33 | ) |
Net operating losses not recognized | | 9,503 | | | | 10,762 | | | | 15,128 | |
Release of valuation allowance associated with acquisitions | | — | | | | (1,312 | ) | | | — | |
Total income tax provision (benefit) | $ | 236 | | | $ | (1,263 | ) | | $ | 97 | |
The benefit
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Federal tax benefit at statutory rate | $ | (11,957 | ) | | $ | (5,473 | ) | | $ | (1,341 | ) |
| State tax, net of federal tax benefit | (233 | ) | | 48 |
| | 32 |
|
| Research and development credits | (5,312 | ) | | (3,284 | ) | | (707 | ) |
| Share-based compensation | (58,780 | ) | | (25,170 | ) | | (18,154 | ) |
| Other permanent differences | 3,149 |
| | 1,325 |
| | 814 |
|
| Change in U.S. federal Tax Rate | — |
| | — |
| | 33,254 |
|
| Foreign tax rate differential | (799 | ) | | (288 | ) | | (445 | ) |
| Net operating (gains) losses not recognized | 73,364 |
| | 32,982 |
| | (13,195 | ) |
| Release of valuation allowance associated with acquisitions | (2,765 | ) | | — |
| | — |
|
| Total income tax provision | $ | (3,333 | ) | | $ | 140 |
| | $ | 258 |
|
In general, it is the Company’s practice and intention to reinvest the earnings of its non-U.S. subsidiaries in those operations. Undistributed earnings of foreign subsidiaries are immaterial for income taxes for 2015 relates primarilyall periods presented. Because the Company’s non-U.S. subsidiary earnings have previously been subject to the release of a valuation allowance of $1.4 million associatedone-time transition tax on foreign earnings required by the 2017 Tax Act, any additional taxes due with nondeductible intangible assets recorded as partrespect to such earnings or the excess of the Glip acquisition, partially offset byamount for financial reporting over the tax basis of its foreign investments would generally be limited to foreign withholding taxes and/or U.S. state minimum income taxes.
The types of temporary differences that give rise to significant portions of the Company’s deferred tax assets and incomeliabilities are as follows (in thousands):
|
| | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 |
| Deferred tax assets | | | |
| Net operating loss and credit carry-forwards | $ | 196,930 |
| | $ | 109,812 |
|
| Research and development credits | 24,452 |
| | 16,380 |
|
| Sales tax liability | 157 |
| | 258 |
|
| Share-based compensation | 5,937 |
| | 5,435 |
|
| Accrued liabilities | 6,612 |
| | 5,135 |
|
| Gross deferred tax assets | 234,088 |
| | 137,020 |
|
| Valuation allowance | (180,090 | ) | | (94,118 | ) |
| Total deferred tax assets | 53,998 |
| | 42,902 |
|
| Deferred tax liabilities | | | |
| Convertible debt discount | (16,701 | ) | | (21,035 | ) |
| Deferred sales commissions | (28,601 | ) | | (18,253 | ) |
| Acquired intangibles | (3,857 | ) | | (2,670 | ) |
| Property and equipment | (6,731 | ) | | (3,573 | ) |
| Net deferred tax (liabilities) assets | $ | (1,892 | ) | | $ | (2,629 | ) |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on ourthe mandatory deemed repatriation of cumulative foreign earnings in foreign jurisdictions. as of December 31, 2017.
In connection with the acquisition of
Glip,Connect First on January 14, 2019, a
net deferred tax liability
of $3.2 million was established,
for the
book-to-tax basis differencesmost significant component of which is related to the
non-goodwill intangible assets.book/tax basis differences associated with the acquired technology and customer relationships. The net deferred tax liability from this acquisition created an additional source of income to realize deferred tax assets. As the Company continues to maintain a full valuation allowance against its deferred tax assets, this additional source of income resulted in the release of the Company’s previously recorded valuation allowance against deferred assets. Consistent with the applicable guidance the release of the valuation allowance
resulting fromof $3.2 million caused by the acquisition was recorded in the consolidated financial statements outside of acquisition accounting
(i.e., recorded as a tax benefit to the
consolidated statementsConsolidated Statements of
operations).In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. Undistributed earnings of foreign subsidiaries are immaterial for all periods presented.
87
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
The types of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows (in thousands):
Operations. | Year ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Deferred tax assets | | | | | | | | | | | |
Net operating loss and credit carry-forwards | $ | 59,863 | | | $ | 54,858 | | | $ | 45,552 | |
Research and development credits | | 6,094 | | | | 4,712 | | | | 3,497 | |
Sales tax liability | | 1,131 | | | | 1,337 | | | | 1,442 | |
Share-based compensation | | 7,281 | | | | 6,694 | | | | 5,560 | |
Accrued liabilities | | 6,525 | | | | 6,090 | | | | 4,676 | |
Gross deferred tax assets | | 80,894 | | | | 73,691 | | | | 60,727 | |
Valuation allowance | | (79,319 | ) | | | (71,514 | ) | | | (60,405 | ) |
Total deferred tax assets | | 1,575 | | | | 2,177 | | | | 322 | |
Deferred tax liabilities - Acquired intangibles | | (803 | ) | | | (1,164 | ) | | | — | |
Deferred tax liabilities - Property and equipment | | (606 | ) | | | (883 | ) | | | (197 | ) |
Net deferred tax assets | $ | 166 | | | $ | 130 | | | $ | 125 | |
As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets as of December 31, 2016, 2015, and 2014, that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased by $18.0 million if and when such deferred tax assets are ultimately realized.
At December 31, 2016,2019, the Company had net operating loss carry-forwards for federal and state income tax purposes of approximately $197.6 million and $137.6 million, respectively, available to reduce future income subject to income taxes. Thehas federal net operating loss carry-forwardcarryforwards of approximately $782.7 million, of which approximately $272.9 million expire between 2023 and 2037 and the remainder do not expire. As of December 31, 2019, the Company had state net operating loss carryforwards of approximately $675.6 million which will begin to expire in 2023 while the state net operating loss carry-forwards began to expire in 2013.2021. The Company also has research credit carry-forwardscarryforwards for federal and California tax purposes of approximately $4.7$20.2 million and $5.2$15.7 million, respectively, available to reduce future income subject to income taxes. The federal research credit carry-forwardscarryforwards will begin to expire in 2028 and the California research credits carry forward indefinitely. As of December 31, 2015, we had federal and state net operating loss carry-forwards of $170.2 million and $117.0 million, respectively, and federal and state research and development tax credit carry-forwards in the amount of $3.6 million and $4.0 million, respectively.
The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as prescribed under Internal Revenue Code Section 382
(IRC(“IRC Section
382)382”). Events which may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period.
InUtilization of the
event the Company had subsequent changes in ownership,federal and state net operating losses
and research and development credit carry-overs, which are reservedmay be subject to substantial annual limitation due to the ownership change limitations provided by the
full deferred tax asset valuation allowance, could be limitedIRC Section 382 and
may expire unutilized.similar state provisions.
The
CompanyCompany’s management believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets will not be realized; and accordingly, for the year ended December 31,
2016,2019, the Company has provided a valuation allowance against the Company’s U.S.
and U.K. net deferred tax assets. The net change in the valuation allowance for the years ended December 31,
2016, 20152019 and
20142018 was an increase of
$7.8$86.0 million,
$11.1$18.2 million,
and $16.4 million, respectively.
88
RINGCENTRAL, INC.
Notes to Consolidated Financial Statements
The
In accordance with ASC 740-10, Income Taxes, the Company has adopted the accounting policy that interest and penalties recognized are classified as part of its income taxes.
The following shows the changes in the gross amount of unrecognized tax benefits as of December 31,
20162019 (in thousands):
Balance as of December 31, 2013 | | $ | 933 | |
Gross amount of increases in unrecognized tax benefits for tax positions taken in current year | | | 465 | |
Gross amount of increases in unrecognized tax benefits for tax positions taken in prior year | | | 1,217 | |
Balance as of December 31, 2014 | | $ | 2,615 | |
Gross amount of increases in unrecognized tax benefits for tax positions taken in current year | | | 499 | |
Gross amount of decreases in unrecognized tax benefits for tax positions taken in prior year | | | (1,217 | ) |
Balance as of December 31, 2015 | | $ | 1,897 | |
Gross amount of increases in unrecognized tax benefits for tax positions taken in current year | | | 538 | |
Gross amount of increases in unrecognized tax benefits for tax positions taken in prior years | | | 25 | |
Balance as of December 31, 2016 | | $ | 2,460 | |
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Unrecognized tax benefits, beginning of the year | $ | 6,029 |
| | $ | 3,004 |
| | $ | 2,460 |
|
| Increases related to prior year tax positions | — |
| | 1,050 |
| | — |
|
| Decreases related to prior year tax positions | (48 | ) | | — |
| | (3 | ) |
| Increases related to current year tax positions | 2,984 |
| | 1,975 |
| | 547 |
|
| Unrecognized tax benefits, end of year | $ | 8,965 |
| | $ | 6,029 |
| | $ | 3,004 |
|
The Company does not anticipate that its total unrecognized tax benefits will significantly change due to settlement of examination or the expiration of statute of limitations during the next 12 months.
The Company files U.S. and foreign income tax returns with varying statutes of limitations. Due to the Company’s net carry-over of unused operating losses and tax credits, all years from 2003 forward remain subject to future examination by tax authorities.
Note
12.13. Basic and Diluted Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture as they are not deemed to be issued for accounting purposes. Diluted net loss per share is computed by giving effect to all potential shares of common stock, stock options, restricted stock units, ESPP, and
stock related to the non-vested early exercised stock options,convertible senior notes, to the extent dilutive.
For the periods presented, all such common stock equivalents have been excluded from diluted net loss per share as the effect to net loss per share would be anti-dilutive.The following table sets forth the computation of the Company’s basic and diluted net loss per share during the years ended December 31,
2016, 20152019, 2018 and
20142017 (in thousands, except per share data):
| | | Year Ended December 31, | | Year Ended December 31, |
| 2016 | | | 2015 | | | 2014 | | 2019 | | 2018 | | 2017 |
Numerator | | | | | | | | | | | | | | | | |
Net loss | $ | (29,309 | ) | | $ | (32,099 | ) | | $ | (48,340 | ) | $ | (53,607 | ) | | $ | (26,203 | ) | | $ | (4,204 | ) |
Denominator | | | | | | | | | | | | | | | | |
Weighted-average common shares for basic and diluted net loss per share | | 72,994 | | | | 70,069 | | | | 66,818 | | 83,130 |
| | 79,500 |
| | 76,281 |
|
Basic and diluted net loss per share | $ | (0.40 | ) | | $ | (0.46 | ) | | $ | (0.72 | ) | $ | (0.64 | ) | | $ | (0.33 | ) | | $ | (0.06 | ) |
The following table summarizes the potentially dilutive common shares that were excluded from diluted weighted-average common shares outstanding
because including them would have had an anti-dilutive effect (in thousands):
| Year Ended December 31, | |
| 2016 | | | 2015 | | | 2014 | |
Shares of common stock subject to repurchase | | — | | | | 2 | | | | 15 | |
Shares of common stock issuable under equity incentive plans outstanding | | 11,726 | | | | 11,475 | | | | 10,897 | |
Potential common shares excluded from diluted net loss per share | | 11,726 | | | | 11,477 | | | | 10,912 | |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Shares of common stock issuable under equity incentive plans outstanding | 6,832 |
| | 8,943 |
| | 10,806 |
|
| Convertible senior notes | 1,905 |
| | 79 |
| | — |
|
| Potential common shares excluded from diluted net loss per share | 8,737 |
| | 9,022 |
| | 10,806 |
|
89
RINGCENTRAL, INC.
Notes
Since the Company expects to Consolidated Financial Statementssettle the principal amount of its outstanding convertible senior notes in cash and any excess in cash or shares of the Company’s Class A Common Stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s Class A Common Stock for a given period exceeds the conversion price of $81.45 per share for the Notes.
Note
13.14. Geographic Concentrations
Revenues by geographic location are based on the billing address of the customer. More than 90% of the Company’s revenues are from the U.S. for fiscal years ended December 31, 2016, 20152019, 2018, and 2014. No2017. NaN other individual country exceeded 10% of total revenues for fiscal years ended December 31, 2016, 20152019, 2018, and 2014. 2017.
Long-lived assets by geographic location is based on the location of the legal entity that owns the asset.
AtAs of December 31,
20162019 and
2015, more than 87%2018, approximately 89% and
86%67% of the Company’s
consolidated long-lived assets,
respectively, were located in the U.S.
, respectively, with no France represented 8% and 26% of the Company’s consolidated long-lived assets, including fair value adjustments relating to the acquisition of Dimelo. There was 0 other single country outside of the U.S. representing
10% or more
than 10% of the Company’s consolidated long-lived
assets. assets as of December 31, 2019 and 2018.
The Company has a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees.
The Company did notSubstantially all of the U.S. employees are eligible to make
any matching contributions to
this planthe 401(k) plan. On July 1, 2017, the Company implemented a 401(k) employer match, based on the amount of the employees’ contributions subject to certain limitations. Employer contributions were $4.1 million, $2.9 million, and $1.1 million for the years ended December 31,
2016, 2015,2019, 2018 and
2014.2017.
Note
15.16. Selected Quarterly Financial Data (unaudited)
The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in the years ended December 31,
20162019 and
20152018 (in thousands except per share data):
| | Quarter ended | | | | | | | | | | | | | | | | | | |
| Dec 31, 2016 | | | Sept 30, 2016 | | | June 30, 2016 | | | Mar 31, 2016 | | | Dec 31, 2015 | | | Sept 30, 2015 | | | June 30, 2015 | | | Mar 31, 2015 | | Dec 31, 2019 | | Sep 30, 2019 | | Jun 30, 2019 | | Mar 31, 2019 | | Dec 31, 2018 | | Sep 30, 2018 | | Jun 30, 2018 | | Mar 31, 2018 |
Consolidated Statements of Operations Data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | $ | 104,503 | | | $ | 96,839 | | | $ | 91,844 | | | $ | 86,538 | | | $ | 83,439 | | | $ | 76,780 | | | $ | 70,691 | | | $ | 65,318 | | $ | 252,865 |
| | $ | 233,352 |
| | $ | 215,152 |
| | $ | 201,489 |
| | $ | 188,624 |
| | $ | 173,825 |
| | $ | 160,832 |
| | $ | 150,343 |
|
Gross profit | | 79,851 | | | | 73,384 | | | | 69,480 | | | | 64,798 | | | | 60,577 | | | | 54,447 | | | | 49,162 | | | | 44,771 | | 185,992 |
| | 173,647 |
| | 161,522 |
| | 150,654 |
| | 144,509 |
| | 134,551 |
| | 122,766 |
| | 114,669 |
|
Operating loss | | (6,606 | ) | | | (7,061 | ) | | | (6,304 | ) | | | (5,981 | ) | | | (5,996 | ) | | | (5,828 | ) | | | (9,539 | ) | | | (9,569 | ) | (20,369 | ) | | (10,663 | ) | | (7,180 | ) | | (7,463 | ) | | (3,404 | ) | | (7,027 | ) | | (4,654 | ) | | (1,351 | ) |
Net loss | | (6,946 | ) | | | (7,979 | ) | | | (7,771 | ) | | | (6,613 | ) | | | (6,941 | ) | | | (6,336 | ) | | | (8,211 | ) | | | (10,611 | ) | (25,257 | ) | | (12,749 | ) | | (9,243 | ) | | (6,358 | ) | | (5,678 | ) | | (9,518 | ) | | (8,291 | ) | | (2,716 | ) |
Net loss per share, basic and diluted | $ | (0.09 | ) | | $ | (0.11 | ) | | $ | (0.11 | ) | | $ | (0.09 | ) | | $ | (0.10 | ) | | $ | (0.09 | ) | | $ | (0.12 | ) | | $ | (0.15 | ) | $ | (0.30 | ) | | $ | (0.15 | ) | | $ | (0.11 | ) | | $ | (0.08 | ) | | $ | (0.07 | ) | | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | (0.03 | ) |
Note
16.17. Related-Party Transactions
In the ordinary course of business, the Company made purchases from Alphabet Inc., the parent company of Google Inc., at which one of the Company’s directors serves as a Vice President, of Google, Inc.Americas. Total payables to AlphabetGoogle Inc. at December 31, 20162019 and 20152018 were $1.0$1.5 million and $2.0$1.2 million, respectively. Total expenses incurred from AlphabetGoogle Inc. in 2016, 2015,2019, 2018, and 20142017 were $14.2$18.7 million, $11.9$18.8 million, and $10.1$15.4 million, respectively.Note 17. Subsequent Event
On February 10, 2017, the Company paid off its 2013 Term Loan and revolving line of credit balances of $3.4 million and $10.8 million, respectively to SVB. Upon repayment, the SVB Agreement was terminated.
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
None.
| |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(Exchange Act)(the “Exchange Act”), as of the end of the period covered by this Annual Report on Form 10-K.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange CommissionSEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20162019 based on the guidelines established in the Internal Control—Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31,
2016. We reviewed2019. In evaluating the
resultseffectiveness of
management’s assessmentour internal controls over financial reporting as of December 31, 2019, our management excluded Connect First, Inc. (“Connect First”) in accordance with
the guidance issued by the Securities and Exchange Commission, since it was acquired on January 14, 2019. Connect First’s assets, excluding acquisition method fair value adjustments, as of December 31, 2019, and revenues for the period from January 14, 2019 through December 31, 2019, were approximately 3% of our
Audit Committee.consolidated total assets and approximately 1% of our consolidated total revenues, in our consolidated financial statements.
The effectiveness of our internal control over financial reporting as of December 31,
20162019 has been audited by KPMG
LLP LLP, an independent registered public accounting firm, as stated in its report which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There wasare no changechanges in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 20162019, that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our chief executive officer and chief financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
| |
| ITEM 9B. | OTHER INFORMATION |
None.
None.
| |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information concerning our directors, compliance with Section 16(a) of the Exchange Act, our Audit Committee and any changes to the process by which stockholders may recommend nominees to the Board required by this Item are incorporated herein by reference to information contained in the Proxy Statement
to be filed with the SEC pursuant to Regulation 14A not later than 120 days after the fiscal year to which this report relates.relates.
The information concerning our executive officers required by this Item is incorporated herein by reference to information contained in the Proxy Statement
to be filed pursuant to Regulation 14A.14A.
We have adopted a code of ethics, our Code of Conduct, which applies to all employees, including our principal executive officers, our principal financial officer, and all other executive officers. The Code of Conduct is available on our Web site at www.ringcentral.comwithin the investor relations section. A copy may also be obtained without charge by contacting Investor Relations, RingCentral, Inc., 20 Davis Drive, Belmont, California 94002 or by calling (650) 472-4100. We plan to post on our Web site at the address described above any future amendments or waivers of our Code of Conduct.
| |
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement
to be filed pursuant to Regulation 14A.14A. | |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to information contained in the Proxy Statement
to be filed pursuant to Regulation 14A.14A.
The following chart sets forth certain information as of December 31,
2016,2019, with respect to our equity compensation plans, specifically our 2003 Equity Incentive Plan
or the 2003 Plan,(the “2003 Plan”), 2010 Equity Incentive Plan
or the 2010 Plan,(the “2010 Plan”), 2013 Equity Incentive Plan
or the 2013 Plan,(the “2013 Plan”), and our
2013Amended and Restated Employee Stock Purchase Plan
or the ESPP.(the “ESPP”). Each of the 2003 Plan, the 2010 Plan, the 2013 Plan and the ESPP has been approved by our stockholders.
Equity Compensation Plan Information | |
| | | | | | | | | | | |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (1) | |
Equity compensation plans approved by security holders | | 11,115,618 | | | $ | 13.12 | | | | 10,994,138 | |
|
| | | | | | | | | | |
| | | Equity Compensation Plan Information |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (1) |
| Equity compensation plans approved by security holders | | 5,580,627 |
| | $ | 57.06 |
| | 19,447,435 |
|
Equity Compensation Plan Information
(1)
| |
| (1) | Includes shares reserved for issuance under the 2013 Plan and the ESPP. The number of shares reserved for issuance under the 2013 Plan automatically increases on January 1st of each year by the lesser of (i) 6,200,000 shares, or (ii) five percent (5%) of the number of shares of our common stock outstanding on the last day of the immediately preceding fiscal year. During the year ended December 31, 2016,2019, a total of 3,598,1224,052,295 shares of Class A common stock were added to the 2013 Plan in connection with the annual automatic increase provision. In addition, the number of shares reserved for issuance under the 2013 Plan is increased from time to time in an amount equal to the number of shares subject to outstanding options under the 2003 and 2010 Plans that are subsequently forfeited or terminate for any other reason before being exercised and unvested shares that are forfeited pursuant to the 2003 and 2010 Plans. The number of shares reserved for issuance under the ESPP automatically increases on January 1st of each year by the lesser of (i) 1,250,000 shares, or (ii) onceone percent (1%) of the number of shares of our common stock outstanding on the last trading day of the immediately preceding fiscal year. During the year ended December 31, 2016,2019, a total of 719,624810,459 shares of Class A common stock were added to the 2013 ESPP Plan in connection with the annual increase provision. |
| |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement
to be filed pursuant to Regulation 14A.14A. | |
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement
to be filed pursuant to Regulation 14A.14A.
PART IV.
| |
| Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)Exhibits. The following exhibits are included herein or incorporated herein by reference:
(a)
| Exhibits. The following exhibits are included herein or incorporated herein by reference:
|
Exhibit
Number
| | Description
|
| | |
3.1
Exhibit Number | Description |
| |
| 3.1 | |
| |
3.2 | | |
| |
4.1 | | |
| |
10.1+
4.2 | |
| |
| 4.3 | |
| |
| 4.4 | |
| |
| 4.5 | |
| |
| 10.1+ | |
| |
10.2+ | | |
| |
10.3+ | | |
| |
10.4+ | |
| Offer Letter by and between the Company and Kira Makagon, dated July 30, 2012
|
| 10.5+ | |
| |
10.5+
10.6+ | | Offer Letter by
|
| |
10.6+
| | Revised Employment Offer Letter by and between the Company and John Marlow, dated September 13, 2013 (filed as Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.7+
| | Offer Letter by and between the Company and Clyde Hosein, dated August 7, 2013 (filed as Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.7A+
| | Amendment to Offer Letter by and between the Company and Clyde Hosein, dated July 24, 2015 (filed as Exhibit 10.110.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed on August 5, 2015,7, 2017, and incorporated herein by reference)
. |
| |
| 10.7+ | |
10.8+
| | 2015 Bonus Plan, Appendix A 2015 H1 (filed as Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 29, 2016, and incorporated herein by reference).
|
| |
10.8A+
| | 2015 Bonus Plan, Appendix A 2015 Q3 (filed as Exhibit 10.9A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 29, 2016, and incorporated herein by reference).
|
| |
10.8B+
| | 2015 Bonus Plan, Appendix A 2015 Q4 (filed as Exhibit 10.9B to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 29, 2016, and incorporated herein by reference).
|
| |
10.9+
| | 2016 Bonus Plan, Appendix A 2016 Q1, Appendix A 2016 Q2, Appendix A 2016 Q3, and Appendix A 2016 Q4
|
| |
10.10+
| | 2013 Employee Stock Purchase Plan (filed as Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.11+
| | |
Exhibit
Number
| | Description
|
| |
10.12+
10.8+ | |
|
| |
| 10.9+ | |
| | |
10.12A+
10.10+ | | |
| | |
10.13
10.11+ | |
| |
| 10.12+ | |
| |
|
| |
Exhibit Number | Description |
| 10.13+ | |
| |
| 10.14+ | |
| |
| 10.15+ | |
| |
| 10.16 | |
| |
| 10.17 | Office Lease, dated September 25, 2014, by and between the CompanyRegistrant and Helen M. Raiser, Trustee of the JHR Marital Trust under Trust Agreement dated October 2, 1969, as amended, Helen M. Raiser, Trustee of the JHR Bypass Trust under Trust Agreement dated October 2, 1969, as amended, Harvey E. Chapman, Jr., Trustee of the Harvey E. Chapman, Jr. Living Trust under Trust Agreement dated July 17, 2006, and Colleen C. Badell, Trustee of the Colleen C. Badell Living Trust under Trust Agreement dated July 17, 2006, as tenants in common (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 3, 2014, and incorporated herein by reference). |
| |
21.1
10.18 | |
| |
| 10.19 | |
| |
| 10.20 | |
| |
| 10.21 | |
| |
| 10.22 | |
| |
| 10.23 | |
| |
| 10.24* | |
| |
| 21.1 | |
| |
23.1 | | |
| | |
24.1 | | |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
101.INS | | Inline XBRL Instance Document. |
| | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
| | |
101.DEF
Exhibit Number | Description |
| |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
+ Indicates a management or compensatory plan
* Certain identified information has been omitted pursuant to Item 601(b)(10) of Regulation S-K because such information is both (i) not material and (ii) would likely cause competitive harm to the Registrant if publicly disclosed.
(b)
| |
| (b) | Financial Statements. Our consolidated financial statements are included under Part II, Item 8 of this Annual Report on Form 10-K. |
(c)
| |
| (c) | Financial Statement Schedules. All financial statement schedules are omitted because they are not applicable or the information is included in the Registrant’s consolidated financial statements or related notes. |
PART IV.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Belmont, State of California, on this
27th26th day of February
2017.2020.RINGCENTRAL, INC.
|
| |
| RINGCENTRAL, INC. |
| |
| Date: February 26, 2020 | /s/ Vladimir Shmunis |
| Vladimir Shmunis |
| Chairman and Chief Executive Officer
(Principal Executive Officer) |
/s/ Clyde Hosein
|
Clyde Hosein
| |
Executive Vice President and Date: February 26, 2020
| /s/ Mitesh Dhruv |
| Mitesh Dhruv |
| Chief Financial Officer
(Principal Financial andOfficer) |
| |
| Date: February 26, 2020 | /s/ Vaibhav Agarwal |
| Vaibhav Agarwal |
| Chief Accounting Officer (Principal Accounting Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Vladimir Shmunis,
Mitesh Dhruv, and
Clyde Hosein,Vaibhav Agarwal, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
| | Title
| | Date
|
| | | | |
Signature | | Title | | Date |
| | | | |
| /s/ Vladimir Shmunis | | Chairman and Chief Executive Officer | | February 27, 2017 26, 2020 |
Vladimir Shmunis | | (Principal Executive Officer) | | |
| | | | |
/s/ Clyde Hosein Mitesh Dhruv | | Chief Financial Officer | | February 27, 2017 26, 2020 |
Clyde Hosein
Mitesh Dhruv | | (Principal Financial and Accounting Officer) | | |
| | | | |
/s/ Vaibhav Agarwal | | Chief Accounting Officer | | February 26, 2020 |
| Vaibhav Agarwal | | (Principal Accounting Officer) | | |
| | | | |
/s/ Michelle McKenna-DoyleMcKenna | | Director | | February 27, 2017 26, 2020 |
Michelle McKenna-Doyle McKenna | | | | |
| | | | |
/s/ Robert Theis | | Director | | February 27, 2017 26, 2020 |
Robert Theis | | | | |
| | | | |
/s/ Allan Thygesen | | Director | | February 27, 2017 26, 2020 |
Allan Thygesen | | | | |
| | | | |
/s/ R. Neil Williams | | Director | | February 27, 2017 26, 2020 |
R. Neil Williams | | | | |
EXHIBIT
INDEX
Exhibit
Number
| | Description
|
| | | | |
3.1
/s/ Kenneth A. Goldman | | Second Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on June 3, 2015, and incorporated herein by reference).
Director | | February 26, 2020 |
| Kenneth A. Goldman | | | | |
3.2
| | Bylaws of the Company (filed as Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
| | |
| /s/ Godfrey Sullivan | | Director | | February 26, 2020 |
4.1
Godfrey Sullivan | | Fourth Amended Investor Rights Agreement, dated November 23, 2012, by and among the Company and the investors listed on Exhibit A thereto (filed as Exhibit 4.3 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.1+
| | 2003 Equity Incentive Plan, as amended, and forms of stock option agreements thereunder (filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.2+
| | 2010 Equity Incentive Plan, as amended, and forms of stock option agreements thereunder (filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.3+
| | 2013 Equity Incentive Plan and forms of stock option agreements thereunder (filed as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.4+
| | Offer Letter by and between the Company and Kira Makagon, dated July 30, 2012 (filed as Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.5+
| | Offer Letter by and between the Company and Praful Shah, dated March 31, 2008 (filed as Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.6+
| | Revised Employment Offer Letter by and between the Company and John Marlow, dated September 13, 2013 (filed as Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.7+
| | Offer Letter by and between the Company and Clyde Hosein, dated August 7, 2013 (filed as Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.7A+
| | Amendment to Offer Letter by and between the Company and Clyde Hosein, dated July 24, 2015 (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 5, 2015, and incorporated herein by reference)
|
| |
| |
10.8+
| | 2015 Bonus Plan, Appendix A 2015 H1(filed as Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 29, 2016, and incorporated herein by reference).
|
| | |
10.8A+
| | 2015 Bonus Plan, Appendix A 2015 Q3 (filed as Exhibit 10.9A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 29, 2016, and incorporated herein by reference).
|
| | |
10.8B+
| | 2015 Bonus Plan, Appendix A 2015 Q4 (filed as Exhibit 10.9B to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 29, 2016, and incorporated herein by reference).
|
| |
10.9+
| | 2016 Bonus Plan, Appendix A 2016 Q1, Appendix A 2016 Q2, Appendix A 2016 Q3, and Appendix A 2016 Q4
|
| | |
10.10+
| | 2013 Employee Stock Purchase Plan (filed as Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.11+
| | Employment Letter by and between the Company and Vladimir Shmunis, dated September 13, 2013 (filed as Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1, File No. 333-190815, and incorporated herein by reference).
|
| |
10.12+
| | Offer Letter by and between the Company and David Sipes, dated June 10, 2008 (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 29, 2016, and incorporated herein by reference).
|
| | |
10.12A+
| | Supplemental Offer Letter by and between the Company and David Sipes, dated as of August 12, 2016 (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, filed on November 7, 2016, and incorporated herein by reference).
|
Exhibit
Number
| | Description
|
| |
10.13
| | Office Lease, dated September 25, 2014, by and between the Company and Helen M. Raiser, Trustee of the JHR Marital Trust under Trust Agreement dated October 2, 1969, as amended, Helen M. Raiser, Trustee of the JHR Bypass Trust under Trust Agreement dated October 2, 1969, as amended, Harvey E. Chapman, Jr., Trustee of the Harvey E. Chapman, Jr. Living Trust under Trust Agreement dated July 17, 2006, and Colleen C. Badell, Trustee of the Colleen C. Badell Living Trust under Trust Agreement dated July 17, 2006, as tenants in common (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed on November 3, 2014, and incorporated herein by reference).
|
| |
21.1
| | List of subsidiaries of the Registrant.
|
| |
23.1
| | Consent of KPMG LLP, independent registered public accounting firm.
|
| | |
24.1
| | Power of Attorney (included in signature page).
|
| |
31.1
| | Certification of Periodic Report by Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
| |
31.2
| | Certification of Periodic Report by Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
| |
32.1
| | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| |
32.2
| | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| |
101.INS
| | XBRL Instance Document.
|
| |
101.SCH
| | XBRL Taxonomy Extension Schema Document.
|
| |
101.CAL
| | XBRL Taxonomy Extension Calculation Linkbase Document.
|
| |
101.DEF
| | XBRL Taxonomy Extension Definition Linkbase Document.
|
| | |
101.LAB
| | XBRL Taxonomy Extension Label Linkbase Document.
|
| |
101.PRE
| | XBRL Taxonomy Extension Presentation Linkbase Document.
|
94
99