Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from to
Commission File Number: 001-36089
RingCentral, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
94-3322844
(I.R.S. Employer
Identification Number)
20 Davis Drive
Belmont, California 94002
(Address of principal executive offices)
(650) 472-4100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, par value $0.0001
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by a check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark 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 Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “ large accelerated filer,” “ accelerated filer”, “ smaller reporting company”, and “ emerging growth company” in Rule
12b-2 of the Exchange Act.
☒
Large accelerated filer
Non-accelerated filer
☐
Emerging growth company ☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of voting stock held by non-affiliates of the Registrant on June 29, 2018, based on the closing price of $70.35 for shares of the
Registrant’s common stock as reported by the New York Stock Exchange, was approximately $4.8 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 21, 2019, there were 69,644,199 shares of Class A common stock and 11,601,207 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 2019. 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, 2018.
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Change in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
PART III
Item 15.
Exhibits
PART IV
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PART I.
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. 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:
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our progress against short-term and long-term goals;
our future financial performance;
our anticipated growth, growth strategies, and our ability to effectively manage that growth and effect these strategies;
our success in the enterprise market;
anticipated trends, developments, and challenges in our business and in the markets in which we operate, as well as general
macroeconomic conditions;
our ability to scale to our desired goals, particularly the implementation of new processes and systems and the addition to our
workforce;
the impact of competition in our industry and innovation by our competitors;
our ability to anticipate and adapt to future changes in our industry;
our ability to predict software subscriptions revenues, formulate accurate financial projections, and make strategic business decisions
based on our analysis of market trends;
our ability to anticipate market needs and develop new and enhanced products and subscriptions to meet those needs, and our ability
to successfully monetize them;
maintaining and expanding our customer base;
maintaining, expanding, and responding to changes in our relationships with other companies;
maintaining and expanding our distribution channels, including our network of sales agents and resellers;
our success with our carrier partners;
our ability to sell, market, and support our products and services;
our ability to expand our business to medium-sized and larger customers as well as expanding domestically and internationally;
our ability to realize increased purchasing leverage and economies of scale as we expand;
the impact of seasonality on our business;
the impact of any failure of our solutions or solution innovations;
our reliance on our third-party product and service providers;
the potential effect on our business of litigation to which we may become a party;
our liquidity and working capital requirements;
the impact of changes in the regulatory environment;
our ability to protect our intellectual property and rely on open source licenses;
our expectations regarding the growth and reliability of the internet infrastructure;
the timing of acquisitions of, or making and exiting investments in, other entities, businesses, or technologies;
our ability to successfully and timely integrate, and realize the benefits of any significant acquisition we may make;
our capital expenditure projections;
the estimates and estimate methodologies used in preparing our consolidated financial statements;
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the political environment and stability in the regions in which we or our subcontractors operate;
the impact of economic downturns on us and our customers;
our ability to defend our systems and our customer information from fraud and cyber-attack;
our ability to prevent the use of fraudulent payment methods for our products;
our ability to retain key employees and to attract qualified personnel; and
the impact of foreign currencies on our non-U.S. business as we expand our business internationally.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be significantly different from any future results, performance or achievements expressed or implied by the forward-
looking statements. We discuss these risks in greater detail in the section entitled “Risk Factors” and elsewhere in this 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-looking statements, even if new information becomes available in the
future.
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ITEM 1. BUSINESS
Overview
We are a leading provider of software-as-a-service (“SaaS”) solutions that enable businesses to communicate, collaborate, and 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 smartphones and tablets. We enable
convenient and effective communications for organizations across all their locations and employees, enabling them to be more productive and 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 suit their own business workflows.
Traditionally, business communications have been comprised of a series of inflexible, expensive, and disparate systems: on-premise hardware
based private branch exchanges (“PBX systems”) which primarily support only voice on desktop phones. The rapid growth of mobile
communications 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 on-premise systems do not support. In addition, our cloud-based SaaS solutions are location and device independent and better
suited to address the needs of modern mobile and global enterprise workforces that are hard, if not impossible, for legacy on-premise systems to
match.
We believe RingCentral benefits from both the shift to mobile and distributed workforces and the migration of hardware on-premise based
communication systems to cloud-based software solutions. RingCentral’s software cloud communications platform is designed from the ground-up,
specifically for today’s mobile and distributed workforce. RingCentral is a leading provider of global enterprise cloud communications,
collaboration, and customer engagement solutions. We provide unified voice, video, on-line meetings, team messaging, digital customer
engagement, and contact center solutions. In addition, our differentiated 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 multi-national enterprises in multiple
countries.
We primarily generate revenues from the sale of software subscriptions for our cloud-based services. We focus on acquiring and retaining
our customers, adding value to their experience, and increasing their use of our products. As customer needs change, they add users to services,
upgrade to premium subscription editions, providing additional features and functionality, and expand use of other products. We continue to invest
in our direct sales force while also developing indirect sales channels to market our brand and sell our product offerings. Our indirect channel
partners include regional and global master agents, national partners, and strategic partners such as Alphabet Inc. (the parent company of Google
Inc.). We also sell our solutions through carriers including AT&T, Inc. (“AT&T”), TELUS Communications Company (“TELUS”) and BT Group plc
(“BT”).
“RingCentral” and other of our trademarks appearing in 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 Solutions
Our cloud-based business communications, collaboration, and customer engagement solutions function across multiple locations and
devices, including smartphones, tablets, PCs and desk phones, allow for communication across multiple modes, including high-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, allowing our customers to add new users
regardless of where they are located. Our 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.
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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, SMS, team messaging, collaboration,
fax, social media, and HD video web conferencing. The key benefits of our solutions include:
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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.
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 on-premise PBX systems
with a single global cloud solution.
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.
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.
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.
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 Office365, Google G-Suite, Salesforce CRM, Oracle, Okta, Zendesk, and Box, as well as customer lines-of
business applications.
Our Products
RingCentral has 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 software subscriptions of our offerings,
which include the following:
RingCentral Office. RingCentral Office, our flagship product, provides a unified 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 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 four
editions: Essentials, Standard, Premium, and Ultimate. Our Essentials Edition is designed for small organizations and includes high definition voice,
call management, mobile applications, business SMS and MMS, team messaging and collaboration, audio/video/web conferencing capabilities, and
out-of-the-box integrations with other cloud-based business applications such as Box, Dropbox, Google G-Suite, Office365, Outlook, and Salesforce.
Our Standard Edition includes Essentials functionality, together with auto-attendant, fax, and business analytics and reporting. Our Premium and
Ultimate Editions include the Standard Edition functionality, together with additional software integrations with business applications such as
Salesforce CRM, Zendesk, and others, the ability to create, develop, and deploy custom integrations using our APIs, 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. RingCentral Office customers also have available to them RingCentral
Global Office.
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Key features of RingCentral Office include:
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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.
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.
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.
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.
RingCentral Rooms and Rooms Connector bring a cloud web conferencing solution to meeting rooms, support for large meetings and
Webinars 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, 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.
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.
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.
RingCentral Contact Center. Our RingCentral Contact Center is a collaborative contact center solution that delivers omni-channel and
integrates with RingCentral Office and RingCentral Glip. RingCentral Contact Center enables businesses to transform the way they engage their
customers across all channels while effectively maximizing agent availability. The solution leverages technology from NICE inContact, Inc., and has
a comprehensive feature set that integrates with RingCentral Office. This enables businesses to build customer loyalty and increase productivity by
resolving customer issues faster and more effectively.
RingCentral Engage. 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.
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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 using RingCentral Glip for team messaging and
communications, teams can share tasks, notes, group calendars, and files. RingCentral Glip 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, Github, Google, and
others.
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 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.
Our Customers
We have a diverse and growing customer base across a wide range of industries, including financial services, healthcare, legal services, real
estate, retail, technology, insurance, construction, hospitality, and state and local government, among others. For the year ended December 31,
2018, none of our customers accounted for more than 10% of total revenue. For the years ended December 31, 2017 and 2016, revenue generated
from one of our carrier resellers, AT&T, accounted for 11%, and 14% of our total revenues, respectively.
We sell our products to enterprise customers, and small and medium-sized businesses. We define a “customer” as one individual billing
relationship for the subscription to our services, which generally correlates to one company account per customer. We continuously expand our
product offering globally and 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 onboarding
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.
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 resellers who sell our solutions, including regional and global
master agents, and partners. We also sell our solutions through carriers including AT&T, TELUS and BT. Our indirect sales channels
help broaden the adoption of our products without the need for a large direct sales force.
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.
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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. We typically have multiple releases per year, where
we constantly improve our product and introduce new capabilities and features 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 acquired Dimelo, a cloud-based digital customer engagement platform, in
October 2018, and 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 product reach.
Our research and development expenses were $101.0 million, $75.1 million, and $65.5 million in fiscal years 2018, 2017, and 2016, respectively.
Technology and Operations
Our platforms 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.
Our private cloud is served from 28 data centers located in 21 cities. We operate data centers in the United States, Canada, the United
Kingdom, the Netherlands, Switzerland, France, Australia, Singapore, and Japan. 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.
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 153 issued U.S. utility patents, which expire between 2025 and 2037. We also have 46 patent
applications pending examination in the U.S. and 15 patent applications pending 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 products and software subscriptions.
Competition
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:
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system reliability, availability, and performance;
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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
total cost of ownership.
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:
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traditional on-premise, hardware business communications providers such as Alcatel-Lucent Enterprise, Avaya Inc., Cisco Systems,
Inc., Mitel Networks Corporation, 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 (Microsoft Teams (Skype for Business)) and BroadSoft, Inc. (acquired by Cisco
Systems, Inc.) that generally license 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, 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. (with its Connect and Chime products), DialPad, Inc., Fuze, StarBlue,
Intermedia.net, Inc., J2 Global, Inc., Jive Communications, Inc., Microsoft Corporation (Microsoft Teams (Skype for Business)), Nextiva,
Inc., Twilio, Inc., Vonage Holdings Corp., West Corporation, and Zoom Video Communications, Inc.;
other large internet companies such as Alphabet Inc. (Google Voice), Facebook, Inc., Oracle Corporation, and Salesforce.com, Inc., 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., Nexmo
(acquired by Vonage Holding Corp.), and Slack Technologies, Inc., on which customers can build diverse solutions by integrating cloud
communications into business applications;
established contact center and customer relationship management providers such as Amazon.com, Inc., Aspect Software, Inc., Avaya
Inc., Five9, Inc., Genesys Telecommunications Laboratories, Inc., Serenova, LLC, Talkdesk, Inc., NewVoiceMedia (acquired by Vonage
Holdings Corp.), Salesforce.com, Inc., and Twilio, Inc.; and
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.
Employees
As of December 31, 2018, we had 1,871 full-time employees. None of our employees are covered by collective bargaining agreements. We
believe that our employee relations are good and we have never experienced any work stoppages.
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Regulatory
As a provider of communication services over the Internet, 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 Protocol (“VoIP”) services. In addition, we have certified a wholly owned subsidiary as a competitive local
exchange carrier in thirty-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 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 to 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. See the section entitled “Risk Factors” for more information.
Geographic Information
For a description of our revenue by geographic location, see Note 14 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, ir.ringcentral.com as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange
Commission, or the “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 at www.sec.gov.
The Company announces material information to the public about the Company, its products 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 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. 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.
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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 $26.2 million, $4.2 million and $16.2 million for the years
ended December 31, 2018, 2017 and 2016, respectively, and had an accumulated deficit of $235.7 million as of December 31, 2018. 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.
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 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. Any success that we may
experience in the future will depend, in large part, on our ability to, among other things:
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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 expand our business to larger customers;
successfully expand our business internationally;
successfully acquire customers on a cost-effective basis;
improve the performance and capabilities of our services, products and applications through research and development and third-party
service providers;
deliver our onsite support and professional services engagements effectively to ensure our customers’ systems are successfully
deployed;
successfully compete in our markets;
continue to innovate and expand our offerings;
continue our relationship with carriers and our 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.
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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:
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our ability to retain existing customers, resellers, and 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;
service outages or 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.
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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 Enterprise, Avaya Inc., Cisco Systems, Inc.,
Mitel Networks Corporation, NEC Corporation, Siemens Enterprise Networks, LLC, their resellers, and others; as well as companies such as
Microsoft Corporation (Microsoft Teams (Skype for Business)) and BroadSoft, Inc. (acquired by Cisco Systems, Inc.) and their resellers that license
their software. Mitel Networks became a privately held company in November 2018, enabling it to have additional flexibility to focus on transitioning
their business to cloud solutions. They could accelerate their development and sales for such solutions and become more competitive. In addition,
certain of our carriers are also our competitors. AT&T, BT and TELUS, for example, each sell 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 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. For
example, AT&T launched a competing 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, the Company and AT&T entered into a revised agreement, under which
AT&T has resumed reselling our solutions, and we expect sales of our solutions by AT&T to increase as a result, but there can be no guarantee
that AT&T will not cease reselling our solutions in the future. We also face competition from other cloud companies such as 8x8, Inc., Amazon.com,
Inc. (with its Connect and Chime products), Dialpad, Inc., Fuze, StarBlue, Intermedia.net, Inc., J2 Global, Inc., Jive Communications, Inc., Microsoft
Corporation (Microsoft Teams (Skype for Business)), Nextiva, Inc., Twilio, Inc., Vonage Holdings Corp., West Corporation, and Zoom Video
Communications, Inc., which recently 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 currently, 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), Facebook, Inc., Oracle Corporation, and 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. We also compete against providers of
communications platform as a service solutions and messaging software platforms with APIs such as Twilio, Inc., Nexmo (acquired by Vonage
Holdings Corp.) and Slack Technologies, Inc., on which customers can build diverse solutions by integrating cloud communications into business
applications. These vendors leverage free, and usage and user based paid services that over time could result in disincentives for customers to
switch to RingCentral. In order to compete, we must successfully enlist developers to write applications for our marketplace and ensure that these
applications have high quality, customer appeal and value. Efforts to compete with these application marketplaces may increase our cost of revenue
and lower our operating margins. In addition, in 2016 we began selling a contact center solution. 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.,
Genesys Telecommunications Laboratories, Inc., Serenova, LLC, Talkdesk, Inc., NewVoiceMedia (acquired by Vonage Holdings Corp.),
Salesforce.com, Inc., and 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. Demand 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, 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 us to decrease our prices, slow
our growth, increase our customer turnover, reduce our sales, or decrease our market share. The adverse impact of a shortfall in our revenues may
be magnified if we are unable to adjust spending adequately to compensate for such shortfall.
14
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, including CenturyLink, Inc., Bandwidth.com, Inc., Inteliquent,
Inc. and Verizon Communications, Inc. in North America, Iristel Inc. and Comwave Networks Inc. in Canada, Colt Technology Services and British
Telecommunications plc in Europe, and several others throughout the world, to deliver our subscriptions over their networks. Our third-party
network service providers provide access to their Internet protocol (“IP”) networks and public switched telephone networks (“PSTN”), and provide
call termination and origination services, including 911 emergency calling in the U.S. and equivalent services in Canada, the U.K., Asia, Europe,
Latin America, and the Middle East, 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 also obtain certain connectivity and network services from
our wholly owned subsidiary, RCLEC, Inc. (“RCLEC”) in certain geographic markets; however, RCLEC also uses the infrastructure of third-party
network service providers to deliver its services. 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, Bandwidth.com for our texting capabilities, and NICE inContact, Inc. for our contact center capabilities.
We do not, and may not in the future, have long-term contracts with certain of these third-party providers, including Zoom Video Communications
and Bandwidth.com. 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, carriers, or liability for failure to
meet service level agreements, and may seriously harm our business and results of operations.
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 three data center hosting facilities located in northern California, northern Virginia,
and Chicago, Illinois, where we lease space from Equinix, Inc. We serve our customers in the U.K. and other European countries from two third-
party data center hosting facilities in Amsterdam, the Netherlands, and Zurich, Switzerland and we serve the customers of Dimelo SA (“Dimelo”)’s
digital customer engagement platform from a third-party data center hosting facility in Paris, France. We also use third-party co-location facilities in
Canada, the U.K., Australia, Switzerland, Singapore, Brazil, and Japan to serve our customers in these regions. Our collaboration solution,
RingCentral Glip, is hosted by Amazon Web Services, Inc. (“AWS”), and our contact center solution is hosted by NICE inContact’s third party data
center facilities and AWS. In addition, RCLEC uses third-party co-location facilities to provide us with network services at 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 infrastructure and all of our North American customers’ data is
currently replicated in near real-time at two of our 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. 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.
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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 (“DSL”) connection. Increasing numbers of users and increasing bandwidth requirements
may degrade the performance of our subscriptions and applications due to capacity constraints and other Internet infrastructure limitations. As our
customer base grows and their usage of communications capacity 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 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. Frequent or persistent
interruptions could cause current or potential users to believe that our systems or subscriptions 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, or LTE, to use our subscriptions 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 products 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 January 4, 2018, the FCC released an order reclassifying broadband Internet access as an information service, subject to certain
provisions of Title I of the Communications Act. The order eliminates rules adopted in 2015 that prohibited broadband providers from blocking,
impairing, or degrading access to legal content, applications, services, or non-harmful devices, or 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 does require broadband providers to
disclose publicly accurate information regarding network management practices, performance characteristics, and commercial terms of their
broadband Internet access services sufficient to enable consumers to make informed choices regarding the purchase and use of such services and
entrepreneurs and other small businesses to develop, market, and maintain Internet offerings. The rules require that such disclosure be made via a
publicly available, easily accessible website or through transmittal to the FCC. The order also shifts regulatory oversight of broadband providers to
the Federal Trade Commission, under its authority to prevent unfair or deceptive acts or practices. The new rules went into effect on June 11,
2018. The FCC decision was appealed and oral argument was held on February 1, 2019 before the U.S. Court of Appeals for the District of Columbia
Circuit. In addition, Congress may take action to curtail or modify the FCC’s new broadband rules. On September 30, 2018, California enacted the
California Internet Consumer Protection and Net Neutrality Act of 2018, making California the fourth state to enact a state-level net neutrality law
since the FCC repealed its nationwide regulations, mandating that all broadband services in California must be provided in accordance with state
net neutrality requirements. The U.S. Department of Justice has sued to block the law going into effect, and California has agreed to delay
enforcement until the resolution of the FCC’s repeal of the federal rules. A number of other states are considering legislation or executive actions
that would regulate the conduct of broadband providers. We cannot predict whether the FCC order or state initiatives will be modified, overturned,
or vacated by legal action of the court, federal legislation, or the FCC. Under the new FCC rules, broadband internet 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.
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Most of our customers may terminate their subscriptions for our service at any time without penalty, and increased customer turnover, or costs
we incur to retain 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 enter into long-term contracts with larger customers, our customers generally 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 to 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.
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Most of our revenues today come from small and medium-sized businesses, which may have fewer financial resources to weather an economic
downturn.
Most 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, 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 our indirect sales channel 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, 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, AT&T launched a competing 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, the Company and AT&T entered into a revised
agreement, under which AT&T has resumed reselling our solutions, and we expect sales of our solutions by AT&T to increase as a result, but there
can be no guarantee that AT&T will not cease reselling our solutions in the future. If AT&T will cease reselling our solutions, our revenues and
growth could be significantly and adversely affected. If we fail to maintain relationships with our resellers and carriers, fail to develop relationships
with new resellers and carriers in new markets or expand the number of resellers and carriers in our network in existing markets, or fail to manage,
train, or provide appropriate incentives to our existing resellers and carriers, or if our resellers and carriers 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 BT or TELUS, or
if these carriers reduce resources committed to reselling the service, our results of operations may suffer.
Recruiting and retaining qualified resellers and carriers 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 and carriers may not be willing to invest
the time and resources required to train their staff to effectively market our subscriptions.
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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 products 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.
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 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. 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, video, team messaging, collaboration, conferencing, contact center, and
fax 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.
19
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 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 (“DoS/DDoS”) 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, service outages, data breach 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 Amazon Web Services, and some of our products allow users to store files, tasks,
calendar events, and messages indefinitely on our service. 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 also 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 established
and implemented a vulnerability disclosure program to address third party reports. 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’ public and private computers, tablets, mobile
devices, software, data networks, or voice networks. If there is a security weakness or vulnerability in our or our vendors’ 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 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 fraudulently 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 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, 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. 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.
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information. A cybersecurity breach could expose us
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
indemnity obligations,
government investigations, contractual liability relating to contractual security obligations 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 us as described
above. A cybersecurity breach of our partners’ or vendors’ systems can result in similar actual or perceived impacts.
litigation,
to
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 any 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 cyber-security
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 not being in compliance with such changing laws and regulations.
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 poor relations between the U.S. and Russia and sanctions by the
U.S. and the European Union (“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.
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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 recently
and in the past been sued by third parties claiming infringement of their intellectual property rights and we may be sued for infringement from time
to time in the future. Also, in some instances, we have agreed to indemnify our customers, resellers, and carriers for expenses and liability resulting
from claimed intellectual property infringement by our products. 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 receive, 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 customers, 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 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, or any of our products, 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:
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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 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.
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We also rely, in part, on patent law to protect our intellectual property in the U.S. and internationally. Our intellectual property portfolio
includes 153 issued U.S. utility patents, which expire between 2025 and 2037. We also have 46 patent applications pending examination in the U.S.
and 15 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 rapid development of and changes in
the technology and solutions offered. As is typical of a new and rapidly evolving industry, the demand for, and market acceptance of, these
solutions 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.
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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:
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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.
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, or 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, many of our customers 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 make
to our subscriptions upset these customers, their blogging could negatively affect our brand and reputation. Complaints or negative publicity about
our subscriptions or customer service could materially and adversely impact our ability to attract and retain customers and our business, financial
condition and results of operations.
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 people 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 are referred to in the industry as
chargebacks, from the credit card companies from claims that the customer did not authorize the 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
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may change merchant standards, including data protection standards, required to utilize their services from time to time. We are compliant with the
Payment Card Industry Data Security Standard (“PCI DSS”) in the United States, Canada, and the U.K. If we fail to maintain compliance with current
merchant standards, such as PCI DSS, 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 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 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 (“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 from 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 or consultants into disclosing customer credentials and other account information. Communications fraud
can result in unauthorized access to customer accounts and customer data, unauthorized use of customers’ services, charges to customers for
fraudulent usage and expense 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, could have a material
adverse effect on our results of operations, financial condition, and ability to grow our business.
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 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 and upgrade our current
internally developed billing system and enable automation of certain manual billing processes. Our current internally developed billing system
requires us to process an increasing number of invoices manually, which could result in billing errors. 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 report our financial
performance on a timely basis during the implementation period, 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 our ability to commercialize our subscriptions.
We use open source software in our platform on which our subscriptions operate. There is a risk that the owners of the copyrights in such
software may claim that such licenses impose unanticipated conditions or restrictions on 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 offering our subscriptions in the event re-engineering cannot be accomplished on a
timely basis or at 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.
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We are in the process of expanding our international operations, which exposes us to significant risks.
To date, we have not generated significant revenues from outside of the U.S., Canada, and the U.K. However, we already have significant
operations outside these countries, including software development and information technology operations in Russia and China, software
development and quality assurance operations in Ukraine, and sales and marketing operations in the Philippines. In addition, Dimelo, our recently
acquired digital customer engagement platform provider, is based in France. We have also recently begun selling our solutions to customers in
other countries in the EU and in Australia, and we expect to grow our international presence in the future, including through the expansion of our
Global Office solution and sales of our solutions to customers internationally. The future success of our business will depend, in part, on our ability
to expand our operations 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 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,
including:
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our ability to comply with differing and evolving technical and environmental standards, data protection and telecommunications
regulations, and certification requirements outside 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;
restrictions on travel to or from countries in which we operate or inability to access certain areas;
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;
changes in diplomatic and trade relationships, including tariffs and other non-tariff barriers, such as quotas and local content rules;
tariffs imposed by the U.S. on goods from other countries and tariffs imposed by other countries on U.S. goods, including the tariffs
recently implemented and additional tariffs that have been proposed by the U.S. government on various imports from China, Canada,
Mexico and the EU, and by the governments of these jurisdictions on certain U.S. goods, and any other possible tariffs that may be
imposed on services such as ours or the phones that we sell, the scope and duration of which, if implemented, remain uncertain;
U.S. government trade restrictions, including those which may impose restrictions, including prohibitions, on the exportation,
reexportation, sale, shipment or other transfer of programming, technology, components, and/or services to foreign persons;
our ability to comply with 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, particularly in light of the referendum in favor of the U.K. leaving the EU (commonly referred to
as “Brexit”) vote and other recent political developments, which could increase the price 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;
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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 predominantly 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 third-party
software development operations in Russia and our development operations in China;
political or social unrest, economic instability, conflict or war in a specific country or region, such as the events over the last few years
in the Ukraine, 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, which could have an adverse
impact on our third-party software development and quality assurance operations there, and
deterioration of political relations between the U.S. and Canada, the U.K. and the EU, which could have a material adverse effect on our
sales and operations in these countries.
Our failure to manage any of these risks successfully could harm our future international operations and our overall business.
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, a referendum was held on the U.K.’s membership in the EU the outcome of which was a vote in favor of leaving the EU,
commonly referred to as Brexit. The Brexit vote created an uncertain political, economic, and regulatory environment in the U.K. and potentially
across other EU member states, which may last for a number of months or years.
The date of the U.K.’s exit from the EU is currently scheduled for March 29, 2019, and the terms of the exit remain uncertain as the U.K. has
not approved the terms that were negotiated with the EU. It is uncertain whether the date of the exit will be extended. There is a risk of the U.K.'s exit
from the EU being effected without mutually acceptable terms being agreed and that any terms of such exit could adversely affect our operating
results, financial condition and prospects. Even if a last minute negotiated settlement is achieved between the EU and the U.K. for the terms of the
exit (with or without the date of the exit being extended), the effect of uncertainty of the last two years could adversely affect our operating results,
financial conditions 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
the U.K.’s exit from the EU, if any, it is possible that there may be adverse practical and/or operational implications on our business.
Brexit has also created uncertainty with regard to the regulation of data protection in the U.K. In the immediate term, the U.K. will remain
bound by the GDPR following its exit from the EU since the U.K. government has implemented the Data Protection Act of 2018 that implements the
GDPR in U.K. domestic 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 protection laws or regulations will develop in the medium to longer term, and how data transfers to and
from the U.K. will be regulated. The EU Commission has announced that the U.K. will become a “third country” once it has exited the EU,
notwithstanding the U.K.’s stated intention to transpose all existing EU law into its domestic law.
Consequently, no assurance can be given as to the overall impact of the Brexit vote and, in particular, no assurance can be given that our
operating results, financial condition and prospects would not be adversely impacted by the result.
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Our business could be negatively impacted by changes in the United States political environment.
The 2016 presidential election in the United States has resulted in significant uncertainty with respect to, and has and could further result in
changes in, legislation, regulation, and government policy at the federal level, as well as the state and local levels, and the results of the 2018
congressional elections may result in further significant uncertainty and changes. 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 telecommunications laws and regulations, trade agreements,
immigration policy, import and export regulations, tariffs and customs duties, income tax regulations and the federal tax code, public company
reporting requirements, and antitrust enforcement. Further, an extended federal government shutdown resulting from failing to pass budget
appropriations, adopt continuing funding resolutions or raise the debt ceiling, and other budgetary decisions limiting or delaying deferral
government spending, may negatively impact U.S. or global economic conditions, including corporate and consumer spending, and liquidity of
capital markets. To the extent changes in the political environment have a negative impact on us or on our markets, our business, results of
operation and financial condition could be materially and adversely impacted in the future.
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.
Federal Regulation
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 (“USF”) contributions, Enhanced 911 (“E-911”), outage
reporting, and other requirements. 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 (“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 (“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 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:
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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
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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 regarding call completion 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, which are considered to be nomadic because they can be
used from any broadband connection. However, a small number of state regulatory commissions 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 providers to be certified, a number of states require us to register as a Voice 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 some state public utility commissions will continue their attempts to apply state telecommunications
regulations to Internet voice communications subscriptions like ours.
Our CLEC subsidiary’s 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’s services and provide rates for those
services. We are also required to comply with state regulations that vary from state to 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.
Both we and our CLEC subsidiary 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.
International Regulation
As we expand internationally, we may be subject to telecommunications, consumer protection, data protection, emergency call services, and
other laws, regulations, taxes, and fees 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, the U.K., Australia, and several
European countries. We also offer our Global Office solution, enabling our multinational customers in the U.S., U.K., Canada, and other 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 (“CRTC”). We are registered with the CRTC as a reseller of telecommunications services and have been issued a
basic international telecommunications services (“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. In addition, the CRTC has mandated that all Internet voice communications providers, such as our company, implement
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authentication and verification of caller ID for all calls received in Canada by March 31, 2019, and once implemented, we will be required to offer call
traceability to customers for all calls. The CRTC recently mandated that providers of voice telecommunications service in Canada, like our service,
provide universal network call blocking, where the call identification does not conform to established numbering plans, by December 2019 unless
prior to this date alternate call filtering services are offered in the alternative. 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 (“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; responding to warrants and orders for
interception and other forms of surveillance; providing access to standard caller line identification facilities without charge; 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 product and service offerings or prevent us from offering or providing our products 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 products 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 products and subscriptions in those
countries notwithstanding the illegality or embargo. We may be subject to penalties or governmental action if customers continue to use our
products 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.
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 products and subscriptions, and expose us to
liability.
In the course of providing its service, RingCentral collects, stores, and processes 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 (including the GDPR in the EU), 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. Failure to comply with obligations and restrictions related to data
privacy and security in any jurisdiction in which we operate could subject us to lawsuits, fines, criminal penalties, statutory damages, consent
decrees, injunctions, adverse publicity, and other losses that could harm our business.
The GDPR, which came into force in May 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 harm and (ii) the right of individual member states to impose additional sanctions over and above the administrative
fines specified in the GDPR.
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At present, we use the EU-U.S. and Swiss-U.S. Privacy Shield framework and EU Standard Contractual Clauses (“Model Clauses”) to protect
data exports between the EEA and U.S. The EU-U.S. Privacy Shield and the Model Clauses are subject to ongoing legal challenges. Any or all of
these court proceedings may result in a ruling that the industry-standard measures we, and other companies, have taken are no longer
sufficient. Additionally, it is possible that the EU-U.S. Privacy Shield or the Model Clauses may need to be updated by the European Commission,
the Swiss Administration, and Department of Commerce to take into account the GDPR. Should any of these prove to be the case, we will need to
take any necessary and additional measures to ensure compliance with EU law with respect to our transfers of personal data from the EEA to the
U.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.
Additionally, although the U.K. has passed a Data Protection Act that substantially implements the GDPR, the future of cross-border data
flows following the U.K.’s anticipated exit from the EU in Brexit is uncertain. As such, 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. Implementing these solutions may take time and, if not achieved promptly before or immediately following Brexit, may result in disruption
to our business and expose us to potential regulatory fines and civil claims.
The European Commission has also proposed new legislation to enhance privacy protections for users of communications services and to
enhance protection for individuals against online tracking technologies. The proposed legislation, the Regulation on Privacy and Electronic
Communications (the “e-Privacy Regulation”), is currently undergoing legislative scrutiny. When introduced, the e-Privacy Regulation is expected
to impose greater potential liabilities upon communications service providers, including potential fines for the most serious of breaches of the
greater of € 20 million or 4% of worldwide annual turnover. New rules introduced by the e-Privacy Regulation are likely to include enhanced consent
requirements for communications service providers in order to use communications content and communications metadata to deliver value added
services, as well as restrict the use of data related to corporations and other non-natural persons. These restrictions, if adopted, may affect our
future business growth in the EU.
Other foreign jurisdictions also have currently in-effect privacy and data protection laws and regulations that may impact our growth and
costs. For example, Canadian anti-spam legislation (“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 CAD 10 million, and the CRTC has begun actively enforcing the law and penalization non-compliant organizations. In June 2017,
the government of Canada announced the suspension of the private right of action under CASL that was originally scheduled to come into force on
July 1, 2017. During 2017, a committee of the Parliament of Canada completed a public process to review the scope, substance and enforcement of
the CASL. Following the review, several recommendations were made to provide for further clarification of certain terms under CASL and for
the government of Canada to reconsider implementing the private right of action that was suspended earlier in 2017. No decision has yet been made
by the government of Canada regarding any changes to CASL or the implementation of the private right of action. Compliance with, and other
burdens imposed by, current obligations and restrictions as well as those occasioned by future changes could increase the cost of our operations.
Similarly, in Australia, the sending of commercial electronic messages without prior consent is prohibited under Australia’s Spam Act 2005
(Cth), as are various activities around the development, sale and use of software-harvested contact lists. Violations of this legislation are subject to
penalties of up to AUD 2.1 million for repeat infringers, and the regulator, the Australian Communications and Media Authority (ACMA), is active
in monitoring market behavior and prosecuting infringements. 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 CAD
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.
Such obligations and restrictions, in force since November 1, 2018, 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.
Similarly, Australia’s Privacy Act 1988 (Cth) was amended in February 2018 to introduce mandatory data breach notification requirements
providing that where personal information is lost or is subject to unauthorized access or disclosure, and that would be likely to lead to serious harm,
then affected individuals and the Information Commissioner must be notified within 30 days. A failure to notify can result in an enforceable
undertaking and penalties of up to AUD 2.1 million.
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More generally, data privacy is an area of increasing public awareness and concern in Australia. In 2014, the Privacy Act was amended to
introduce the 13 Australian Privacy Principles that govern the collection, storage, use and disclosure of personal information, and set out
restrictions about the use of personal information for direct marketing and disclosure of personal information of Australians overseas. Under these
principles, the acts of an overseas recipient of personal information are taken to be the acts of the party in Australia who disclosed the information.
Non-compliance with these principles is subject to penalties of up to AUD 2.1 million.
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 recently enacted the California Consumer Privacy Act (“CCPA”), which is sweeping legislation with some similarities
to the GDPR. It is scheduled to come into effect on January 1, 2020. The CCPA was amended on September 23, 2018, but without substantial
modification of its fundamental obligations. If CCPA is not further amended before the implementation date, we will be 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 would be able to seek substantial monetary penalties and injunctive relief in the event of our non-
compliance with the CCPA after its effective date. The CCPA also allows for private lawsuits from Californians in the event of certain data breaches.
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 or California models.
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 failure by us 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.
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We have implemented policies and procedures to assist us in complying with applicable privacy-related laws and regulations and our
contractual obligations and will develop new policies and procedures as new legal obligations arise. However, we cannot provide assurance
regarding how these regulations will be interpreted as they apply to our operations. 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 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-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 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. 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. 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 (“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.
In Canada, 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 accessed from applications 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. In
2017, the CRTC mandated that all telecommunications service providers, including Internet voice communications providers, are to be in a position
to support Next Generation 911 (“NG9-1-1”) services by June 30, 2020 following changes to be made to the networks of incumbent telephone
companies necessary to deliver the NG9-1-1 services. The implementation of the changes necessary to offer NG9-1-1 services may be costly and
may make our service less competitive.
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In connection with the regulatory requirements that we provide E-911/999/112 to all of 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 are not able to confirm that the service is used at the physical addresses provided by our customers, and because
customers may provide an incorrect location or use the subscriptions in locations that differ from the registered location without providing us with
the updated information, it is possible that E-911/999/112 calls may get routed to the wrong PSAP. If E-911/999/112 calls 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. It is possible that in the future the FCC may require interconnected
VoIP providers to automatically update subscriber location information, for purposes of routing 911 calls.
We could be subject to enforcement action by the FCC, the CRTC or Ofcom for our customer lines that cannot provide E-911/999/112 service
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 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. 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.
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. 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 in
English, French, German, and Spanish. 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 multiple 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 emergency services calls 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 emergency 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 databases for the purpose of deploying and operating E-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 rely on the underlying cellular or wireless carrier to
provide 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.
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We depend largely on the continued services of our senior 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, 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; Fort Lauderdale, Florida; London, England, Paris, France, Xiamen, China, and
Sydney, Australia, 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. Many of 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 their 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 recent acquisitions of Dimelo and Connect First and our acquisition of Glip, Inc. (“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:
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the potential failure to achieve the expected benefits of the combination or acquisition;
unanticipated costs and liabilities;
difficulties in integrating new products 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 the acquired businesses;
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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;
the potential liability or expenses associated with new types of data stored, existing security obligations or liabilities, unknown product
weaknesses, inadequate 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 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:
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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 affect our results of operations.
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Changes in U.S. and foreign tax laws could have a material adverse effect on our business, cash flow, results of operations or financial
conditions.
We are subject to tax legislation in several countries; changes in tax laws or challenges to our tax positions could adversely affect our
business, results of operations, 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 (the “Tax Act”), 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, 2018, we had federal and state net operating loss carryforwards (“NOLs”) of $428.7 million and $344.8 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 (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, 2018. While management concluded internal control over financial reporting was effective as of
December 31, 2018, 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 (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 CenturyLink, 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 CenturyLink, 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.
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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 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 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 rely on third-party hardware and software that may be difficult to replace or which could cause errors or failures of our subscriptions.
We rely on purchased or leased hardware and software licensed from third parties in order to offer our subscriptions. In some cases, we
integrate third-party licensed software components into our platform. This hardware and 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 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 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.
38
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 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 and ABP Tech to configure and deliver the phones that we sell to our customers.
Accordingly, we could be adversely affected if our suppliers or Westcon and ABP Tech fail to maintain competitive phones or configuration
services, or fail to continue to make them available on attractive terms, or at all.
If Westcon and ABP Tech are unable to deliver phones of acceptable quality, or if there is a reduction or interruption in Westcon’s and ABP
Tech’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 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: Cisco
Systems, Inc., Polycom, Inc., and Yealink Network Technology Co, Ltd. 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. 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 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 affected.
39
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 stock has been and may continue to be highly volatile, and investors in our Class A
common 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 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 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, 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 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. 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, a number of
co-location facilities are located in Asia and Australia, 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. Global warming trends are contributing to an increase in erratic
weather patterns globally and intensifying the impact of certain types of catastrophes. 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.
40
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. For example, in May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, which superseded nearly all prior
revenue recognition guidance effective as of January 1, 2018. The new standard permits adoption either by using (i) a full retrospective approach for
all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new
standard recognized at the date of initial application and providing certain additional disclosures. We adopted the new revenue guidance as of
January 1, 2018, utilizing the full retrospective transition method. Under the new standard, we 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 our total revenues has not been material. However, the most significant impact of adopting the new standard primarily related to the deferral of
sales commissions, which previously were expensed as incurred and to the incremental disclosure requirements. Adoption of the new standard
resulted in changes to our accounting policies for revenue recognition, trade and other receivables, and deferred commissions.
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.
Risks Related to Our Class A Common Stock, Our Convertible Senior Notes Due 2023 and Our Charter Provisions
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 has 10 votes per share, and our Class A common stock has one vote per share. Stockholders who hold shares of
Class B common stock, including our founders, previous investors and our executive officers, employees and directors and their affiliates, together
hold approximately 63% 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 all
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 stock collectively will continue to control all 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-one voting ratio
between our Class B and Class A common stock, the holders of our Class B common 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 stock represent at least 10% of all outstanding shares of our
Class A and Class B common stock. This concentrated control will limit your ability to influence corporate matters for the foreseeable future, and, as
a result, the market price of our Class A common stock could be adversely affected.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, which will
have the effect, over time, of increasing the relative voting power of those holders of Class B common 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 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. As a board member, Mr. Shmunis owes a
fiduciary duty 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 entitled to vote his shares in his own interests, which may not always be in the
interests of our stockholders generally.
41
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 stock appreciates and the investor sells its shares at a profit. There is no guarantee that the price of our
Class A common 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, our stock price and trading volume may decline.
The trading market for our Class A common 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 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 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 convertible senior notes due 2023 in cash or to repurchase the
notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the
notes.
Holders of our 0% convertible senior notes due 2023 (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 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. A default under such indenture or the fundamental change itself could also
lead to a default under agreements governing our future indebtedness. Moreover, the occurrence of a fundamental change under the indenture
governing the Notes could constitute an event of default under any such agreement. If the payment 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.
The capped call transactions in connection with the pricing of the Notes may affect the value of the Notes and our Class A common stock.
In connection with the pricing 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.
42
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.
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:
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•
•
•
•
•
•
•
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 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 Chairman 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 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Belmont, California, and consists of approximately 110,000 square feet of office space, under a lease
that expires in July 2021.
We also lease offices in Denver, Colorado; Charlotte, North Carolina; Fort Lauderdale, Florida; London, England; Xiamen, China; Kwun
Tong, Hong Kong; Paris, France; and 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; Tokyo, Japan, and Singapore. We
expect to further expand our facilities and datacenter capacity internationally during the year ending December 31, 2019. We believe that we will be
able to obtain additional space at other locations at commercially reasonable terms to support our continuing expansion.
ITEM 3.
LEGAL PROCEEDINGS
Information with respect to this item may be found in Note 9 Commitment and Contingencies in the accompanying notes 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,
under “Legal Matters” which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
43
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.
PART II
Our Class B common stock is not listed or traded on any stock exchange.
Dividend Policy
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.
Stockholders
As of February 20, 2019, there were 25 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
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.
44
Stock Performance Graph
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 compares the cumulative total return on our Class A common stock with that of the Russell 2000 Index and the Nasdaq
Computer Index. The period shown commences on the last trading day of the Company’s fiscal year ended December 31, 2013, and ends on
December 31, 2018, the end of our last fiscal year. The graph assumes $100 was invested at the close of market on December 31, 2013 in the Class A
common stock of RingCentral, Inc., or on December 31, 2013 in the Russell 2000 Index and the Nasdaq Computer Index, and assumes the
reinvestment of any dividends. 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.
45
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following 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 Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results in any future period. The
consolidated statements of operations for the years ended December 31, 2018, 2017, and 2016, are derived from our audited consolidated financial
statements. The consolidated balance sheet data as of December 31, 2018 and 2017 are derived from our audited consolidated financial statements.
The consolidated balance sheet data as of December 31, 2016 has been derived from our audited consolidated financial statements adjusted for the
adoption of ASC 606, Revenue from Contracts with Customers (Topic 606). The consolidated statements of operations and consolidated balance
sheet data as of and for the years ended December 31, 2015 and 2014 are derived from our audited consolidated financial statements, which have not
been adjusted for ASC 606.
Year ended December 31,
2018
2017*
2016*
(in thousands, except per share amounts)
2015
2014
Consolidated Statements of Operations
Revenues
Software subscriptions
Other
Total revenues
Loss from operations
Net loss
Net loss per common share
Basic and diluted
$
$
$
612,888 $
60,736
673,624
(16,436 )
(26,203 ) $
465,254 $
38,363
503,617
(5,338 )
(4,204 ) $
356,562 $
23,874
380,436
(12,868 )
(16,225 ) $
271,245 $
24,983
296,228
(30,932 )
(32,099 ) $
200,098
19,789
219,887
(45,205 )
(48,340 )
(0.33 ) $
(0.06 ) $
(0.22 ) $
(0.46 ) $
(0.72 )
Weighted-average number of shares used in computing net loss
per share
Basic and diluted
79,500
76,281
72,994
70,069
66,818
* Includes the impact of adoption of Topic 606 in 2018. Periods prior to 2016 have not been revised.
Consolidated Balance Sheet Data (in thousands)
Cash and cash equivalents
Short-term investments
Working capital surplus
Total assets
Deferred revenue
Debt and capital lease obligations
Total stockholders' equity
2018
2017*
2016*
2015
2014
As of December 31,
$
$
$
$
$
$
$
566,329
—
508,155
894,326
88,527
370,324
317,609
$
$
$
$
$
$
$
181,192
—
139,602
359,814
62,917
—
228,346
$
$
$
$
$
$
$
160,355
—
100,220
286,297
44,618
15,021
164,248
$
$
$
$
$
$
$
137,588
—
90,472
214,813
36,657
19,040
110,132
$
$
$
$
$
$
$
113,182
28,479
83,513
188,337
25,586
25,621
96,505
* Includes the impact of adoption of Topic 606 in 2018. Periods prior to 2016 have not been revised.
46
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this report. As discussed in the section entitled “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 materially from those expressed or implied by such
forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this
report, particularly in the section entitled “Risk Factors.”
Overview
We are a leading provider of software-as-a-service (“SaaS”) solutions that enable businesses to communicate, collaborate, and 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 organizations across all their locations and employees, enabling them to be more productive and 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, configured
and managed easily. Through our platform, we enable third-party developers and customers to integrate our solution with leading business
applications to suit their own business workflows.
RingCentral has a portfolio of cloud-based offerings that are subscription based, made available at different monthly rates, varying by the
specific functionalities, services, and number of users. We primarily generate revenues from the sale of software subscriptions to our offerings.
Our subscription plans have historically had monthly or annual contractual terms, although we also have subscription plans with multi-year
contractual terms, generally with larger customers. We believe that this flexibility in contract duration is important to meet the different needs of our
customers. For the years ended December 31, 2018, 2017, and 2016, software subscriptions revenues accounted for 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 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.
We make significant upfront investments to acquire customers. We continue to invest 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 resellers who sell our
solutions. We also sell our solutions through carriers including AT&T, Inc. (“AT&T”), TELUS Communications Company (“TELUS”) and BT
Group plc (“BT”). 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. As of December 31, 2018, we had customers from a range of industries, including financial services, healthcare,
legal services, real estate, retail, technology, insurance, construction, hospitality, and state and local government, among others. For the years
ended December 31, 2018, 2017 and 2016, 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 $673.6
million, $503.6 million and $380.4 million, in the years ended December 31, 2018, 2017 and 2016, respectively, representing year-over-year increases of
34% and 32%, 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 $26.2 million, $4.2 million, and $16.2 million in the years ended December
31, 2018, 2017 and 2016, respectively.
47
Key Business Metrics
In addition to United States generally accepted accounting principles (“U.S. 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”) 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 ARR equals our Monthly Recurring Subscriptions multiplied by 12. Our
Monthly Recurring Subscriptions equals the monthly value of all customer recurring charges contracted at the end of a given month. For example,
our Monthly Recurring Subscriptions at December 31, 2018 were $60.5 million. As such, our ARR at December 31, 2018 was $725.8 million compared
to $546.4 million at December 31, 2017.
RingCentral Office Annualized Exit Monthly Recurring Subscriptions
We calculate our RingCentral Office Annualized Exit Monthly Recurring Subscriptions (“Office ARR”) in the same manner as we calculate
our ARR, except that only customer subscriptions from RingCentral Office, RingCentral Contact Center, and RingCentral Engage customers are
included when determining Monthly Recurring Subscriptions for the purposes of calculating this key business metric. We believe that trends in
revenue with respect to these products are 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 Office ARR at December 31, 2018 was $644.1 million compared to $466.2
million at December 31, 2017.
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 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 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, 2018 were as follows (dollars in millions):
Net Monthly Subscription Dollar Retention Rate
Annualized Exit Monthly Recurring Subscriptions
RingCentral Office Annualized Exit Monthly
Recurring Subscriptions
December 31,
2018
September 30,
2018
June 30,
2018
March 31,
2018
December 31,
2017
>99%
725.8 $
>99%
673.6 $
>99%
629.6 $
>99%
589.0 $
>99%
546.4
644.1 $
591.7 $
548.0 $
509.2 $
466.2
$
$
48
Components of Results of Operations
Revenues
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 product 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 five 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.
We also generate revenues through sales of our subscriptions and products by resellers and carrier partners. When we control 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 control is evidenced when, among other things, we take responsibility for delivery of the service or
products, establish pricing of the arrangement, and assume inventory risk. When a reseller assumes the majority of these factors, we record the
associated revenue at the net amount remitted to us by the reseller.
“Other revenues” includes product revenues from the sale of pre-configured phones, phone rentals, and professional services. Product
revenue is recognized when the product has been delivered to the customer. Professional services revenue is recognized as services are delivered.
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 included 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. We recognized commission revenues for this arrangement as we were the agent of these sales. Sales of phones that were provided free
or significantly discounted to customers were excluded from the agency model. We recognized revenues and costs from these sales as we were the
primary obligor and had latitude in determining pricing. 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 phone sales model
whereby we no longer serve as an agent for referring phone sales to Westcon and we no longer receive commissions for our services. Under the
direct phone sales model, we recognize revenues and costs for phone sales as we are the primary obligor for order fulfillment, have latitude in
establishing pricing, and assume general inventory risk.
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.
Cost of other revenue is comprised primarily of the cost associated with the purchase of phones, cost of professional services, and allocated
costs of facilities and information technology.
Operating Expenses
We classify our operating expenses as research and development, sales and marketing, and general and administrative expenses.
49
Our research and development efforts are focused on developing new and expanded features for our products, 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, 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-imposed taxes, and the costs of legal matters, business acquisition costs, and loss contingencies. 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.
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):
2018
Year ended December 31,
2017
*As adjusted
2016
*As adjusted
Revenues
Software subscriptions
Other
Total revenues
Cost of revenues
Software subscriptions
Other
Total cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other income (expense), net
Interest expense
Other income (expense), net
Other income (expense), net
Loss before provision for income taxes
Provision for income taxes
Net loss
*
Adjusted for adoption of Topic 606.
$
$
612,888 $
60,736
673,624
109,454
47,675
157,129
516,495
101,042
329,116
102,773
532,931
(16,436 )
(16,102 )
6,475
(9,627 )
(26,063 )
140
(26,203 ) $
465,254 $
38,363
503,617
89,193
32,078
121,271
382,346
75,148
240,223
72,313
387,684
(5,338 )
(99 )
1,491
1,392
(3,946 )
258
(4,204 ) $
356,562
23,874
380,436
73,470
18,741
92,211
288,225
65,514
180,125
55,454
301,093
(12,868 )
(746 )
(2,375 )
(3,121 )
(15,989 )
236
(16,225 )
50
Effective January 1, 2018, we adopted the requirements of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with
Customers (Topic 606), using the full retrospective method as discussed in the Notes to the consolidated financial statements provided under Item
8 of this Annual Report on Form 10-K.
2018
Percentage of Total Revenues
Revenues
Software subscriptions
Other
Total revenues
Cost of revenues
Software subscriptions
Other
Total cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other income (expense), net
Interest expense
Other income (expense), net
Other income (expense), net
Loss before provision for income taxes
Provision for income taxes
Net loss
*
Adjusted for adoption of Topic 606.
Year ended December 31,
2017
*As adjusted
2016
*As adjusted
91 %
9
100
92 %
8
100
16
7
23
77
15
49
15
79
(2 )
(2 )
1
(1 )
(4 )
0
(4 %)
18
6
24
76
15
48
14
77
(1 )
(0 )
0
0
(1 )
0
(1 %)
94 %
6
100
19
5
24
76
17
47
15
79
(3 )
(0 )
(1 )
(1 )
(4 )
0
(4 %)
Comparison of Fiscal Years Ended December 31, 2018, 2017, and 2016:
Revenues
(in thousands, except percentages)
2018
$ Change % Change
2017
*As
adjusted
Year Ended
December 31,
Year Ended
December 31,
2017
*As
adjusted
2016
*As
adjusted
$ Change % Change
Revenues
Software subscriptions
Other
Total revenues
Percentage of revenues
Software subscriptions
Other
Total
$ 612,888 $ 465,254 $ 147,634
60,736
22,373
$ 673,624 $ 503,617 $ 170,007
38,363
32 % $ 465,254 $ 356,562 $ 108,692
58 % 38,363
14,489
34 % $ 503,617 $ 380,436 $ 123,181
23,874
30 %
61 %
32 %
91 %
9
100 %
92 %
8
100 %
92 %
8
100 %
94 %
6
100 %
*
Adjusted for adoption of Topic 606.
51
Software subscriptions revenue. Software subscriptions revenue increased by $147.6 million and $108.7 million, or 32% and 30%, from fiscal
years 2017 to 2018 and from fiscal years 2016 to 2017, respectively. The increases were primarily due to the acquisition of new customers, upsells of
additional offerings to our existing customer base, an increase in sales to our mid-market and enterprise customers as we continue to move up
market, and sales through our channel partners.
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 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 between a customer’s initial subscription and the purchase of additional subscriptions varies significantly,
ranging from one month to a few years. The overall growth in our customer base was primarily driven by the recognition of our product leadership
and increased brand awareness.
Our core subscription revenues, defined as subscription revenue excluding subscription revenue from AT&T legacy base, was $565.6
million, $411.7 million, and $308.8 million, for the years ended December 31, 2018, 2017, and 2016, respectively, or a 37% and 33% increase period
over period, respectively. New subscriptions for the RingCentral Office@Hand solution sold by AT&T had declined throughout 2017 and into 2018
to an immaterial level, and in January 2018, we closed a transaction with AT&T to allow us to transition the existing customer base for RingCentral
Office@Hand solution sold by AT&T directly to us. As such, we believed this core subscription revenues information provided a useful indicator
of our business performance.
Subsequently, in August 2018, we entered into a revised service agreement with AT&T under which AT&T has resumed reselling our
solutions and is recorded in software subscription revenue. Given that AT&T has resumed reselling our solutions and is part of our software
subscription revenues, we believe that our software subscription revenue is a better overall measure of our performance. As such, we will not be
separately disclosing core subscription revenue in the future.
Other revenues. Other revenues are primarily comprised of product revenue from the sale of pre-configured phones, phone rentals, and
professional services.
Other revenue increased by $22.4 million, or 58%, from fiscal year 2017 to 2018 primarily due to an increase in product sales and professional
services revenue, mainly due to overall growth in our business, primarily to the mid-market and enterprise customers. These customers generally
require professional services. Other revenues increased by $14.5 million, or 61%, from fiscal year 2016 to 2017 primarily due to the shift to the direct
phone sales model during 2017 from an agency model and increase in professional services revenue.
Cost of Revenues and Gross Margin
(in thousands, except percentages)
Cost of revenues
Software subscriptions
Other
Total cost of revenues
Percentage of revenues
Software subscriptions
Other
Gross margins
Software subscriptions
Other
Total gross margin %
Year Ended
December 31,
Year Ended
December 31,
2018
2017
$ Change % Change
2017
2016
$ Change % Change
$ 109,454 $
89,193 $ 20,261
15,597
47,675
32,078
$ 157,129 $ 121,271 $ 35,858
23 % $ 89,193 $
49 % 32,078
30 % $ 121,271 $
73,470 $ 15,723
13,337
18,741
92,211 $ 29,060
21 %
71 %
32 %
16 %
7 %
82 %
22 %
77 %
18 %
6 %
81 %
16 %
76 %
18 %
6 %
81 %
16 %
76 %
19 %
5 %
79 %
22 %
76 %
Cost of software subscriptions revenues. Cost of software subscriptions revenues increased by $20.3 million, or 23%, from fiscal year 2017 to
2018 primarily due to increases in third-party costs to support our products of $9.0 million, headcount and personnel related costs, including share-
based compensation, of $4.9 million, overhead costs to support our products of $3.1 million, and service and professional fees of $2.7 million.
52
Cost of software subscriptions revenues increased by $15.7 million, or 21%, from fiscal year 2016 to 2017 primarily due to increases in
personnel costs, including share-based compensation, of $4.6 million, third-party costs to support our products of $4.4 million, overhead costs to
support our products of $4.2 million, service and professional fees of $1.5 million, and co-location fees of $1.0 million.
The increases in headcount and other expense categories described herein were 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.
Cost of other revenues. Cost of other revenues increased by $15.6 million, or 49%, from fiscal year 2017 to 2018, primarily due to increases in
the cost of product sales of $6.7 million, personnel costs of $5.3 million, and professional services of $2.4 million, which are mainly due to an
increase in revenues for implementation services.
Cost of other revenues increased by $13.3 million, or 71%, from fiscal year 2016 to 2017, primarily due to the increase in the cost of product
sales of $9.4 million, which was driven primarily by the shift to the direct phone sales model during 2017, cost of professional services of $3.1
million, mainly due to an increase in revenues from implementation services, and personnel costs of $0.6 million.
Gross margin. Our gross margin was 77% for fiscal year 2018 and 76% for both fiscal years 2017 and 2016. We expect gross margin to remain
fairly consistent in the future.
Software subscription revenues gross margin has improved from 79% to 81% from fiscal year 2016 to 2017 and from 81% to 82% from fiscal
year 2017 to 2018, primarily due to economies of scale obtained in our infrastructure, which includes transport costs and customer support
expenses.
Gross margin for other revenues was 22% in fiscal year 2018 and 16% in fiscal year 2017. The increase in gross margin was driven primarily by
improved savings on phones, coupled with a higher mix of professional services, which have higher margin. The gross margin for other revenues
decreased from 22% in fiscal year 2016 to 16% in fiscal year 2017. The decrease in gross margin for other revenues was due primarily to the
transition from the agency model to direct phone sales model for phones. Adjusting for the direct phone sales model, on a comparable basis, gross
margin would have been 1.7% higher year over year.
Research and Development
(in thousands, except percentages)
Research and development
Percentage of total revenues
Year Ended
December 31,
2018
2017
Year Ended
December 31,
$ 101,042 $
15 %
75,148 $ 25,894
15 %
$ Change % Change
2017
34 % $ 75,148 $
15 %
$ Change % Change
15 %
9,634
2016
65,514 $
17 %
Research and development expenses increased by $25.9 million, or 34%, from fiscal year 2017 to 2018 primarily due to increases in personnel
costs of $20.4 million, overhead costs to support our research and development efforts of $3.8 million, and professional fees of $1.1 million. The
increase in personnel costs was primarily driven by headcount growth and higher share-based compensation expense of $5.4 million.
Research and development expenses increased by $9.6 million, or 15%, from fiscal year 2016 to 2017 primarily due to increases in personnel
costs of $6.9 million, overhead costs to support our research and development efforts of $2.2 million, and professional fees of $0.4 million. The
increase in personnel costs was primarily driven by headcount growth and higher share-based compensation costs of $2.3 million.
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-based and mobile applications. We expect research and development expenses to continue to
increase in absolute dollars as we continue to invest in such development.
53
Sales and Marketing
Year Ended
December 31,
Year Ended
December 31,
(in thousands, except percentages)
2018
2017
*As
$ Change % Change
Sales and marketing
Percentage of total revenues
adjusted
$ 329,116 $ 240,223 $ 88,893
49 %
48 %
*
Adjusted for adoption of Topic 606.
2017
*As
adjusted
2016
*As
adjusted
37 % $ 240,223 $ 180,125 $ 60,098
$ Change % Change
33 %
48 %
47 %
Sales and marketing expenses increased by $88.9 million, or 37%, from fiscal year 2017 to 2018 primarily due to increases in personnel costs of
$49.4 million, advertising and marketing costs of $19.5 million, overhead costs to support our marketing efforts of $8.8 million, amortization of
deferred sales commissions of $7.1 million, and training and travel costs of $2.4 million. The increase in personnel costs was primarily due to
headcount growth, higher share-based compensation expense of $11.3 million, and other related costs.
Sales and marketing expenses increased by $60.1 million, or 33%, from fiscal year 2016 to 2017 primarily due to increases in personnel costs of
$31.3 million, third-party commissions of $10.1 million, overhead costs to support our marketing efforts of $5.8 million, amortization of deferred sales
commissions of $5.1 million, advertising and marketing costs of $3.8 million, training and travel costs of $2.8 million, and professional fees of $1.3
million. The increase in personnel costs was primarily due headcount of growth and higher share-based compensation expense of $5.1 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 establish brand recognition to achieve greater penetration in the North American and 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, Europe, and other markets.
General and Administrative
(in thousands, except percentages)
General and administrative
Percentage of total revenues
Year Ended
December 31,
2018
2017
Year Ended
December 31,
$ 102,773 $
15 %
72,313 $ 30,460
14 %
$ Change % Change
2017
42 % $ 72,313 $
14 %
2016
$ Change % Change
55,454 $ 16,859
30 %
15 %
General and administrative expenses increased by $30.5 million, or 42%, from fiscal year 2017 to 2018 primarily due to increases in personnel
costs of $21.6 million, legal and professional fees of $4.8 million and acquisition related costs of $2.5 million. The increase in personnel costs was
primarily driven by headcount growth and higher share-based compensation expense of $8.0 million.
General and administrative expenses increased by $16.9 million, or 30%, from fiscal year 2016 to 2017 primarily due to increases in personnel
costs of $13.1 million, travel and overhead costs of $1.5 million, and professional fees of $1.4 million. The increase in personnel costs was primarily
driven by headcount growth and higher share-based compensation expense of $3.3 million.
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.
54
Other Income (expense), net
(in thousands, except percentages)
Interest expense
Other income (expense), net
Other income (expense), net
nm - not meaningful
Year Ended
December 31,
Year Ended
December 31,
2018
2017
$ Change % Change
2017
2016
$ (16,102 ) $
6,475
(9,627 ) $
$
(99 ) $ (16,003 )
4,984
1,491
1,392 $ (11,019 )
nm $
nm
nm $
(99 ) $
1,491
1,392 $
$ Change % Change
647
3,866
4,513
87 %
163 %
145 %
(746 ) $
(2,375 )
(3,121 ) $
Other expense, net increased by $11.0 million from fiscal year 2017 to 2018, primarily due to a $16.0 million increase in interest expense
resulting from the amortization of debt discount and issuance costs of our 0% convertible senior notes due 2023 (“Notes”), and foreign currency
losses of $1.9 million. This was partially offset by a $6.8 million increase in interest income on our cash and cash equivalents.
Other income, net increased by $4.5 million from fiscal year 2016 to 2017 primarily due to foreign currency gains driven by the significant
increase in the Canadian dollar relative to the U.S. dollar and lower interest expense of $0.6 million due to the repayment of our debt in February
2017.
Liquidity and Capital Resources
As of December 31, 2018 and 2017, we had cash and cash equivalents of $566.3 million and $181.2 million, respectively. We finance our
operations primarily through sales to our customers, proceeds from issuance of stock under our stock plans, and proceeds from issuance of debt.
We believe that our operations and existing liquidity sources will satisfy our cash requirements for at least the next 12 months.
A majority of our customers are billed monthly, and about 63% of our total billings are collected through credit card payments received at the
beginning of each month. As we continue to move up market, the number and size of customers with annual or multi-year contracts and those who
opt for annual invoicing is increasing. For these customers, 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. As of December 31, 2018 and 2017, we had deferred
revenue of $88.5 million and $62.9 million, respectively.
As of December 31, 2018, the carrying value of our Notes was $366.6 million. We had no outstanding debt as of December 31, 2017.
Our future capital requirements will depend on many factors, including revenue growth and costs incurred to support customer growth,
acquisitions and expansions, 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 cash and cash equivalents are not
sufficient to fund our future operations, we may need to raise additional funds through public or private equity offerings or through additional debt
financing. We may in the future make investments in or acquisitions of businesses or technologies, which could also require us to seek additional
equity or debt financing. Additional financing sources may not be available on terms favorable to us or at all.
The table below, for the periods indicated, provides selected cash flow information (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes
Net increase in cash and cash equivalents
2018
Year ended December 31,
2017
2016
$
$
72,130
(83,448 )
397,255
(800 )
385,137
$
$
41,165
(26,387 )
6,783
(724 )
20,837
$
$
29,708
(16,398 )
9,330
127
22,767
55
Net Cash Provided by Operating Activities
Cash provided by operating activities is influenced by the amount of cash we invest in personnel, marketing, and infrastructure costs to
support the anticipated growth of our business, the increase in the number of customers, the amount and timing of customer collections, as well as
the amount and timing of disbursements to our vendors.
Net cash provided by operating activities was $72.1 million for the year ended December 31, 2018. This was driven by net loss of $26.2 million
adjusted for impacts of non-cash adjustments of $131.4 million. The non-cash adjustments resulted primarily due to $68.1 million of stock-based
compensation, $23.3 million of depreciation and amortization, $19.8 million amortization of deferred sales commissions costs, and $15.9 million
amortization of debt discount and issuance costs related to convertible notes. This was offset by a reduction of net working capital of $33.1 million
driven primarily by timing of cash payments to vendors and cash receipts and prepayments from customers and carriers.
Net cash provided by operating activities was $41.2 million for the year ended December 31, 2017. This was driven by net loss of $4.2 million
adjusted for the impacts of non-cash adjustments of $72.0 million. The non-cash adjustments resulted primarily due to $42.1 million of stock-based
compensation, $16.2 million of depreciation and amortization, and $12.6 million amortization of deferred sales commissions costs. This was partially
offset by net working capital changes of $26.7 million, which was primarily driven by timing of cash receipts and prepayments from our customers
and carriers and payments to vendors.
Net cash provided by operating activities for the year ended December 31, 2018, increased by $31.0 million as compared to the year ended
December 31, 2017, resulted primarily from increased sales and the related cash collections, partially offset by higher operating expenses driven by
increased headcount.
Net Cash Used in Investing Activities
Our primary investing activities have consisted of capital expenditures and internal-use software. It also reflects net cash used to acquire
Dimelo and the acquisition of the existing customer base of RingCentral Office@Hand solution from AT&T. As our business grows, we expect our
capital expenditures to continue to increase.
Net cash used in investing activities was $83.4 million for the year ended December 31, 2018. This was driven by $38.6 million in capital
expenditures, including personnel-related costs associated with development of internal-use software, $26.4 million net cash paid for our acquisition
of Dimelo, and $18.5 million paid for the acquisition of the existing customer base for the RingCentral Office@Hand solution from AT&T.
Net cash used in investing activities was $26.4 million for the year ended December 31, 2017, primarily due to $19.5 million in purchases of
property and equipment and $7.4 million of personnel-related costs associated with the development of internal-use software, partially offset by $0.5
million of proceeds received from the release of restricted investments.
Net cash used in investing activities for the year ended December 31, 2018 increased by $57.1 million as compared to the year ended
December 31, 2017, primarily due to $44.9 cash paid for the acquisition of Dimelo and the customer base from AT&T, an increase of $7.6 million in
purchases of property and equipment, and $4.0 million in personnel-related costs associated with the development of internal-use software.
Net Cash Provided by Financing Activities
Our primary financing activities have consisted of our issuance of the Notes and raising proceeds through the issuance of stock under our
stock plans.
Net cash provided by financing activities was approximately $397.3 million for the year ended December 31, 2018, primarily driven by $449.5
million in proceeds from the issuance of the Notes net of issuance costs, and $13.4 million in proceeds from the issuance of shares in connection
with our stock plans, net of taxes paid; partially offset by payments of capped call transactions and costs in connection with the issuance of the
Notes of $49.9 million and repurchase of Class A common stock of $15.0 million.
Net cash provided by financing activities was $6.8 million for the year ended December 31, 2017, primarily due to $21.8 million in proceeds
from the issuance of shares in connection with our stock plans, net of taxes paid, partially offset by the repayment of $14.8 million for debt, and
capital lease payments of $0.2 million.
56
Net cash provided by financing activities for the year ended December 31, 2018, increased by $390.5 million as compared to the year ended
December 31, 2017, primarily due to $449.5 million in proceeds from the issuance of Notes net of issuance costs, partially offset by payments of
capped call transactions and costs in connection with the issuance of the Notes of $49.9 million, and repurchases of Class A common stock of $15.0
million.
Backlog
We have generally signed new 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. Payment terms are generally billed
either monthly or on an annual 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. Given the variability in our contract length, we believe that backlog is not a reliable indicator of
future revenues and we do not utilize backlog as a key management metric internally.
Deferred Revenue
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 who opt for multi-year contracts
are increasing along with their related contract values. For 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.
Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2018 (in thousands):
Operating lease obligations
Financing obligations
Long-term debt
Purchase obligations
Total
Up to
1 year
Payments due by period
More than
1 to 3 years
3 to 5 years
5 years
Total
$
$
13,470 $
2,956
—
70,067
86,493 $
20,456 $
5,912
—
39,079
65,447 $
7,233 $
2,956
460,000
11,487
481,676 $
28 $
—
—
25,935
25,963 $
41,187
11,824
460,000
146,568
659,579
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, 2018. 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.
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, 2018.
57
Contingencies
We are and may be in the future subject to certain legal proceedings 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 matters relating to various claims that arise in the normal course of business. We record a provision for a liability when we believe that it
is both probable that a liability has been incurred, and the amount can be reasonably estimated. Significant 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 control. Should any of these estimates and assumptions change or prove to be incorrect, it could have a significant impact on
our results of operations, financial position, and cash flows.
Refer to Note 9 – Commitment and Contingencies of the notes 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 for additional information.
Off-Balance Sheet Arrangements
Through December 31, 2018, 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 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 software subscriptions, sale of products, and professional services. Software subscriptions revenue is
generally recognized over the period of the subscription contract. 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 non-cancellable and the
customer is obligated to pay for the remaining term of the contract. For sale of products, revenue is recognized when control is transferred. For
professional services, revenue is recognized as services are rendered.
Business combination
When we acquire a business, we allocate the purchase price to the tangible and intangible assets acquired and liabilities assumed based
upon their estimated fair values at the acquisition date. Any residual purchase price is recorded to goodwill. The allocation of purchase price
requires management to make significant estimates and assumptions in determining the fair value of intangible assets. Although we believe the
assumptions and estimates we made are reasonable, they are based in part on historical experience, market conditions, and information obtained
from management of the acquired companies, and are inherently uncertain. These estimates can include, but are not limited to, the cash flows
expected to be generated in the future and discount rates.
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.
58
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
The majority 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 (“E.U.”) Euro, Canadian
Dollars and Australian Dollars, among others. However, this impact has not been significant in 2018. 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. Our functional currency of our foreign subsidiaries is generally the 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 exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or
other derivative financial instruments. During fiscal 2018, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to
our business would not have a material impact on our consolidated financial statements. As our international operations grow, our risks associated
with fluctuation in currency rates could become greater, and we will continue to reassess our approach to managing these risks.
Interest Rate Sensitivity
We had cash and cash equivalents of $566.3 million and $181.2 million as of December 31, 2018 and December 31, 2017, respectively. We hold
our cash and cash equivalents for working capital purposes. Declines in interest rates would reduce future interest income. The effect of a
hypothetical 10% increase or decrease in overall interest rate would not materially impact our interest income. The carrying amount of our cash
equivalents reasonably approximates fair values. Due to the short-term nature of our money market funds, we believe that we do not have any
material exposure to changes in the fair value of our cash equivalents as a result of changes in interest rates.
As of December 31, 2018, we had $366.6 million outstanding on our 0% convertible senior notes due 2023. The Notes have zero percent fixed
annual interest rates and, therefore, we do not have economic interest rate exposure on our Notes. However, the values of the Notes are exposed to
interest rate risk. Generally, the fair market value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise.
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 declines in value. Additionally, 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. As of December 31, 2017, we had no current or
long-term debt. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our
financial statements.
59
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RINGCENTRAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
60
Page
61
63
64
65
66
67
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
RingCentral, Inc.:
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, 2018 and
2017, 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, 2018, and the related notes (collectively, the consolidated financial statements). We also have audited the
Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway 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, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2018, 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, 2018 based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired Dimelo SA on October 22, 2018 as discussed in Note 6 to the consolidated financial statements. As discussed in
Management’s Annual Report on Internal Controls over Financial Reporting appearing under Item 9A, management excluded from its assessment of
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, Dimelo SA’s internal control over financial
reporting associated with consolidated total assets and consolidated total revenue of less than 1% included in the consolidated financial
statements of the Company as of and for the year ended December 31, 2018. Our audit of internal control over financial reporting of the Company as
of December 31, 2018 also excluded an evaluation of the internal control over financial reporting of Dimelo SA.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts
with customers and accounting for sales commissions due to the adoption of Accounting Standards Codification (ASC) Topic 606 and Subtopic
340-40. The Company adopted the new revenue standard using the full retrospective approach.
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 appearing in Item 9A. Our responsibility is to express an opinion on the 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 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial 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.
61
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.
/s/ KPMG LLP
We have served as the Company’s auditor since 2010
Santa Clara, California
February 26, 2019
62
RINGCENTRAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value per share)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Deferred sales commission costs
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Deferred sales commission costs, non-current
Goodwill
Acquired intangibles, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
Accrued liabilities
Deferred revenue
Total current liabilities
Convertible senior notes, net
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 9)
Stockholders' equity:
Class A common stock, $0.0001 par value; 1,000,000 shares authorized at
December 31, 2018 and 2017; 69,445 and 65,855 shares issued and outstanding at
December 31, 2018 and 2017
Class B common stock, $0.0001 par value; 250,000 shares authorized at
December 31, 2018 and 2017; 11,601 and 12,199 shares issued and outstanding at
December 31, 2018 and 2017
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
* See Note 2 for a summary of adjustments.
See accompanying notes to consolidated financial statements
63
December 31,
2018
December 31,
2017
*As adjusted
$
$
$
$
566,329 $
94,375
23,038
23,772
707,514
70,205
55,735
31,238
19,480
10,154
894,326 $
10,145 $
100,687
88,527
199,359
366,552
10,806
576,717
7
1
181,192
46,690
15,424
21,512
264,818
43,298
37,871
9,393
1,462
2,972
359,814
7,322
54,977
62,917
125,216
—
6,252
131,468
7
1
551,078
2,226
(235,703 )
317,609
894,326 $
434,840
2,998
(209,500 )
228,346
359,814
RINGCENTRAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenues
Software subscriptions
Other
Total revenues
Cost of revenues
Software subscriptions
Other
Total cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Other income (expense), net
Interest expense
Other income (expense), net
Other income (expense), net
Loss before provision for income taxes
Provision for income taxes
Net loss
Net loss per common share
Basic and diluted
Weighted-average number of shares used in computing net loss per share
Basic and diluted
* See Note 2 for a summary of adjustments.
Year ended December 31,
2018
2017
2016
*As adjusted
*As adjusted
612,888 $
60,736
673,624
109,454
47,675
157,129
516,495
101,042
329,116
102,773
532,931
(16,436 )
(16,102 )
6,475
(9,627 )
(26,063 )
140
(26,203 ) $
465,254 $
38,363
503,617
89,193
32,078
121,271
382,346
75,148
240,223
72,313
387,684
(5,338 )
(99 )
1,491
1,392
(3,946 )
258
(4,204 ) $
356,562
23,874
380,436
73,470
18,741
92,211
288,225
65,514
180,125
55,454
301,093
(12,868 )
(746 )
(2,375 )
(3,121 )
(15,989 )
236
(16,225 )
(0.33 ) $
(0.06 ) $
(0.22 )
79,500
76,281
72,994
$
$
$
See accompanying notes to consolidated financial statements
64
RINGCENTRAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Other comprehensive income (loss)
Foreign currency translation adjustments, net
Comprehensive loss
* See Note 2 for a summary of adjustments.
Year ended December 31,
2018
2017
2016
*As adjusted
*As adjusted
(26,203 ) $
(4,204 ) $
(16,225 )
(772 )
(26,975 ) $
261
(3,943 ) $
2,210
(14,015 )
$
$
See accompanying notes to consolidated financial statements
65
RINGCENTRAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common stock
Additional
Paid-in
Amount Capital
Shares
Accumulated
Other
Total
Comprehensive Accumulated Stockholders'
Loss
Deficit
Equity
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
Issuance of common stock for achievement
of Glip related matters
Share-based compensation
Changes in comprehensive loss
Cumulative effect adjustment related to adoption
of ASU 2016-09
Net loss
Balance as of December 31, 2016
Issuance of common stock in connection
with Equity Incentive and Employee
Stock Purchase plans
Issuance of common stock for achievement
of Glip related matters
Share-based compensation
Changes in comprehensive loss
Net loss
Balance as of December 31, 2017
Issuance of common stock in connection
with Equity Incentive and Employee
Stock Purchase plans
Shares repurchased
Share-based compensation
Equity component of convertible senior notes, net
of issuance cost
Purchase of capped calls
Changes in comprehensive loss
Net loss
Balance as of December 31, 2018
2,374
—
14,849
—
—
14,849
46
—
—
—
—
—
1,080
31,079
—
—
—
2,210
—
—
—
1,080
31,079
2,210
—
—
74,383 $
—
—
7 $
—
—
366,800 $
—
—
2,737 $
21,123
(16,225 )
(205,296 ) $
21,123
(16,225 )
164,248
3,594
1
21,803
—
—
21,804
77
—
—
—
78,054 $
3,231
(239 )
—
—
—
—
—
81,046 $
—
—
—
—
8 $
3,560
42,677
—
—
434,840 $
—
—
261
—
2,998 $
—
—
—
(4,204 )
(209,500 ) $
—
—
—
13,449
(15,000 )
68,876
—
—
—
—
8 $
98,823
(49,910 )
—
—
551,078 $
—
—
—
—
—
—
—
—
(772 )
—
2,226 $
—
—
—
(26,203 )
(235,703 ) $
3,560
42,677
261
(4,204 )
228,346
13,449
(15,000 )
68,876
98,823
(49,910 )
(772 )
(26,203 )
317,609
See accompanying notes to consolidated financial statements
66
RINGCENTRAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities
2018
Year ended December 31,
2017
*As adjusted
2016
*As adjusted
$
(26,203 ) $
(4,204 ) $
(16,225 )
Depreciation and amortization
Share-based compensation
Amortization of deferred sales commission cost
Amortization of debt discount and issuance cost
Foreign currency remeasurement (gain) loss
Provision for bad debt
Deferred income tax
Others
Changes in assets and liabilities
Accounts receivable
Deferred sales commission costs
Prepaid expenses and other current assets
Other assets
Accounts payable
Accrued liabilities
Deferred revenue
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Capitalized internal-use software
Cash paid for business combination, net of cash acquired
Cash paid for acquisition of intangible assets
Restricted investments
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of convertible senior notes, net of issuance costs
Payments for capped call transactions and costs
Repurchase of common stock
Proceeds from issuance of stock in connection with stock plans
Payment of holdback from Glip acquisition
Repayment of debt
Repayment of capital lease and financing obligations
Taxes paid related to net share settlement of equity awards
Net cash provided by financing activities
Effect of exchange rate changes
Net increase in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash
Beginning of period
End of period
Supplemental disclosure of cash flow data:
Cash paid for interest
Cash paid for income taxes, net of refunds
Non-cash investing and financing activities
Reclassification from intangible assets to prepaid services
Equipment and capitalized internal-use software purchased and unpaid at period end
Equipment under financing obligations
Liability for potential future payments
Earnout related matters, including issuance of common stock for milestone achievements
* See Note 2 for a summary of adjustments.
23,273
68,088
19,754
15,918
951
3,091
(303 )
614
(47,877 )
(45,232 )
(342 )
279
2,783
33,695
24,780
(1,139 )
72,130
(27,123 )
(11,421 )
(26,434 )
(18,470 )
—
(83,448 )
449,457
(49,910 )
(15,000 )
20,621
—
—
(741 )
(7,172 )
397,255
(800 )
385,137
16,214
42,060
12,623
—
(666 )
1,674
(47 )
181
(17,903 )
(32,469 )
(6,199 )
1,533
176
9,918
18,298
(24 )
41,165
(19,497 )
(7,420 )
—
—
530
(26,387 )
—
—
—
25,495
—
(14,840 )
(181 )
(3,691 )
6,783
(724 )
20,837
14,663
30,840
7,567
—
2,615
648
(36 )
583
(11,899 )
(19,940 )
(1,018 )
76
1,516
15,165
7,962
(2,809 )
29,708
(14,236 )
(2,162 )
—
—
—
(16,398 )
—
—
—
15,104
(1,500 )
(3,750 )
(269 )
(255 )
9,330
127
22,767
$
$
$
$
$
$
$
$
181,192
566,329 $
160,355
181,192 $
137,588
160,355
40 $
433 $
8,223 $
4,785 $
4,513 $
971 $
5,375 $
116 $
216 $
— $
1,699 $
— $
— $
3,560 $
711
229
—
2,152
—
—
1,080
See accompanying notes to consolidated financial statements
67
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
RingCentral, Inc. (the “Company”) is a provider of software-as-a-service (“SaaS”) solutions that enables businesses to communicate,
collaborate and connect. The Company was incorporated in California in 1999 and was reincorporated in Delaware on September 26, 2013.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, 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, deferred sales commission costs, goodwill, share-based compensation, capitalization of internally developed
software, return reserves, provision for income taxes, uncertain tax positions, loss contingencies, sales tax liabilities and accrued liabilities.
Management periodically evaluates these estimates and will make adjustments prospectively based upon the results of such periodic evaluations.
Actual results could differ from these estimates.
Foreign Currency
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.
Allowance for Doubtful Accounts
For the years ended December 31, 2018 and 2017, 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 as the Company continues to move up market. 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, 2018, 2017 and 2016 (in thousands):
Year ended December 31, 2018
Allowance for doubtful accounts
Year ended December 31, 2017
Allowance for doubtful accounts
Year ended December 31, 2016
Allowance for doubtful accounts
Balance at
beginning of
year
Provision,
net of
recoveries
Balance at
end of
year
Write-offs
712 $
3,091 $
1,297 $
2,506
434 $
1,674 $
1,396 $
377 $
648 $
591 $
712
434
$
$
$
68
Inventory
The Company’s inventory consists primarily of phones held at third parties. Inventory is stated at the lower of cost computed on a first-in,
first-out basis, or market value. Inventory write-downs are recorded when the cost 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.
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, 2018 and 2017, the Company capitalized $11.7 million and $8.3 million, net of impairment, of internal-use
software development costs, respectively. The carrying value of internal-use software development costs was $22.2 million and $11.9 million at
December 31, 2018 and 2017, 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
Internal-use software development costs
Furniture and fixtures
Leasehold improvements
3 to 5 years
3 to 5 years
1 to 5 years
Shorter of the estimated lease term or useful life
The Company evaluates the recoverability of property and equipment 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.
Concentrations of Credit Risk and Significant Customers
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 maintains an
allowance for doubtful accounts for estimated potential credit losses. At December 31, 2018, and for the year then ended, none of the Company’s
customers accounted for more than 10% of total accounts receivable, total revenues, or software subscription revenues. At December 31, 2017,
AT&T, one of the Company’s resellers, accounted for 18% of the Company’s total accounts receivable. For the years ended December 31, 2017 and
2016, AT&T accounted for 11%, and 14% of the Company’s total revenues and 12% and 13% of the Company’s software subscription revenues,
respectively.
During the years ended December 31, 2018, 2017 and 2016, 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.
Revenue Recognition
The Company derives its revenues primarily from software subscriptions, sale of products, and professional services. Revenues are
recognized when control of these services is transferred to the customers, in an amount that reflects the consideration the Company expects to be
entitled to in exchange for those services.
69
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:
Software subscriptions revenue
Software subscriptions revenue is generated from fees that provide customers access to one or more of the Company’s software applications
and related services. These arrangements have contractual terms typically ranging from one month to five years and include recurring fixed plan
subscription fees and variable usage-based fees for usage in excess of plan limits.
Arrangements with customers do not provide the customer with the right to take possession of the Company’s software at any time. Instead,
customers are granted continuous access to the services over the contractual period. The Company transfers control evenly over the contractual
period by providing stand-ready service. Accordingly, the fixed consideration related to subscription is recognized over time on a straight-line basis
over the contract term beginning on the date the Company’s service is made available to the customer. The Company may offer its customer
services for no consideration during the initial months. Such discounts are recognized ratably over the term of the contract.
Fees for additional minutes of usage in excess of plan limits are deemed to be variable consideration that meet the allocation exception for
variable consideration as they are specific to the month that the usage occurs.
The Company’s subscription contracts typically allow the customers to terminate their services within the first 30 or 60 days and receive a
refund for any amounts paid. After the end of the termination period, the contract is non-cancellable and the customer is obligated to pay for the
remaining term of the contract. Accordingly, the Company considers the non-cancellable term of the contract to begin after the expiration of the
termination period.
The Company has service-level agreements with customers warranting defined levels of uptime reliability and performance and these
customers can get credits or refunds if the Company fails to meet those levels. If the services do not meet certain criteria, fees are subject to
adjustment or refund representing a form of variable consideration.
The Company records reductions to revenue for estimated sales returns and customer credits at the time the related revenue is recognized.
Sales returns and customer credits are estimated based on the Company’s historical experience, current trends and the Company’s expectations
regarding future experience. The Company monitors the accuracy of its sales reserve estimates by reviewing actual returns and credits and adjusts
them for its future expectations to determine the adequacy of its current and future reserve needs. If actual future returns and credits differ from past
experience, additional reserves may be required.
Other revenue
Other revenue includes revenue generated from phone sales and professional implementation services.
Phone revenue is recognized upon transfer of control to the customer which is generally upon shipment from the Company’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.
70
Principal vs. Agent
A portion of the Company’s software 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 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 of benefit taking into consideration the expected subscription term and expected renewal periods of its
customer contracts, the duration of its relationships with its customers considering historical and expected customer retention, technology and
other factors. Amortization expense is included in sales and marketing expenses in the accompanying consolidated statement of operations.
Disaggregation of revenue
The following table provides information about disaggregated revenue by primary geographical markets:
Primary geographical markets
North America
Others
Total revenues
Year Ended December 31,
2018
2017
2016
95 %
5 %
100 %
96 %
4 %
100 %
97 %
3 %
100 %
The Company derived approximately 88%, 84% and 81% of subscription revenues from RingCentral Office product for the years ended
December 31, 2018, 2017 and 2016, respectively.
Deferred revenue
During the year ended December 31, 2018, the Company recognized revenue of $60.3 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, 2018 that has not yet been
recognized was approximately $0.6 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 59% of this balance over the next 12 months and 41% thereafter.
Cost of Revenues
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.
71
Cost of other revenue is comprised primarily of the cost associated with purchased phones, 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.
Share-Based Compensation
Share-based compensation expense resulting from options, restricted stock units (“RSUs”), performance-based awards, and employee stock
purchase plan (“ESPP”) rights granted is measured as the grant date fair value of the award and is recognized using the straight-line attribution
method over the requisite service period of the award, which is generally the vesting period. The Company estimates the fair value of stock options,
ESPP rights, and performance-based awards using the Black-Scholes-Merton option-pricing model. The Company estimates the fair value of RSUs
as the closing market value of its Class A Common Stock on the grant date. For awards with performance-based and service-based conditions,
compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied. The expense for
performance-based awards is evaluated each quarter based on the achievement of the performance conditions. The effect of a change in the
estimated number of performance-based awards expected to be earned is recognized in the period those estimates are revised. Compensation
expense for stock options and RSUs granted to non-employees is revalued, or marked to market, as of each reporting date until the stock options
and RSUs are vested. Compensation expense is recognized net of estimated forfeiture activity, which is based on historical forfeiture rates.
Research and Development
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
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 $58.3
million, $42.4 million, and $41.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Convertible Debt
The Company bifurcates the debt and equity (the contingently convertible feature) components of its convertible debt instruments in a
manner that reflects its nonconvertible debt borrowing rate at the time of issuance. The equity components of the 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.
Income Taxes
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, 2018, except for deferred tax assets associated with its
subsidiaries 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.
Segment Information
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.
72
Indemnification
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. The Company has not accrued any liabilities related to such obligations as of December 31, 2018 and
2017.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases
(Topic 842), which requires that lessees recognize a right-of-use asset and a lease liability on the balance sheet for all leases, with the exception of
short-term leases. Both capital and operating leases will need to be recognized on the balance sheet. The standard is effective for interim and annual
reporting periods beginning after December 15, 2018, with early adoption permitted. In 2018, the FASB issued ASU 2018-10 and 2018-11, providing,
among other things, codification improvements and the optional transition method. The Company will adopt the standard in the first quarter of
2019, utilizing the optional transition method for adoption of Topic 842, which allows entities to continue to apply the legacy guidance in ASC
840, Leases, including disclosure requirements, in the comparative periods presented in the year of adoption. While the Company is continuing to
assess the potential impact that the standard will have on its consolidated financial statements and related disclosures, the Company expects to
take advantage of the transition package of practical expedients permitted within the new standard, which among other things, allows the Company
to carryforward its historical lease classifications. The Company expects the impact of adoption of the new standard on the
Company’s consolidated statements of operations not to be material. The Company anticipates the most significant impact of adopting the new
standard will primarily be the establishment of a right-of-use asset and a corresponding lease liability in its consolidated balance sheets.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which modifies the goodwill impairment test
and requires an entity to write down the carrying value of goodwill up to the amount by which the carrying amount of a reporting unit exceeds its
fair value. The standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The
adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-
Based Payment Accounting, which expands the scope of Topic 718 to include and simplify financial reporting for share-based payments issued to
nonemployees. This amendment is applicable to all public business entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018, with early adoption permitted. The adoption of this amendment is not expected to have a material impact on the Company’s
consolidated financial statements or disclosures.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements, which is intended to change or to clarify the codification or correct
unintended application of guidance that is not expected to have a significant effect on current accounting practice or create a significant
administrative cost to most entities. Since this applies to various codifications, its implementation and impact on financial statements would be
commensurate with the codification itself, for example - it clarifies when companies should recognize excess tax benefits for share-based
compensation awards; removes inconsistent guidance about income tax accounting for business combinations; clarifies derivatives measurement of
a liability with an identical instrument held as an asset, and allows companies to use the portfolio approach to valuation of financial instruments;
etc. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
In June 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurements, which expands the disclosure requirements for Level 3 fair value measurements and expands
disclosures for entities that calculate net assets value. This amendment is applicable to all public business entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company expects to adopt this update
effective fiscal first quarter of 2020. The adoption of this amendment is not expected to have a material impact on the Company’s consolidated
financial statements or disclosures.
In June 2018, the FASB issued ASU 2018-15, Intangibles- Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for
capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation
costs incurred to develop or obtain internal-use software. This amendment is applicable to all public business entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is in the process of evaluating the
impact of implementing this amendment on its financial statements or disclosures.
73
In August 2018, the SEC issued a final rule that amends certain disclosure requirements that were redundant, duplicative, overlapping or
superseded. The final rule requires registrants, among other things, to disclose in interim periods changes to stockholders’ equity for current and
comparative year-to-date periods for each interim period, and dividends per share for each class of shares. The final rule is effective for all filings
made on or after November 5, 2018. On September 25, 2018, the SEC released guidance advising it will not object to a registrant adopting the
requirement to include changes in stockholders’ equity in the Form 10-Q for the first quarter beginning after the effective date of the rule. The
Company expects to adopt the new rule in the first fiscal quarter of 2019. The adoption of this amendment is not expected to have a material impact
on the Company’s consolidated financial statements or disclosures.
Note 2. Impact of Recent Accounting Pronouncements
On January 1, 2018, the Company adopted the requirements of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
issued by the FASB utilizing the full retrospective method of transition. Topic 606 also includes subtopic 340-40, Other Assets and Deferred Costs –
Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company
refers to Topic 606 and Subtopic 340-40 as “Topic 606” or the “new standard”. The Company adjusted its consolidated financial statements from
amounts previously reported due to the adoption of Topic 606.
The following tables summarize the effects of adopting Topic 606 (in thousands):
Assets
Accounts receivable, net
Deferred sales commission costs
Deferred sales commission costs, noncurrent
Liabilities
Deferred revenue
Stockholders' equity
Revenues
Software subscriptions
Other
Total revenues
Gross profit
Operating expenses
Sales and marketing
Operating loss
Net loss
Basic and diluted net loss per common share
Weighted-average number of shares used in computing
net (loss) income per share
Basic and diluted
December 31, 2017
Adoption of
Topic 606
As Adjusted
As Reported
$
$
45,339 $
—
—
1,351 $
15,424
37,871
46,690
15,424
37,871
64,415
172,202 $
(1,498 )
56,144 $
62,917
228,346
Year Ended December 31, 2017
Adoption
of Topic
606
As
As
Adjusted
Reported
Year Ended December 31, 2016
Adoption
of Topic
606
As
As
Adjusted
Reported
$ 463,163 $
38,363
501,526
380,255
—
2,091 $ 465,254 $ 355,850 $
23,874
38,363
2,091 503,617 379,724
2,091 382,346 287,513
0
712 $ 356,562
23,874
712 380,436
712 288,225
260,069
(27,275 )
(26,141 ) $
(0.34 ) $
$
$
(19,846 ) 240,223 192,497 (12,372 ) 180,125
(12,868 )
21,937
(16,225 )
21,937 $
(0.22 )
0.28 $
(25,952 ) 13,084
(29,309 ) $ 13,084 $
0.17 $
(5,338 )
(4,204 ) $
(0.06 ) $
(0.40 ) $
76,281
—
76,281
72,994
—
72,994
74
Year Ended December 31, 2017
Adoption
of Topic
606
As
As
Adjusted
Reported
Year Ended December 31, 2016
Adoption
of Topic
606
As
As
Adjusted
Reported
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of deferred sales commission costs
Changes in operating assets and liabilities:
Accounts receivable
Deferred sales commission costs
Deferred revenue
Net cash provided by operating activities
$
(26,141 ) $
21,937 $
(4,204 ) $
(29,309 ) $ 13,084 $
(16,225 )
—
12,623
12,623
—
7,567
7,567
(16,770 )
—
19,256
41,165
(1,133 )
(32,469 )
(958 )
—
(17,903 )
(32,469 )
18,298
41,165
(11,728 )
(171 )
— (19,940 )
(540 )
—
8,502
29,708
(11,899 )
(19,940 )
7,962
29,708
In March 2018, the FASB issued ASU 2018-05, Income Taxes Topic (740): Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118 ("ASU 2018-05") to address the application of GAAP in situations when a registrant does not have the necessary
information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects
of the Tax Act. As of December 31, 2018, the Company’s analysis of the Transition Tax has been filed with its December 31, 2017 tax return and the
Company considers its accounting for this area of the Tax Act to be complete as of such date and did not make any measurement-period
adjustments related to it. In addition, the Company recognizes its accounting for changes in the U.S. federal rate and deferred tax impact for the rate
change to be complete. The Company also accounted for the tax impact related to other areas of the Tax Act and believes its analysis to be
completed consistent with the guidance in ASU 2018-05. The Company recognizes that the IRS is continuing to publish and finalize ongoing
guidance with respect to the Act, which may modify accounting interpretation for the Tax Act. The Company would look to account for these
impacts in the period of such change is enacted.
Note 3. Other Revenues and Cost of Revenue
Other revenues are primarily comprised of product revenue from the sale of pre-configured phones, phone rentals, and professional services.
For the years ended December 31, 2018, 2017 and 2016, the majority of other revenues consisted of product revenues from sales of phones. Product
revenues were $34.7 million, $26.0 million, and $13.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. Product cost of
revenues were $30.9 million, $25.0 million, and $15.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Note 4. Financial Statement Components
Cash and cash equivalents consisted of the following (in thousands):
Cash
Money market funds
Total cash and cash equivalents
December 31,
2018
December 31,
2017
$
$
80,457 $
485,872
566,329 $
70,893
110,299
181,192
The Company has an immaterial restricted cash balance as of December 31, 2018 and 2017, included in the cash balances above.
Accounts receivable, net consisted of the following (in thousands):
Accounts receivable
Unbilled accounts receivable
Allowance for doubtful accounts
Accounts receivable, net
*
See Note 2 for a summary of adjustments.
75
December 31,
2018
December 31,
2017
*As adjusted
$
$
82,740 $
14,141
(2,506 )
94,375 $
42,243
5,159
(712 )
46,690
Prepaid expenses and other current assets consisted of the following (in thousands):
Prepaid expenses
Inventory
Other current assets
Total prepaid expenses and other current assets
Property and equipment, net consisted of the following (in thousands):
Computer hardware and software
Internal-use software development costs
Furniture and fixtures
Leasehold improvements
Property and equipment, gross
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2018
December 31,
2017
14,805 $
199
8,768
23,772 $
13,690
198
7,624
21,512
December 31,
2018
December 31,
2017
103,766 $
29,886
5,896
6,863
146,411
(76,206 )
70,205 $
74,555
18,217
6,293
4,311
103,376
(60,078 )
43,298
$
$
$
$
Total depreciation and amortization expense related to property and equipment was $18.9 million, $15.4 million, and $13.6 million for the fiscal
years ended December 31, 2018, 2017 and 2016, respectively.
Accrued liabilities consisted of the following (in thousands):
Accrued compensation and benefits
Accrued sales, use, and telecom related taxes
Accrued marketing
Other accrued expenses
Total accrued liabilities
The carrying value of goodwill is as follows (in thousands):
Balance at December 31, 2017 and 2016
Dimelo acquisition
Foreign currency translation adjustments
Balance at December 31, 2018
The carrying values of intangible assets are as follows (in thousands):
December 31, 2018
Customer relationships
Developed technology
Total acquired intangible assets
Estimated
Lives
2-5 years
4-5 years
Cost
$ 20,121 $
6,098
$ 26,219 $
Accumulated
Amortization
Acquired
Intangibles,
Net
4,460 $
2,279
6,739 $
15,661
3,819
19,480
76
December 31,
2018
December 31,
2017
$
$
20,932 $
19,609
12,291
47,855
100,687 $
18,578
11,828
7,020
17,551
54,977
December 31,
2018
$
$
9,393
21,995
(150 )
31,238
December 31, 2017
Acquired
Accumulated
Amortization
Intangibles,
Net
$
$
840 $
1,548
2,388 $
—
1,462
1,462
Cost
$ 840
3,010
$ 3,850
Amortization expense from acquired intangible assets for the years ended December 31, 2018, 2017 and 2016 was $4.4 million, $0.8 million and
$1.1 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, 2018, the weighted-
average amortization period for developed technology is approximately 2.8 years and for customer relationships is approximately 3.6 years.
Estimated amortization expense for acquired intangible assets for the following five fiscal years and thereafter is as follows (in thousands):
2019
2020
2021
2022
2023
Total estimated amortization expense
Deferred Sales Commission Costs
$
$
4,895
4,551
4,293
4,164
1,577
19,480
Deferred sales commission costs, which relate to sales commission costs capitalized for incremental cost of obtaining customer contracts
were $78.8 million and $53.3 million as of December 31, 2018 and 2017, respectively. Amortization expense for the deferred sales commission costs
for the years ended December 31, 2018, 2017 and 2016 were $19.8 million, $12.6 million and $7.6 million, respectively. There was no impairment loss in
relation to the costs capitalized for the periods presented.
Note 5. Fair Value of Financial Instruments
The Company measures and reports certain cash equivalents, including money market funds and certificates of deposit, at fair value in
accordance with the provisions of the authoritative accounting guidance that addresses fair value measurements. This guidance establishes a
hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels based on the reliability of the
inputs as follows:
Level 1: Observable inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Other inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in inactive
markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
asset or liability.
Level 3: Unobservable inputs that are supported by little or no market activity and that are based on management’s assumptions, including
fair value measurements determined by using pricing models, discounted cash flow methodologies or similar techniques.
The financial assets carried at fair value were determined using the following inputs (in thousands):
Cash equivalents:
Money market funds
Cash equivalents:
Money market funds
Balance at
December 31, 2018
(Level 1)
(Level 2)
(Level 3)
$
485,872 $
485,872 $
— $
—
Balance at
December 31, 2017
(Level 1)
(Level 2)
(Level 3)
$
110,299 $
110,299 $
— $
—
The Company’s other financial instruments, including accounts receivable, accounts payable and other current liabilities, are carried at cost,
which approximates fair value due to the relatively short maturity of those instruments.
At December 31, 2018, the estimated fair value of the 0% convertible senior note due 2023 (the “Notes”) was approximately $542.6 million.
The fair value was determined based on the 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.
77
Note 6. Business Combinations
On October 22, 2018, the Company acquired Dimelo SA (“Dimelo”), a cloud-based digital customer engagement platform. The acquisition will
expand the Company’s platform and will enable 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 out of total maximum contingent consideration of $10.0 million. The contingent consideration can be settled either in cash or shares, at
the Company’s discretion. Under the terms of the agreement, the Company acquired all of the equity interests of Dimelo.
The contingent consideration is based on the achievement of specified performance targets through the end of the second quarter of
2019. The fair value of the contingent consideration is included in accrued liabilities on the Consolidated Balance Sheet.
In connection with the acquisition, the Company has agreed to grant $3.3 million in restricted stock units, of which $0.2 million have been
granted as of December 31, 2018 and is being recognized as stock-based compensation expense, as the restricted stock units vest over four
years. The remaining awards are expected to be granted once shareholder approval is received in or after the second quarter of 2019. These
restricted stock units will vest over a period up to four years and will be recognized as stock-based compensation expense.
The preliminary 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
Other tangible assets acquired
Acquired intangible assets
Goodwill
Total assets acquired
Liabilities assumed
Total consideration
$
$
4,225
3,289
12,208
21,995
41,717
(5,646 )
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 tangible and identifiable intangible assets and liabilities acquired and, as a result of the 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.
Note 7. Acquired Customer Base
On January 16, 2018, the Company acquired from AT&T the existing customer base of the RingCentral Office@Hand solution, which was
previously sold by AT&T, for a total fair value of the purchase consideration of $24.0 million. The fair value of the purchase price consisted of
a $20.0 million cash payment upon closing of the transaction and approximately $4.0 million in earn-out payments based on achievement of certain
milestones, with a total potential earn-out of up to $6.0 million. The transition of the customer base was expected to be completed over a period of
one year from the close of the transaction. The Company had entered into a Transition Services Agreement (“TSA”) for a one-year period. The
transaction was accounted for as an asset acquisition. The value of the total consideration was allocated between the customer relationship
intangible asset of $22.0 million, to be amortized over the expected useful life of five years, and the TSA services of $2.0 million, to be amortized over
the expected one year of service, based on their relative fair value. Under the terms of the agreement, a portion of the customers transitioned to the
Company. The value of the customer base that transitioned to the Company is reflected as a customer relationship asset of approximately $10.0
million, to be amortized over the expected useful life of five years.
Subsequently on August 31, 2018, the Company and AT&T entered into a revised agreement through June 30, 2024, under which AT&T
resumed reselling RingCentral solutions to its customers and will obtain control over the non-transitioned customer base. Under the revised
agreement, AT&T retained the $20.0 million previously paid to them, and has potential future payments estimated to be approximately $1.0 million.
Of these amounts, the value attributed to the non-transitioned customer base was approximately $11.0 million, which is treated as prepaid services
for ongoing customer support for existing and new customers and will be amortized over the expected term of the agreement.
78
Note 8. Senior Convertible Notes
In March 2018, the Company issued $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 do not bear regular interest, and the
principal amount of the Notes does not accrete. The Notes may bear special interest under specified circumstances relating to the Company’s failure
to comply with its reporting obligations under the indenture relating to the issuance of 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.
Prior to the close of business on the business day immediately preceding December 15, 2022, the Notes will be convertible only under the
following circumstances:
(1)
(2)
during any calendar quarter commencing after June 30, 2018, and only during such calendar quarter, if the last reported sale price of the
Class A Common Stock for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on
the last trading day of the immediately preceding calendar quarter is more than 130% of the conversion price on each applicable trading
day;
during the five business days period after any five consecutive trading days period in which, for each trading day of that period, the
trading price per $1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale price
of the Class A Common Stock and the conversion rate on each such trading day;
(3)
upon the Company’s notice that it is redeeming any or all of the Notes, at any time prior to the close of business on the scheduled
trading day immediately preceding the redemption date; or
(4)
upon the occurrence of specified corporate events.
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 the foregoing 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 the principal amount of the Notes with
cash.
During the year ended December 31, 2018, the conditions allowing holders of the Notes to convert were not met.
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 redemption date, if the last reported sale price of the Class A
Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30
consecutive trading day period ending within not more than three trading days preceding the date on which the Company provides written notice
of redemption. No sinking fund is provided for the Notes. Upon the occurrence of a fundamental change (as defined in the Indenture) prior to the
maturity 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.
The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly
subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so
subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing
such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the
Company.
79
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 liability component from the par value of the Notes. 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
amortized to interest expense at an effective interest rate over the contractual terms of the Notes.
In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred to the liability and equity
components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the
liability component were $8.2 million were recorded as additional debt discount to be amortized to interest expense using the effective interest
method over the contractual terms of the Notes. Issuance costs attributable to the equity component were netted with the equity component in
stockholders’ equity.
The net carrying amount of the liability component of the Notes was as follows (in thousands):
Principal
Unamortized discount
Unamortized issuance cost
Net carrying amount
The net carrying amount of the equity component of the Notes was as follows (in thousands):
Proceeds allocated to the conversion option (debt discount)
Issuance cost
Net carrying amount
The following table sets forth the interest expense recognized related to the Notes (in thousands):
December 31, 2018
460,000
(86,270 )
(7,178 )
366,552
December 31, 2018
101,141
(2,318 )
98,823
$
$
$
$
Contractual interest expense
Amortization of debt discount
Amortization of debt issuance cost
Total interest expense related to the Notes
Year ended December 31,
2018
2017
2016
$
$
— $
14,872
1,046
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 consolidated balance sheet.
Concurrently with the issuance of the Notes, the Company’s board of directors approved the repurchase of an aggregate of 239,425, or $15.0
million of, shares of the Company’s outstanding Class A Common Stock in privately negotiated transactions at a price of $62.65 per share, which
was equal to the closing price per share of the Company’s Class A Common Stock on March 1, 2018, the date of the pricing of the offering of the
Notes. The share repurchase was recorded as a reduction of additional paid-in capital on the consolidated balance sheet.
80
Note 9. Commitments and Contingencies
Leases
The Company leases facilities for office space under non-cancelable operating leases for its U.S. and international locations and has entered
into financing 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, 2018, non-cancelable leases expire on various
dates between 2019 and 2024 and require the following future minimum lease payments by year (in thousands):
Year ending December 31,
2019
2020
2021
2022
2023
2024
Total future minimum lease payments
Operating Leases
$
$
13,470
12,057
8,399
4,009
3,224
28
41,187
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 $6.9 million, $5.5 million, and $4.5 million for the fiscal years ended December 31, 2018,
2017 and 2016, respectively.
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, 2018 and
2017, the Company recorded a long-term sales tax liability of $1.1 million and $2.6 million, respectively, which is included in other long-term liabilities,
based on its best estimate of the probable liability for the loss contingency incurred as of those dates. The Company’s estimate of a probable
outcome under the loss contingency is based on analysis of its sales and marketing activities, revenues subject to sales tax, and applicable
regulations in each state in each period. No significant adjustments to the long-term sales tax liability have been recognized in the accompanying
consolidated financial statements for changes to the assumptions underlying the estimate. However, changes in management’s assumptions may
occur in the future as the Company obtains new information which can result in adjustments to the recorded liability. Increases and decreases to the
long-term sales tax liability are recorded as general and administrative expense.
The Company recorded a current sales tax liability for non-contingent amounts expected to be remitted in the next twelve months of $14.4
million and $9.0 million as of December 31, 2018 and 2017, respectively, which is included in accrued liabilities in the consolidated balance sheet.
Legal Matters
The Company is 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.
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.
81
TCPA Matters
On April 21, 2016, Supply Pro Sorbents, LLC (“SPS”) filed a putative class action against the Company in the United States District Court for
the Northern District of California, alleging common law conversion and violations of the federal Telephone Consumer Protection Act (“TCPA”)
arising from fax cover sheets used by the Company’s customers when sending facsimile transmissions over the Company’s system (“SPS
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, 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 SPS Lawsuit (“Petition”). The Petition remains pending. On July 8, 2016, the Company filed a motion to dismiss the SPS
Lawsuit in its entirety, along with a collateral motion to dismiss or stay the SPS Lawsuit pending a ruling by the FCC on its Petition. On October 7,
2016, the Court granted the Company’s motion to dismiss and gave SPS 20 days to amend its complaint. The district court concurrently dismissed
the Company’s motion to dismiss or stay as moot. Plaintiff filed its amended complaint on October 27, 2016, alleging essentially 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. On July 17, 2017, the Court granted the Company’s motion to dismiss with prejudice and
concurrently dismissed its motion to dismiss or stay as moot. SPS filed a notice of appeal to the Ninth Circuit Court of Appeals on July 28, 2017.
SPS’s opening brief on appeal was filed on December 20, 2017; asking that the dismissal be reversed and the case be returned to the district court
for the Lawsuit to proceed. The Company’s answering brief was filed on February 20, 2018; asking that the dismissal be affirmed. SPS filed its reply
brief on April 12, 2018. Oral argument had been scheduled to be heard on November 16, 2018, but on October 23, 2018, the district court ordered that
the case be submitted on the briefs and record without oral argument. The Ninth Circuit Court of Appeals issued a decision on November 20, 2018,
affirming the order of the district court and finding in RingCentral’s favor. On December 4, 2018, SPS filed a petition for panel rehearing, which
RingCentral responded to on January 9, 2019. On January 28, 2019, the Ninth Circuit Court of Appeals denied SPS’ petition for rehearing. It is too
early to predict the outcome of the SPS Lawsuit. Based on the information known to 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, it is not possible to provide an estimated amount of
any such loss or range of loss that may occur.
On 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 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 alleges 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
court dismissed Hurley’s vicarious liability claim, but allowed Hurley’s TCPA claim to proceed. The Company filed its answer and affirmatives
defenses to the second amended complaint on October 18, 2018. It is too early to predict the outcome of this lawsuit. Based on the information
known to 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, it is not possible to provide an estimated amount of any such loss or range of loss that may 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 alleging 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. In response to the motion, plaintiffs filed a first
amended complaint on October 24, 2017. The Company filed a renewed 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 litigation pending the
resolution of certain third-party inter partes review proceedings (“IPRs”) before the United States Patent and Trademark Office. On February 9, 2018,
the court stayed the litigation pending resolution of the IPRs without prejudice to or waiver of the Company’s motion to dismiss or
transfer. This litigation is still in its earliest stages. Based on the information known to 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, 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.
82
Employment Matter
On August 13, 2018, the Company was sued by a former employee, Darren Stemple, in the United States District Court for the Northern
District of California in a putative class and collective action alleging certain violations of federal and Colorado laws concerning overtime pay. In
January 2019, the Company entered into a memorandum of understanding with the plaintiff’s attorneys to settle the suit, without admission of
wrongdoing. The proposed settlement is subject to court approval. The consolidated financial statements include an accrual for the estimated loss
that is expected to occur.
Employee Agreements
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, 2018, 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.
Note 10. Stockholders’ Equity
In connection with the Company’s initial public offering (“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.
Preferred Stock
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, 2018 and 2017, there were 100,000,000 shares of preferred stock authorized and no 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 one 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 year anniversary of the closing date of the IPO (October 2, 2020).
83
Shares of Class A common stock reserved for future issuance were as follows (in thousands):
Preferred stock
Class B common stock
2013 Employee stock purchase plan
2013 Equity incentive plan:
Outstanding options and restricted stock unit awards
Available for future grants
December 31, 2018
100,000
11,601
3,290
7,692
13,060
135,643
Note 11. Share-Based Compensation
A summary of share-based compensation expense recognized in the Company’s consolidated statements of operations is as follows (in
thousands):
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total share-based compensation expense
2018
Year Ended December, 31
2017
2016
$
$
4,982 $
14,975
27,324
20,807
68,088 $
3,735 $
9,550
16,015
12,760
42,060 $
3,165
7,296
10,902
9,477
30,840
A summary of share-based compensation expense by award type is as follows (in thousands):
Options
Employee stock purchase plan rights
Restricted stock units
Total share-based compensation expense
Equity Incentive Plans
2018
Year Ended December, 31
2017
2016
$
$
3,433 $
3,094
61,561
68,088 $
6,803 $
2,177
33,080
42,060 $
9,626
1,737
19,477
30,840
In September 2013, the Board adopted and the Company’s stockholders approved the 2013 Equity Incentive 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”), 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”) 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 been 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, 2018, a total of 3,902,709 shares of Class A common stock were added
to the 2013 Plan in connection with the annual automatic increase provision. As of December 31, 2018, a total of 13,060,030 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).
84
A summary of option activity under all of the plans at December 31, 2018 and changes during the periods then ended is presented in the
following table:
Number of
Options
Weighted-
Average
Outstanding Exercise Price
(in thousands)
Per Share
Weighted-
Average
Contractual
Term
(in Years)
Aggregate
Intrinsic
Value
(in thousands)
107,091
6.2 $
Outstanding at December 31, 2015
Granted
Exercised
Canceled/Forfeited
Outstanding at December 31, 2016
Granted
Exercised
Canceled/Forfeited
Outstanding at December 31, 2017
Granted
Exercised
Canceled/Forfeited
Outstanding at December 31, 2018
Vested and expected to vest as of December 31, 2018
Exercisable as of December 31, 2018
8,048 $
547
(962 )
(249 )
7,384 $
25
(1,722 )
(401 )
5,286 $
—
(1,138 )
(17 )
4,131 $
4,120 $
3,957 $
10.27
16.53
10.01
15.50
10.59
23.99
10.39
16.04
10.30
—
8.17
18.79
10.86
10.84
10.58
5.3 $
74,065
4.2 $
201,480
3.3 $
3.3 $
3.3 $
295,921
295,028
284,364
The total intrinsic values of options exercised during the years ended December 31, 2018, 2017, and 2016 were as follows (in thousands):
Total intrinsic value of options exercised
Valuation Assumptions
2018
Year Ended December 31,
2017
2016
$
74,568 $
41,184 $
10,718
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. No
options were granted during the year ended December 31, 2018.
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 2017,
the expected term 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. In the fourth quarter of 2017, the Company’s historical data was weighted at
100%. The expected term for options issued to non-employees is the remaining contractual term.
Expected volatility: Prior to the fourth quarter of 2017, the expected stock price volatility of common stock was derived based on a weighing
of the Company’s historical volatility and the historical volatilities of a peer group of similar publicly traded companies over a period that
approximates the expected term of the option. In the fourth quarter of 2017, the Company’s historical volatility was weighted at 100%.
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.
85
The weighted-average assumptions used in the option-pricing model and the resulting grant date fair value of stock options granted in the
periods presented were as follows:
Expected term for employees (in years)
Expected term for non-employees (in years)
Expected volatility
Risk-free interest rate
Expected dividend yield
Grant date fair value of employee options
2018
Year ended December 31,
2017
2016
—
—
—
—
—
— $
4.4
4.6
44 %
1.78 %
0 %
9.08 $
4.7
5.9
47 %
1.12 %
0 %
6.72
As of December 31, 2018 and 2017, there was approximately $1.0 million and $3.8 million of unrecognized share-based compensation expense,
net of estimated forfeitures, related to stock option grants, which will be recognized on a straight-line basis over the remaining weighted-average
vesting periods of approximately 0.8 years and 1.4 years, respectively.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (“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 13th and November 13th 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,
2018, a total of 780,542 shares of Class A common stock were added to the ESPP Plan in connection with the annual increase provision. At
December 31, 2018, a total of 3,290,355 shares were available for issuance under the ESPP.
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:
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividend yield
Offering grant date fair value of ESPP rights
2018
Year ended December 31,
2017
2016
0.5
42 %
2.31 %
0 %
18.07 $
0.5
34 %
1.20 %
0 %
9.52 $
0.5
41 %
0.50 %
0 %
5.29
$
As of December 31, 2018 and 2017, there was approximately $1.5 million and $1.1 million of unrecognized share-based compensation expense
related to outstanding ESPP rights, which will be recognized on a straight-line basis over the remaining weighted average vesting periods of
approximately 0.4 years, respectively.
86
Restricted Stock Units
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, 2018 and changes during the periods then ended is presented
in the following table:
Weighted-
Number of
Average
RSUs
Grant Date Fair
Outstanding
(in thousands) Value Per Share
Aggregate
Intrinsic
Value
(in thousands)
53,972
Outstanding at December 31, 2015
Granted
Released
Canceled/Forfeited
Outstanding at December 31, 2016
Granted
Released
Canceled/Forfeited
Outstanding at December 31, 2017
Granted
Released
Canceled/Forfeited
Outstanding at December 31, 2018
2,288 $
2,798
(1,096 )
(436 )
3,554 $
3,005
(1,680 )
(598 )
4,281 $
1,746
(1,971 )
(495 )
3,561 $
16.63 $
18.65
16.77
17.92
18.01 $
30.20
19.54
20.91
25.51 $
67.64
30.50
34.99
42.09 $
73,261
207,197
293,523
As of December 31, 2018 and 2017, there was a total of $107.9 million and $79.1 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 2.4 years and 2.7 years, respectively.
Bonus Plan
In December 2017, the Board adopted the Selective 2018 Key Employee Equity Bonus Plan (“KEEB Plan”), which became effective on
January 1, 2018. The KEEB Plan allows the recipients to earn fully vested shares of the Company’s common stock upon the achievement of
quarterly service and performance conditions. During the year ended December 31, 2018, 114,147 RSUs were issued under the KEEB Plan. The
Company recognized an estimated $9.2 million of expense on a straight-line basis during the year ended December 31, 2018, based on a total
requisite service period of approximately 0.4 years.
The unrecognized share-based compensation expense was approximately $0.9 million, which will be recognized over the remaining service
period of 0.1 year. The shares issued under this plan will be issued from the Company’s 2013 Plan shares available for issuance.
Note 12. Income Taxes
Net loss before provision for (benefit from) income taxes consisted of the following (in thousands):
United States
International
Total net loss before provision for (benefit from) income taxes
* Adjusted for the adoption of Topic 606
87
2018
Year ended December 31,
2017
*As adjusted
2016
*As adjusted
$
$
(29,584 ) $
3,521
(26,063 ) $
(5,883 ) $
1,937
(3,946 ) $
(14,824 )
(1,165 )
(15,989 )
The provision for (benefit from) income taxes consisted of the following (in thousands):
Current
Federal
State
Foreign
Total current
Deferred
Federal
State
Foreign
Total deferred
Total income tax provision
2018
Year ended December 31,
2017
2016
$
$
$
— $
61
382
443
— $
—
(303 )
(303 )
140 $
— $
49
256
305
— $
—
(47 )
(47 )
258 $
—
63
209
272
—
—
(36 )
(36 )
236
The provision for (benefit from) income tax differed from the amounts computed by applying the U.S. federal income tax rate to pretax loss as
a result of the following (in thousands):
Federal tax benefit at statutory rate
State tax, net of federal tax benefit
Research and development credits
Share-based compensation
Other permanent differences
Change in U.S. federal Tax Rate
Foreign tax rate differential
Net operating (gains) losses not recognized
Release of valuation allowance associated with acquisitions
Total income tax provision
* Adjusted for the adoption of Topic 606
2018
Year ended December 31,
2017
*As adjusted
2016
*As adjusted
$
$
(5,473 ) $
48
(3,284 )
(25,170 )
1,325
—
(288 )
32,982
—
140 $
(1,341 ) $
32
(707 )
(18,154 )
814
33,254
(445 )
(13,195 )
—
258 $
(5,436 )
28
(745 )
960
600
—
(225 )
5,054
—
236
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 all periods presented. Because the Company’s non-U.S. subsidiary earnings have previously been
subject to the one-time transition tax on foreign earnings required by the 2017 Tax Act, any additional taxes due with respect to such earnings or the
excess of the amount for financial reporting over the tax basis of its foreign investments would generally be limited to foreign withholding taxes
and/or U.S. state income taxes.
88
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):
Deferred tax assets
Net operating loss and credit carry-forwards
Research and development credits
Sales tax liability
Share-based compensation
Accrued liabilities
Gross deferred tax assets
Valuation allowance
Total deferred tax assets
Deferred tax liabilities
Convertible debt discount
Deferred sales commissions
Acquired intangibles
Property and equipment
Net deferred tax (liabilities) assets
* Adjusted for the adoption of Topic 606
Year ended December 31,
2018
2017
*As adjusted
$
$
109,812 $
16,380
258
5,435
5,135
137,020
(94,118 )
42,902
(21,035 )
(18,253 )
(2,670 )
(3,573 )
(2,629 ) $
73,016
8,027
627
4,955
4,881
91,506
(75,874 )
15,632
—
(13,361 )
(344 )
(1,714 )
213
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
the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to
complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company recorded a provisional amount related
to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which was a
net decrease related to deferred tax assets and deferred tax liabilities of $38 million, with a corresponding and fully offsetting adjustment to the
Company’s valuation allowance for the year ended December 31, 2017. As of December 22, 2018, the Company has completed its accounting for the
remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. There have been
no net benefit changes to the provisional estimates disclosed in the period of enactment under SAB 118. The Tax Act also created a new
requirement that certain Global Intangible Low Taxed income (“GILTI”) earned by controlled foreign corporations (“CFCs”) must be included
currently in the gross income of the CFCs’ U.S. shareholder. The Company has elected to treat GILTI as a period cost in the computation of its
income tax provision computations.
In connection with the acquisition of Dimelo on October 24, 2018, a net deferred tax liability of $3.1 million was established, the most
significant component of which is related to the book/tax basis differences associated with the acquired technology and customer relationships.
The amortization of the intangibles also contributed to the deferred tax benefit recorded in the foreign jurisdictions in the current year.
On January 1, 2017, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies
several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax
withholding requirements and classification in the statement of cash flows. The adoption of that standard did not have an impact on the Company’s
consolidated balance sheet, results of operations, cash flows or statement of stockholders’ equity because the Company has a full valuation
allowance on its deferred tax assets. Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified
retrospective transition method. The previously unrecognized excess tax effects were recorded as a deferred tax asset, which was fully offset by a
valuation allowance. Without the valuation allowance, the Company’s deferred tax assets would have increased by $18.0 million.
89
At December 31, 2018, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $428.7
million and $344.8 million, respectively, available to reduce future income subject to income taxes. The federal and state net operating loss
carryforwards will begin to expire in 2023 and 2021, respectively. The Company also has research credit carryforwards for federal and California tax
purposes of approximately $13.1 million and $11.0 million, respectively, available to reduce future income subject to income taxes. The federal
research credit carryforwards will begin to expire in 2028 and the California research credits carry forward indefinitely. 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
Section 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. Utilization of the federal and state net operating losses
may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state
provisions.
The Company’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, 2018, the Company has provided a valuation allowance against the
Company’s U.S. net deferred tax assets. The net change in the valuation allowance for the years ended December 31, 2018 and 2017 was an increase
of $18.2 million, $4.8 million, respectively.
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, 2018 (in thousands):
Unrecognized tax benefits, beginning of the year
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Unrecognized tax benefits, end of year
2018
2017
2016
$
$
3,004 $
1,050
—
1,975
6,029 $
2,460 $
—
(3 )
547
3,004 $
1,897
26
—
538
2,460
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 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, and ESPP, 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,
2018, 2017 and 2016 (in thousands, except per share data):
Numerator
Net loss
Denominator
Weighted-average common shares for basic and diluted net
loss per share
Basic and diluted net loss per share
2018
Year Ended December 31,
2017
2016
(26,203 ) $
(4,204 ) $
(16,225 )
79,500
(0.33 ) $
76,281
(0.06 ) $
72,994
(0.22 )
$
$
90
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):
Shares of common stock issuable under equity incentive plans
outstanding
Convertible senior notes
Potential common shares excluded from diluted net loss per
share
Note 14. Geographic Concentrations
2018
Year Ended December 31,
2017
2016
8,943
79
10,806
—
11,726
—
9,022
10,806
11,726
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, 2018, 2017, and 2016. No other individual country exceeded 10% of total revenues for fiscal years ended
December 31, 2018, 2017, and 2016. Long-lived assets by geographic location is based on the location of the legal entity that owns the asset. At
December 31, 2018 and 2017, more than 67% and 85% of the Company’s long-lived assets were located in the U.S., respectively. As of December 31,
2018, France represented 26% of the Company’s consolidated long-lived assets, including fair value adjustments relating to the acquisition of
Dimelo. There was no other single country outside of the U.S. representing 10% or more of the Company’s consolidated long-lived assets as of
December 31, 2018 and 2017.
Note 15. 401(k) Plan
The Company has a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees.
Substantially all of the U.S. employees are eligible to make contributions to the 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 $2.9 million and
$1.1 million for the years ended December 31, 2018 and 2017. There were no employer contributions to this plan for the years ended December 31,
2016.
Note 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, 2018 and 2017 (in thousands except per share data):
Dec 31, 2018 Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 Dec 31, 2017* Sep 30, 2017* Jun 30, 2017* Mar 31, 2017*
Consolidated Statements of
Operations Data
Revenues
Gross profit
Operating loss
Net income (loss)
Net income (loss) per share,
basic and diluted
$
188,624 $
144,509
(3,404 )
(5,678 )
173,825 $
134,551
(7,027 )
(9,518 )
160,832 $
122,766
(4,654 )
(8,291 )
150,343 $
114,669
(1,351 )
(2,716 )
141,185 $
107,565
(217 )
(121 )
130,279 $
99,495
(265 )
269
119,919 $
90,358
(2,627 )
(2,115 )
112,234
84,928
(2,229 )
(2,237 )
$
(0.07 ) $
(0.12 ) $
(0.10 ) $
(0.03 ) $
— $
— $
(0.03 ) $
(0.03 )
*
Adjusted for the adoption of Topic 606.
91
Note 17. Related-Party Transactions
In the ordinary course of business, the Company made purchases from Google Inc., at which one of the Company’s directors serves as
President, Americas. Total payables to Google Inc. at December 31, 2018 and 2017 were $1.2 million and $1.1 million, respectively. Total expenses
incurred from Google Inc. in 2018, 2017, and 2016 were $18.8 million, $15.4 million, and $14.2 million, respectively.
Note 18. Subsequent Events
On January 14, 2019, the Company acquired all the stock of Connect First, Inc. (“Connect First”), a cloud-based outbound/blended customer
engagement platform for midsize and enterprise companies, for total consideration, net of cash acquired, of up to $40 million, including up to $4
million in restricted stock units, subject to customary transaction adjustments. The acquisition of Connect First will complement the Company’s
current Customer Engagement portfolio and will provide transformative and differentiated customer experiences. The acquisition will be accounted
for as a business combination. Management is evaluating the impact of the business combination on its consolidated financial statements. The
purchase price will be allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values at the acquisition
date. The Company is currently performing procedures necessary to determine the purchase price allocation and will record the initial fair value
estimates in the financial statements for the quarter ending March 31, 2019.
92
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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 (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 SEC 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,
2018 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”). 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, 2018. In evaluating the effectiveness of our internal controls over financial reporting as of December 31, 2018, our management
excluded Dimelo SA (“Dimelo”) in accordance with the guidance issued by the Securities and Exchange Commission, since it was acquired on
October 22, 2018. Dimelo’s assets, excluding acquisition method fair value adjustments, as of December 31, 2018, and Dimelo’s revenues for the
period from October 22, 2018 through December 31, 2018, were less than 1% of our consolidated total assets and total revenues, respectively, in our
consolidated financial statements.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by KPMG 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
Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Changes were made to the
relevant business processes and the related control activities, including information systems, in order to monitor and maintain appropriate controls
over financial reporting. There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31,
2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
93
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.
94
PART III
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.
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.
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.com within 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.
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.
The following chart sets forth certain information as of December 31, 2018, with respect to our equity compensation plans, specifically our
2003 Equity Incentive Plan (the “2003 Plan”), 2010 Equity Incentive Plan (the “2010 Plan”), 2013 Equity Incentive Plan (the “2013 Plan”), and our
Amended and Restated Employee Stock Purchase Plan (the “ESPP”). Each of the 2003 Plan, the 2010 Plan, the 2013 Plan and the ESPP has been
approved by our stockholders.
Plan Category
Equity compensation plans approved by security holders
Number of
securities to
be issued
upon exercise
of outstanding
options,
warrants and
rights
Equity Compensation Plan Information
Weighted
average
exercise
price of
outstanding
options,
warrants and
rights
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (1)
7,805,035 $
25.93
16,350,385
Equity Compensation Plan Information
(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, 2018, a total of
3,902,709 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) once 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,
2018, a total of 780,542 shares of Class A common stock were added to the 2013 ESPP Plan in connection with the annual increase provision.
95
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.
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.
96
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are included herein or incorporated herein by reference:
PART IV.
Exhibit
Number
3.1
3.2
4.1
4.2
10.1+
10.2+
10.3+
10.4+
Description
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).
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).
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).
Indenture, dated March 5, 2018, between RingCentral, Inc. and U.S. Bank National Association. (filed as Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed on March 6, 2018, and incorporated herein by reference).
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).
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).
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).
Amended and Restated Employee Stock Purchase Plan (filed as Exhibit 10.2 to the Registrant’s Quarterly Statement on Form 10-Q for
the quarter ended June 30, 2018, filed on August 7, 2018, and incorporated herein by reference).
10.5+
Equity Acceleration Policy.
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
Form of Director and Executive Officer Indemnification Agreement (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2017, filed on August 7, 2017, and incorporated herein by reference).
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).
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).
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).
Offer Letter by and between the Company and Mitesh Dhruv, dated March 1, 2012 (filed as Exhibit 10.2 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2017, filed on August 7, 2017, and incorporated herein by reference).
Offer Letter by and between the Company and Mitesh Dhruv, dated July 28, 2017 (filed as Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2017, filed on November 9, 2017, and incorporated herein by reference).
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).
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).
97
Exhibit
Number
10.14+
2017 Bonus Plan, Appendix A 2017 H1, Appendix B 2017 H2 (filed as Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2017, filed on February 26, 2018, and incorporated herein by reference).
Description
10.15+
2018 Bonus Plan, Appendix A 2018.
10.16
10.17
10.18
10.19
10.20
21.1
23.1
24.1
31.1
31.2
32.1
32.2
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).
Commercial Lease Agreement, dated May 17, 2017, by and between the Company and TG Brothers, LLC. (filed as Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, filed on August 7, 2017, and incorporated herein by
reference).
First Amendment to Lease, dated May 7, 2018, by and between the Registrant and TG Brothers, LLC. (filed as Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed on August 7, 2018, and incorporated herein by
reference).
Form 0% Convertible Senior Note due 2023 (included in Exhibit 4.2). (Filed as Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on March 6, 2018, and incorporated herein by reference).
Form of Capped Call Confirmation. (Filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2018, and
incorporated herein by reference).
List of subsidiaries of the Registrant.
Consent of KPMG LLP, independent registered public accounting firm.
Power of Attorney (included in signature page).
Certification of Periodic Report by Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Periodic Report by Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
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
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.
+ Indicates a management or compensatory plan
(b) Financial Statements. Our consolidated financial statements are included under Part II, Item 8 of this Annual Report on Form 10-K.
(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.
98
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
26th day of February 2019.
SIGNATURES
RINGCENTRAL, INC.
/s/ Vladimir Shmunis
Vladimir Shmunis
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Mitesh Dhruv
Mitesh Dhruv
Chief Financial Officer
(Principal Financial and Accounting Officer)
99
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Vladimir Shmunis
and Mitesh Dhruv, 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
/s/ Vladimir Shmunis
Vladimir Shmunis
/s/ Mitesh Dhruv
Mitesh Dhruv
/s/ Michelle McKenna
Michelle McKenna
/s/ Robert Theis
Robert Theis
/s/ Allan Thygesen
Allan Thygesen
/s/ R. Neil Williams
R. Neil Williams
/s/ Kenneth A. Goldman
Kenneth A. Goldman
Title
Chairman and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
(Back To Top)
100
Section 2: EX-10.5+ (EX-10.5+)
Date
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
EXHIBIT 10.5
RINGCENTRAL, INC.
EQUITY ACCELERATION POLICY
EFFECTIVE AS OF JULY 28, 2017
This RingCentral, Inc. Equity Acceleration Policy (the “Policy”) is designed to provide equity acceleration benefits to a select group
of key employees of RingCentral, Inc. (the “Company”) or any of its subsidiaries if their employment is involuntarily terminated under
the circumstances described in this Policy. The Policy is designed to be an “employee welfare benefit plan” (as defined in Section 3
(1) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), and this document is both the formal plan
document and the required summary plan description for the Policy. The Policy is effective July 28, 2017.
1. Administration: The Policy will be administered by the Compensation Committee of the Board of Directors of the
Company or its delegate (in each case, an “Administrator”). The Administrator will have full discretion to administer and
interpret the Policy. Any decision made or other action taken by the Administrator with respect to the Policy and any
interpretation by the Administrator of any term or condition of the Policy, or any related document, will be conclusive and
binding on all persons and be given the maximum possible deference allowed by law. The Administrator is the “plan
administrator” of the Policy for purposes of ERISA and will be subject to the fiduciary standards of ERISA when acting in
such capacity.
2. Eligibility: An individual is only eligible for the benefits under this Policy if he or she is an Eligible Employee and complies
with its terms (including any terms in such Eligible Employee’s Participation Agreement (as defined below)). An “Eligible
Employee” is an employee of the Company or any subsidiary of the Company who has (a) been designated by the
Administrator as eligible to participate in the Policy, whether individually or by position or category of position and (b)
executed a participation agreement in the form attached hereto as Exhibit A (a “Participation Agreement”).
3. Equity Acceleration: On a Qualified Termination, a percentage as shall be set forth in the Eligible Employee’s Participation
Agreement of the then-unvested shares subject to each of the Eligible Employee’s then-outstanding Equity Awards, will
immediately vest and, in the case of Equity Awards that are stock options and stock appreciation rights, will become
exercisable. For the avoidance of doubt, if an Eligible Employee’s employment with the Company or any subsidiary of the
Company terminates in a manner where such termination will constitute a Qualified Termination if a Change of Control
occurs within 60 days of the termination date, then any unvested portion of the Eligible Employee’s Equity Awards will remain
outstanding for 60 days so that any benefits on a Qualified Termination can be provided if a Change of Control occurs within
60 days following such Eligible Employee’s termination date (provided that in no event will the terminated Eligible Employee’s
Equity Awards that are stock options or similar Equity Awards remain outstanding beyond the Equity Award’s maximum
term). In such case, if no Change of Control occurs within 60 days following the termination date, any unvested portion of the
Eligible Employee’s Equity Awards automatically will be forfeited permanently without having vested.
4. Death of Eligible Employee: If the Eligible Employee dies before all payments or benefits he or she is entitled to receive
have been paid under this Policy, such unpaid amounts will be paid to his or her designated beneficiary, if living, or otherwise
to his or her personal representative in a lump-sum payment as soon as possible following his or her death.
5. Forfeiture/Clawback: If the Company discovers after the Eligible Employee’s receipt of payments or benefits under this
Policy that grounds for the termination of the Eligible Employee’s employment for Cause existed, then the Eligible Employee
will cease receiving any further payments or benefits under this Policy and, to the extent permitted under applicable laws, will
be required to repay to the Company any payments or benefits he or she received under the Policy (or any financial gain
derived from such payments or benefits).
6. Release: The Eligible Employee’s receipt of the benefits under this Policy is subject to the Eligible Employee signing and not
revoking the Company’s then-standard separation agreement and release of claims (which may include an agreement not to
disparage the Company, non-solicit provisions, and other standard terms and conditions) (the “Release”) which must become
effective and irrevocable no later than the 60th day following the Eligible Employee’s termination of employment (the
“Release Deadline”). If the Release does not become effective and irrevocable by the Release Deadline, the Eligible
Employee will forfeit any right to benefits under this Policy. In no event will benefits under the Policy be paid or provided until
the Release actually becomes effective and irrevocable.
7. Section 409A: The Company intends that all payments and benefits provided under this Policy or otherwise are exempt
from, or comply with, the requirements of Section 409A of the Code and any guidance promulgated thereunder (collectively,
“Section 409A”) so that none of the payments or benefits will be subject to the additional tax imposed under Section 409A,
and any ambiguities herein will be interpreted in accordance with this intent. No payment or benefits to be paid to an Eligible
Employee, if any, under this Policy or otherwise, when considered together with any other severance payments or separation
benefits that are considered deferred compensation under Section 409A (together, the “Deferred Payments”) will be paid or
otherwise provided until such Eligible Employee has a “separation from service” within the meaning of Section 409A. If, at
the time of the Eligible Employee’s termination of employment, the Eligible Employee is a “specified employee” within the
meaning of Section 409A, then the payment of the Deferred Payments will be delayed to the extent necessary to avoid the
imposition of the additional tax imposed under Section 409A, which generally means that the Eligible Employee will receive
payment on the first payroll date that occurs on or after the date that is 6 months and 1 day following his or her termination of
employment. The Company reserves the right to amend the Policy as it deems necessary or advisable, in its sole discretion
and without the consent of any Eligible Employee or any other individual, to comply with any provision required to avoid the
imposition of the additional tax imposed under Section 409A or to otherwise avoid income recognition under Section 409A
prior to the actual payment of any benefits or imposition of any additional tax. Each payment, installment, and benefit payable
under this Policy is a separate payment for purposes of U.S. Treasury Regulation Section 1.409A-2(b)(2). In no event will
the Company reimburse any Eligible Employee for any taxes that may be imposed on him or her as a result of Section 409A.
8. Parachute Payments:
a. Reduction of Severance Benefits. Notwithstanding anything set forth herein to the contrary, if any payment or
benefit that an Eligible Employee would receive from the Company or any other party whether in connection with
the provisions herein or otherwise (the “Payment”) would (a) constitute a “parachute payment” within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and (b) but for this sentence, be
subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment will be
equal to the Best Results Amount. The “Best Results Amount” will be either (x) the full amount of such
Payment or (y) such lesser amount as would result in no portion of the Payment being subject to the Excise Tax,
2
whichever of the foregoing amounts, taking into account the applicable federal, state and local employment taxes,
income taxes and the Excise Tax, results in the Eligible Employee’s receipt, on an after-tax basis, of the greater
amount notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in
payments or benefits constituting parachute payments is necessary so that the Payment equals the Best Results
Amount, reduction will occur in the following order: reduction of cash payments; cancellation of accelerated vesting
of stock awards; and reduction of employee benefits. In the event that acceleration of vesting of stock award
compensation is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of
grant of the Eligible Employee’s equity awards.
b. Determination of Excise Tax Liability. The Company will select a professional services firm to make all of the
determinations required to be made under these paragraphs relating to parachute payments. The Company will
request that firm provide detailed supporting calculations both to the Company and the Eligible Employee prior to
the date on which the event that triggers the Payment occurs if administratively feasible, or subsequent to such date
if events occur that result in parachute payments to the Eligible Employee at that time. For purposes of making the
calculations required under these paragraphs relating to parachute payments, the firm may make reasonable
assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith determinations
concerning the application of the Code. The Company and the Eligible Employee will furnish to the firm such
information and documents as the firm may reasonably request in order to make a determination under these
paragraphs relating to parachute payments. The Company will bear all costs the firm may reasonably incur in
connection with any calculations contemplated by these paragraphs relating to parachute payments. Any such
determination by the firm will be binding upon the Company and the Eligible Employee, and the Company will have
no liability to the Eligible Employee for the determinations of the firm.
9. Attorneys Fees: The Company and each Eligible Employee will bear their own attorneys’ fees incurred in connection with
any disputes between them.
10. Amendment: The Administrator may amend the Policy at any time, without advance notice to any Eligible Employee or other
individual and without regard to the effect of the amendment on any Eligible Employee or on any other individual; provided,
however, that any amendment of the Policy that is adverse to an Eligible Employee will not be effective with respect to such
Eligible Employee without such Eligible Employee’s prior written consent. Any action to amend the Policy will be taken in a
non-fiduciary capacity.
11. Claims Procedure: Any Eligible Employee who believes he or she is entitled to any payment under the Policy may submit a
claim in writing to the Administrator. If the claim is denied (in full or in part), the claimant will be provided a written notice
explaining the specific reasons for the denial and referring to the provisions of the Policy on which the denial is based. The
notice will also describe any additional information needed to support the claim and the Policy’s procedures for appealing the
denial. The denial notice will be provided within 90 days after the claim is received. If special circumstances require an
extension of time (up to 90 days), written notice of the extension will be given within the initial 90-day period. This notice of
extension will indicate the special circumstances requiring the extension of time and the date by which the Administrator
expects to render its decision on the claim.
3
12. Appeal Procedure: If the claimant’s claim is denied, the claimant (or his or her authorized representative) may apply in
writing to the Administrator for a review of the decision denying the claim. Review must be requested within 60 days
following the date the claimant received the written notice of their claim denial or else the claimant loses the right to
review. The claimant (or representative) then has the right to review and obtain copies of all documents and other
information relevant to the claim, upon request and at no charge, and to submit issues and comments in writing. The
Administrator will provide written notice of the decision on review within 60 days after it receives a review request. If
additional time (up to 60 days) is needed to review the request, the claimant (or representative) will be given written notice of
the reason for the delay. This notice of extension will indicate the special circumstances requiring the extension of time and
the date by which the Administrator expects to render its decision. If the claim is denied (in full or in part), the claimant will
be provided a written notice explaining the specific reasons for the denial and referring to the provisions of the Policy on
which the denial is based. The notice will also include a statement that the claimant will be provided, upon request and free of
charge, reasonable access to, and copies of, all documents and other information relevant to the claim and a statement
regarding the claimant’s right to bring an action under Section 502(a) of ERISA.
13. Successors: Any successor to the Company of all or substantially all of the Company’s business and/or assets (whether
direct or indirect and whether by purchase, merger, consolidation, liquidation or other transaction) will assume the obligations
under the Policy and agree expressly to perform the obligations under the Policy in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence of a succession. For all purposes under the
Policy, the term “Company” will include any successor to the Company’s business and/or assets which becomes bound by the
terms of the Policy by operation of law, or otherwise.
14. Effect of Other Benefits/At Will-Status. All other compensation and benefits shall be governed by the applicable
Company plan or agreement. This Policy is not intended to, and does not, create an employment or service relationship for
any fixed term.
15. Applicable Law: The provisions of the Policy will be construed, administered, and enforced in accordance with ERISA and,
to the extent applicable, the internal substantive laws of the state of California (but not its conflict of laws provisions).
16. Definitions: Unless otherwise defined in an Eligible Employee’s Participation Agreement, the following terms will have the
following meanings for purposes of this Policy and the Eligible Employee’s Participation Agreement:
a. “Cause” means, unless otherwise defined in the Participation Agreement, the Eligible Employee’s (i) commission
of fraud, misappropriation, embezzlement or breach of fiduciary duty, (ii) material breach or repeated failure to
perform the Eligible Employee’s employment duties to the Company or the subsidiary of the Company employing
the Eligible Employee, (iii) material breach of the Eligible Employee’s confidentiality agreement or any other similar
agreement between the Eligible Employee and the Company or any subsidiary of the Company, (iv) conviction of,
or entry of a plea of guilty or nolo contendere to, a felony (other than motor vehicle offenses the effect of which do
not materially impair the Eligible Employee’s performance of the Eligible Employee’s employment duties), or
(v) commission of any act of fraud or embezzlement or any act of dishonesty or any other willful misconduct that
has caused or is reasonably expected to result in a material injury to the Company or any of its subsidiaries.
4
b. “Change of Control” means the occurrence of any of the following events: (i) any consolidation or merger of the
Company with or into any other corporation or other entity or person, or any other corporate reorganization after
which the stockholders of the Company immediately prior to such consolidation, merger or reorganization, fail to
own at least 50% of the voting power of the surviving entity immediately following such consolidation, merger or
reorganization, (ii) any transaction or series of related transactions to which the Company is a party in which in
excess of 50% of the Company’s voting power is transferred, but excluding in the case of (i) and (ii), (x) any
consolidation or merger effected exclusively to change the domicile or state of incorporation of the Company, or
(y) any transaction or series of transactions principally for bona fide equity financing purposes in which cash is
received by the Company or indebtedness of the Company is cancelled or converted or a combination thereof, or
(iii) a sale, lease or other disposition of all or substantially all of the assets of the Company.
c. “Change of Control Period” means the period beginning 60 days prior to a Change of Control and ending 12
months following a Change of Control.
d. “Disability” means the Eligible Employee has been unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment that can be expected to result in death or can be
expected to last for a continuous period of not less than 12 months. Alternatively, the Eligible Employee will be
deemed disabled if determined to be totally disabled by the Social Security Administration. Termination resulting
from Disability may only be effected after at least 30 days’ written notice by the Company of its intention to
terminate the Eligible Employee’s employment. In the event that the Eligible Employee resumes the performance of
substantially all of the Eligible Employee’s duties hereunder before the termination of his or her employment
becomes effective, the notice of intent to terminate based on Disability will automatically be deemed to have been
revoked.
e. “Equity Awards” means, individually or collectively, a grant by the Company of stock options, stock appreciation
rights, restricted stock, restricted stock units or any other award of equity interests in the Company as determined
by the Administrator.
f. “Good Reason” means, unless otherwise defined in the Participation Agreement, an Eligible Employee’s
resignation of employment from all positions the Eligible Employee holds with the Company and its subsidiaries (or
the acquirer) following the occurrence of at least one of the following events that occurs without the Eligible
Employee’s consent: (i) a material diminution of at least five percent (5%) in the Eligible Employee’s overall
annual compensation (it being agreed that the Eligible Employee’s failure to achieve or be paid any target bonus
does not constitute a 5% reduction of the Eligible Employee’s overall compensation), (ii) a material diminution in the
Eligible Employee’s authority, responsibilities, or duties (except that a change in job position or title, without more,
shall not be a material diminution), (iii) a material diminution in the authority, responsibilities, or duties of the
supervisor to whom the Eligible Employee reports either immediately prior to or after the Change of Control, or (iv)
the Company or acquirer’s requirement that the Eligible Employee relocate his or her primary work location to a
location that would increase the Eligible Employee’s one-way commute distance by more than 30 miles (than the
Eligible Employee’s current commute distance to the Company’s then-current corporate offices). For Good
Reason to be established, the Eligible Employee must provide written notice to the Company’s General Counsel
within 90 days immediately following such event, the Company must fail to remedy such event within 30 days after
receipt of such notice, and the Eligible Employee’s resignation must be effective not later than 90
5
days after the expiration of such cure period. For purposes of notice, if a “diminution” occurs incrementally over a
period of time (not to exceed 12 months from the date of the Change of Control), the “event” shall not be deemed
to occur until the end of such diminution period.
g. “Qualified Termination” means a termination of the Eligible Employee’s employment (i) either (A) by the
Company (or any of its subsidiaries) other than for Cause, death, or Disability or (B) by the Eligible Employee for
Good Reason, in either case, during the Change of Control Period.
17. Additional Information:
Plan Name:
Plan Sponsor:
RingCentral, Inc. Equity Acceleration Policy
RingCentral, Inc.
20 Davis Drive
Belmont, CA 94002
Identification Numbers:
EIN: 94-3322844
Plan Year:
Plan Administrator:
Agent for Service of
Legal Process:
Plan Number: 501
Company’s Fiscal Year
RingCentral, Inc.
Attention: Administrator of the RingCentral, Inc. Equity Acceleration
Policy
20 Davis Drive
Belmont, CA 94002
RingCentral, Inc.
Attention: General Counsel
20 Davis Drive
Belmont, CA 94002
Service of process may also be made upon the Plan Administrator.
Type of Plan
Plan Costs
Severance Plan/Employee Welfare Benefit Plan
The cost of the Policy is paid by the Company.
6
Statement of ERISA Rights:
Eligible Employees have certain rights and protections under ERISA:
They may examine (without charge) all Policy documents, including any amendments and copies of all documents filed with
the U.S. Department of Labor, such as the Policy’s annual report (Internal Revenue Service Form 5500). These
documents are available for review in the Company’s Human Resources Department.
They may obtain copies of all Policy documents and other Policy information upon written request to the Plan
Administrator. A reasonable charge may be made for such copies.
In addition to creating rights for Eligible Employees, ERISA imposes duties upon the people who are responsible for the
operation of the Policy. The people who operate the Policy (called “fiduciaries”) have a duty to do so prudently and in the
interests of Eligible Employees. No one, including the Company or any other person, may fire or otherwise discriminate
against an Eligible Employee in any way to prevent them from obtaining a benefit under the Policy or exercising rights under
ERISA. If an Eligible Employee’s claim for a severance benefit is denied, in whole or in part, they must receive a written
explanation of the reason for the denial. An Eligible Employee has the right to have the denial of their claim
reviewed. (The claim review procedure is explained above.)
Under ERISA, there are steps Eligible Employees can take to enforce the above rights. For instance, if an Eligible
Employee requests materials and does not receive them within 30 days, they may file suit in a federal court. In such a case,
the court may require the Administrator to provide the materials and to pay the Eligible Employee up to $110 a day until they
receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan
Administrator. If an Eligible Employee has a claim which is denied or ignored, in whole or in part, he or she may file suit in
a state or federal court. If it should happen that an Eligible Employee is discriminated against for asserting their rights, he or
she may seek assistance from the U.S. Department of Labor, or may file suit in a federal court.
In any case, the court will decide who will pay court costs and legal fees. If the Eligible Employee is successful, the court
may order the person sued to pay these costs and fees. If the Eligible Employee loses, the court may order the Eligible
Employee to pay these costs and fees, for example, if it finds that the claim is frivolous.
If an Eligible Employee has any questions regarding the Policy, please contact the Plan Administrator. If an Eligible
Employee has any questions about this statement or about their rights under ERISA, they may contact the nearest area
office of the Employee Benefits Security Administration (formerly the Pension and Welfare Benefits Administration), U.S.
Department of Labor, listed in the telephone directory, or the Division of Technical Assistance and Inquiries, Employee
Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue, N.W. Washington, D.C. 20210. An
Eligible Employee may also obtain certain publications about their rights and responsibilities under ERISA by calling the
publications hotline of the Employee Benefits Security Administration.
7
EXHIBIT A
RingCentral, Inc. Equity Acceleration Policy
Participation Agreement
This Participation Agreement (“Agreement”) is made and entered into by and between _________________ on the one
hand, and RingCentral, Inc. (the “Company”) on the other.
You have been designated as eligible to participate in the Policy, a copy of which is attached hereto, pursuant to which you
are eligible to receive equity acceleration in accordance with the terms and conditions of the Policy.
Equity Acceleration: [percentage] of the then-outstanding unvested Equity Awards (for avoidance of doubt, no more than
100% of the shares subject to the outstanding portion of an Equity Award may vest and become exercisable pursuant to this
provision).
Other Provisions
Except as set forth in this paragraph, you agree that the Policy and the Agreement constitute the entire agreement of the
parties hereto and supersede in their entirety all prior representations, understandings, undertakings or agreements (whether oral or
written and whether expressed or implied) of the parties, and will specifically supersede any double trigger equity acceleration
provisions of any offer letter, employment agreement, or equity award agreement entered into between you and the Company. To the
extent not amended by the Policy or the Agreement, each offer letter, employment agreement or equity award agreement entered into
between you and the Company remains in full force and effect.
This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will
constitute one and the same instrument.
By its signature below, each of the parties signifies its acceptance of the terms of this Agreement, in the case of the
Company by its duly authorized officer effective as of the last date set forth below.
RINGCENTRAL, INC.
By:
Date:
Signature:
Date:
(Back To Top)
Section 3: EX-10.15+ (EX-10.15+)
RINGCENTRAL, INC.
BONUS PLAN
EXHIBIT 10.15
1.
Purposes of the Plan. This Bonus Plan (the “Plan”) is intended to increase shareholder value and the success of
the Company by motivating Employees to (a) perform to the best of their abilities, and (b) achieve the Company’s objectives.
2.
Definitions.
(a)
ventures) controlled by the Company.
“Affiliate” means any corporation or other entity (including, but not limited to, partnerships and joint
(b)
“Actual Award” means as to any Performance Period, the actual award (if any) payable to a
Participant for the Performance Period, subject to the Committee’s authority under Section 3(d) to modify the award.
(c)
(d)
“Board” means the Board of Directors of the Company.
“Bonus Pool” means the pool of funds available for distribution to Participants. Subject to the terms
of the Plan, the Committee establishes the Bonus Pool for each Performance Period.
(e)
“Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of
the Code or regulation thereunder will include such section or regulation, any valid regulation promulgated thereunder, and any
comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.
(f)
“Committee” means the committee appointed by the Board (pursuant to Section 5) to administer the
Plan. Unless and until the Board otherwise determines, the Board’s Compensation Committee will administer the Plan.
(g)
(h)
“Company” means RingCentral, Inc., or any successor thereto.
“Disability” means a permanent and total disability determined in accordance with uniform and
nondiscriminatory standards adopted by the Committee from time to time.
(i)
“Employee” means any executive or key employee of the Company or of an Affiliate, whether such
individual is so employed at the time the Plan is adopted or becomes so employed subsequent to the adoption of the Plan.
(j)
“Participant” means as to any Performance Period, an Employee who has been selected by the
Committee for participation in the Plan for that Performance Period.
(k)
“Performance Period” means the period of time for the measurement of the performance criteria that
must be met to receive an Actual Award, as determined by the Committee in its sole discretion. A Performance Period may be
divided into one or more shorter periods if, for example, but not by way of limitation, the Committee desires to measure some
performance criteria over 12 months and other criteria over 3 months.
(l)
“Plan” means this Bonus Plan, as set forth in this instrument and as hereafter amended from time to
time.
(m)
“Target Award” means the target award, at 100% performance achievement, payable under the Plan
to a Participant for the Performance Period, as determined by the Committee in accordance with Section 3(b).
(n)
“Termination of Service” means a cessation of the employee-employer relationship between an
Employee and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation,
discharge, death, Disability, retirement, or the disaffiliation of an Affiliate, but excluding any such termination where there is a
simultaneous reemployment by the Company or an Affiliate.
3.
Selection of Participants and Determination of Awards.
(a)
Selection of Participants. The Committee, in its sole discretion, will select the Employees who will be
Participants for any Performance Period. Participation in the Plan is in the sole discretion of the Committee, on a Performance
Period by Performance Period basis. Accordingly, an Employee who is a Participant for a given Performance Period in no way is
guaranteed or assured of being selected for participation in any subsequent Performance Period or Periods.
(b)
Determination of Target Awards. The Committee, in its sole discretion, will establish a Target Award
for each Participant, which generally will be a percentage of a Participant’s average annual base salary for the Performance
Period.
(c)
Bonus Pool. Each Performance Period, the Committee, in its sole discretion, will establish a Bonus
Pool. Actual Awards will be paid from the Bonus Pool.
(d)
Discretion to Modify Awards. Notwithstanding any contrary provision of the Plan, the Committee
may, in its sole discretion and at any time, (i) increase, reduce or eliminate a Participant’s Actual Award, and/or (ii) increase,
reduce or eliminate the amount allocated to the Bonus Pool. The Committee may determine the amount of any increase or
reduction on the basis of such factors as it deems relevant, and will not be required to establish any allocation or weighting with
respect to the factors it considers.
-2-
(e)
Discretion to Determine Criteria. Notwithstanding any contrary provision of the Plan, the Committee
will, in its sole discretion, determine the performance goals applicable to any Target Award which requirement may include, without
limitation, (i) cash flow, (ii) cash position, (ii) earnings (which may include earnings before interest and taxes, earnings before taxes
and net earnings), (iii) earnings per share, (iv) net income, (v) net profit, (vi) net sales, (vii) operating cash flow, (xxiv) operating
expenses, (xxv) operating income, (xxvi) operating margin, (xxvii) overhead or other expense reduction, (xxviii) product defect
measures, (xxix) product release timelines, (xxx) productivity, (xxxi) profit, (xxxii) return on assets, (xxxiii) return on capital, (xxxiv)
return on equity, (xxxv) return on investment, (xxxvi) return on sales, (xxxvii) revenue, (xxxviii) revenue growth, (xxxix) sales
results, (xl) sales growth, (xli) stock price, (xlii) time to market, (xliii) total stockholder return, (xliv) working capital, and individual
objectives such as peer reviews or other subjective or objective criteria. As determined by the Committee, the performance goals
may be based on GAAP or Non-GAAP results and any actual results may be adjusted by the Committee for one-time items or
unbudgeted or unexpected items when determining whether the performance goals have been met. The goals may be on the basis
of any factors the Committee determines relevant, and may be on an individual, divisional, business unit or Company-wide
basis. The performance goals may differ from Participant to Participant and from award to award. The Committee may, in its
discretion, determine to set forth the applicable performance goals in writing from time-to-time, which writing shall be attached
hereto as Appendix A. Failure to meet the goals will result in a failure to earn the Target Award, except as provided in Section 3
(d).
4.
Payment of Awards.
(a)
Right to Receive Payment. Each Actual Award will be paid solely from the general assets of the
Company. Nothing in this Plan will be construed to create a trust or to establish or evidence any Participant’s claim of any right
other than as an unsecured general creditor with respect to any payment to which he or she may be entitled.
(b)
Timing of Payment. Payment of each Actual Award shall be made as soon as practicable as
determined by the Committee after the end of the Performance Period during which the Actual Award was earned, but in no event
later than the fifteenth day of the third month of the Fiscal Year following the date the Participant’s Actual Award is no longer
subject to a substantial risk of forfeiture. Unless otherwise determined by the Committee, a Participant must be employed by the
Company or any Affiliate on the last day of the Performance Period to receive a payment under the Plan.
It is the intent that this Plan comply with the requirements of Code Section 409A so that none of the payments to
be provided hereunder will be subject to the additional tax imposed under Code Section 409A, and any ambiguities herein will be
interpreted to so comply.
(c)
Form of Payment. Each Actual Award will be paid in cash (or its equivalent) in a single lump sum.
(d)
Payment in the Event of Death or Disability. If a Participant dies or becomes Disabled prior to the
payment of an Actual Award earned by him or her prior to death or Disability for a prior Performance Period, the Actual Award
will be paid to his or her estate or to the Participant, as the case may be, subject to the Committee’s discretion to reduce or
eliminate any Actual Award otherwise payable.
-3-
5.
Plan Administration.
(a)
Committee is the Administrator. The Plan will be administered by the Committee or, if no Committee
has been appointed, the Plan shall be administered by the Board. The Committee will consist of not less than two (2) members of
the Board. The members of the Committee will be appointed from time to time by, and serve at the pleasure of, the Board.
(b)
Committee Authority. It will be the duty of the Committee to administer the Plan in accordance with
the Plan's provisions. The Committee will have all powers and discretion necessary or appropriate to administer the Plan and to
control its operation, including, but not limited to, the power to (i) determine which Employees will be granted awards,
(ii) prescribe the terms and conditions of awards, (iii) interpret the Plan and the awards, (iv) adopt such procedures and subplans
as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside of
the United States, (v) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, and
(vi) interpret, amend or revoke any such rules.
(c)
Decisions Binding. All determinations and decisions made by the Committee, the Board, and any
delegate of the Committee pursuant to the provisions of the Plan will be final, conclusive, and binding on all persons, and will be
given the maximum deference permitted by law.
(d)
Delegation by Committee. The Committee, in its sole discretion and on such terms and conditions as
it may provide, may delegate all or part of its authority and powers under the Plan to one or more directors and/or officers of the
Company.
(e)
Indemnification. Each person who is or will have been a member of the Committee will be
indemnified and held harmless by the Company against and from (i) any loss, cost, liability, or expense that may be imposed upon
or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she
may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any award,
and (ii) from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in
satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she will give the
Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it
on his or her own behalf. The foregoing right of indemnification will not be exclusive of any other rights of indemnification to which
such persons may be entitled under the Company’s Articles of Incorporation or Bylaws, by contract, as a matter of law, or
otherwise, or under any power that the Company may have to indemnify them or hold them harmless.
-4-
6.
General Provisions.
(a)
Tax Withholding. The Company will withhold all applicable taxes from any Actual Award, including
any federal, state and local taxes (including, but not limited to, the Participant’s FICA and SDI obligations).
(b)
No Effect on Employment or Service. Nothing in the Plan will interfere with or limit in any way the
right of the Company to terminate any Participant's employment or service at any time, with or without cause. For purposes of the
Plan, transfer of employment of a Participant between the Company and any one of its Affiliates (or between Affiliates) will not be
deemed a Termination of Service. Employment with the Company and its Affiliates is on an at-will basis only. The Company
expressly reserves the right, which may be exercised at any time and without regard to when during a Performance Period such
exercise occurs, to terminate any individual’s employment with or without cause, and to treat him or her without regard to the effect
that such treatment might have upon him or her as a Participant.
(c)
Participation. No Employee will have the right to be selected to receive an award under this Plan, or,
having been so selected, to be selected to receive a future award.
(d)
Successors. All obligations of the Company under the Plan, with respect to awards granted
hereunder, will be binding on any successor to the Company, whether the existence of such successor is the result of a direct or
indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company.
(e)
Beneficiary Designations. If permitted by the Committee, a Participant under the Plan may name a
beneficiary or beneficiaries to whom any vested but unpaid award will be paid in the event of the Participant's death. Each such
designation will revoke all prior designations by the Participant and will be effective only if given in a form and manner acceptable
to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant's death will be
paid to the Participant's estate.
(f)
Nontransferability of Awards. No award granted under the Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent
provided in Section 6(e). All rights with respect to an award granted to a Participant will be available during his or her lifetime only
to the Participant.
7.
Amendment, Termination, and Duration.
(a)
Amendment, Suspension, or Termination. The Board, in its sole discretion, may amend or terminate
the Plan, or any part thereof, at any time and for any reason. The amendment, suspension or termination of the Plan will not,
without the consent of the Participant, alter or impair any rights or obligations under any Actual Award theretofore earned by such
Participant. No award may be granted during any period of suspension or after termination of the Plan.
(b)
Duration of Plan. The Plan will commence on the date specified herein, and subject to Section 7(a)
(regarding the Board's right to amend or terminate the Plan), will remain in effect thereafter.
-5-
8.
Legal Construction.
(a)
Gender and Number. Except where otherwise indicated by the context, any masculine term used
herein also will include the feminine; the plural will include the singular and the singular will include the plural.
(b)
Severability. In the event any provision of the Plan will be held illegal or invalid for any reason, the
illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or
invalid provision had not been included.
(c)
Requirements of Law. The granting of awards under the Plan will be subject to all applicable laws,
rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
(d)
Governing Law. The Plan and all awards will be construed in accordance with and governed by the
laws of the State of California, but without regard to its conflict of law provisions.
(e)
Bonus Plan. The Plan is intended to be a “bonus program” as defined under U.S. Department of
Labor regulation 2510.3-2(c) and will be construed and administered in accordance with such intention.
(f)
interpretation or construction of the Plan.
Captions. Captions are provided herein for convenience only, and will not serve as a basis for
-6-
APPENDIX A-2018
To RingCentral, Inc. Executive Bonus Plan
2018 Performance Goals
(Effective as of January 1, 2018)
1. 2018 Performance Periods and Performance Goals. For the calendar year 2018, there are four quarterly Performance
Periods, ending on March 31, June 30, September 30 and December 31, 2018 (each, a “2018 Performance Period”). For
each of the four 2018 Performance Periods, there are two equally weighted (50% each) performance goals (each, a “2018
Performance Goal”): Revenue and Operating Margin (each as defined below). The chart below set forth the Revenue and
Operating Margin Performance Goals for the four 2018 Performance Periods.
2018 Performance Period
Revenue Performance Goal
(in millions)
Operating Margin Performance
Goal
Q1
Q2
Q3
Q4
$147.5
$156.6
$167.4
$179.3
7.6%
8.3%
8.4%
8.7%
“Revenue” means as to each of the 2018 Performance Periods, the Company’s net revenues generated from third
parties, including both services revenues and product revenues as defined in the Company’s Form 10-K filed for the calendar year
ended December 31, 2017. Net revenue is defined as gross sales less any pertinent discounts, refunds or other contra-revenue
amounts, as presented on the Company’s press releases reporting its quarterly financial results.
“Operating Margin” means as to each of the 2018 Performance Periods, the Company’s non-GAAP operating income
divided by its Revenue. Non-GAAP operating income means the Company’s Revenues less cost of revenues and operating
expenses, excluding the impact of stock-based compensation expense, amortization of acquisition related intangibles, legal
settlement related charges and as adjusted for certain acquisitions, as presented on the Company’s press releases reporting its
quarterly financial results.
2. Funding of 2018 Bonus Pool. Subject to the terms of the Plan, including but not limited to Section 3(d) of the Plan, following
the end of each of the 2018 Performance Periods, the Committee will determine the extent to which each of the 2018
Performance Goals are achieved in accordance with the following guidelines.
-7-
a. If the Company achieves Revenue in the 2018 Performance Period that is lower than the amount of Revenue expected by
analyst consensus estimates after the Company has released its guidance for such 2018 Performance Period (“Revenue
Floor”), the 2018 Bonus Pool related to the Revenue Performance Goal for such 2018 Performance Period will not fund.
b. If the Company achieves Operating Margin in the 2018 Performance Period that is lower than the Operating Margin expected
by analyst consensus estimates after the Company has released its guidance for such 2018 Performance Period (“Operating
Margin Floor”), the 2018 Bonus Pool related to the Operating Margin Performance Goal for such 2018 Performance Period
will not fund.
c. If the Company achieves Revenue that is at least equal to the Revenue Floor, the 2018 Bonus Pool related to the Revenue
Performance goal for the 2018 Performance Period will fund as follows based on the achievement relative to the applicable
Performance Goal.
Revenue: For 100% of the Bonus Pool with respect to Revenue to fund, 100% to 101% of the Performance Goal for
Revenue must be achieved. For each 0.5% of Revenue that is achieved above 101% of the Performance Goal for Revenue,
the Bonus Pool with respect to Revenue will be increased by 5%, and for each 0.5% of Revenue that is achieved below
100% of the Performance Goal for Revenue, the Bonus Pool with respect to Revenue will be reduced by 5%.
d. If the Company achieves Operating Margin that is at least equal to the Operating Margin Floor, the 2018 Bonus Pool related
to the Operating Margin Performance goal for the 2018 Performance Period will fund as follows based on the achievement
relative to the applicable Performance Goal.
Operating Margin: For 100% of the Bonus Pool with respect to Operating Margin to fund, 100% of the Performance Goal for
Operating Margin must be achieved. For each 0.5% of Operating Margin that is achieved above the Performance Goal for
Operating Margin, the Bonus Pool with respect to operating Margin will be increased by 5% (up to a maximum of 120%),
and for each 0.5% of Operating Margin that is achieved below the Performance Goal for Operating Margin, the Bonus Pool
with respect to Operating Margin will be reduced by 5%.
-8-
The chart below illustrates examples of the funding multiple that will apply to each Performance Goal.
Performance Goal Achievement
Revenue
2018 Bonus Pool Funding
Multiple for Revenue*
97%
97.5%
98%
98.5%
99%
99.5%
100% - 101%
101.5%
102%
102.5%
103%
.70x
.75x
.80x
.85x
.90x
.95x
1.00x
1.05x
1.10x
1.15x
1.20x
Performance Goal Achievement
Operating Margin
1.5% below Goal
1.0% below Goal
0.5% below Goal
At Goal
0.5% above Goal
1.0% above Goal
1.5% above Goal
2.0% above Goal
--
--
--
2018 Bonus Pool Funding
Multiple for Operating
Margin*
.85x
.90x
.95x
1.00x
1.05x
1.10x
1.15x
1.20x
--
--
--
* “x” equals the target bonus amount at achievement of 100%-101% of the 2018 Performance Goal for Revenue, and equals
the target bonus amount at achievement of 100% of the 2018 Performance Goal for Operating Margin. The lowest Funding
Multiple for Revenue set forth above assumes that the achievement of the 2018 Performance Goal for Revenue is equal to at
least the Revenue Floor required to fund the 2018 Bonus Plan. The maximum Funding Multiple for Operating Margin shall be
1.20x. There is no maximum Funding Multiple for Revenue.
Illustration
For example, if the Company achieves its Revenue at 101% of the 2018 Performance Goal for Revenue and achieves its
Operating Margin at 1.3% above the 2018 Performance Goal for Operating Margin, the 2018 Bonus Pool will fund as to
106.5%, determined as follows:
- 50% on achievement of the Revenue 2018 Performance Goal (50% weighted target * 1.00x)
- 56.5% on achievement of the Operating Margin 2018 Performance Goal (50% weighted target * 1.13x)
3. Timing of Bonus Payments. Quarterly bonuses earned under this 2018 Bonus Plan shall be paid in the quarter following the
quarter in which earned.
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-9-
Section 4: EX-21.1 (EX-21.1)
Name
RingCentral International, Inc.
RCLEC, Inc.
RCVA, Inc.
Connect First, Inc.
RingCentral Florida, LLC
RingCentral Canada Inc.
RingCentral Brasil Soluces EM TI LTDA
RingCentral UK LTD
RingCentral CH GmbH
RingCentral B.V.
List of Subsidiaries
Jurisdiction of Incorporation
Exhibit 21.1
Delaware
Delaware
Virginia
Delaware
Florida
Canada
Brazil
United Kingdom
Switzerland
Netherlands
RingCentral Ireland Ltd.
RingCentral Espana SL
RingCentral Italy, SrL
Dimelo, SA
RingCentral Hong Kong Limited
RingCentral Xiamen Software Co., Ltd.
RingCentral Singapore Pte. Ltd.
RingCentral Australia Pty Ltd
RingCentral Japan K.K.
RingCentral Korea Ltd.
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Section 5: EX-23.1 (EX-23.1)
Ireland
Spain
Italy
France
Hong Kong
China
Singapore
Australia
Japan
South Korea
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
RingCentral, Inc.:
We consent to the incorporation by reference in the registration statement (Nos. 333-223228, 333-216297, 333-209794, 333-202367,
and 333-191433) on Form S-8 of RingCentral, Inc. of our report dated February 26, 2019, with respect to the consolidated balance
sheets of RingCentral, Inc. as of December 31, 2018 and 2017, 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, 2018, and the related
notes (collectively, the consolidated financial statements), and the effectiveness of internal control over financial reporting as of
December 31, 2018, which report appears in the December 31, 2018 annual report on Form 10-K of RingCentral, Inc.
Our report dated February 26, 2019 contains an explanatory paragraph that states that RingCentral, Inc. acquired Dimelo SA on
October 22, 2018, as discussed in Note 6 to the consolidated financial statements. As discussed in Management’s Annual Report on
Internal Control over Financial Reporting appearing under Item 9A, management excluded from its assessment of the effectiveness
of RingCentral, Inc.’s internal control over financial reporting as of December 31, 2018, Dimelo SA’s internal control over financial
reporting associated with consolidated total assets and consolidated total revenue of less than 1% included in the consolidated
financial statements of the Company as of and for the year ended December 31, 2018. Our audit of internal control over financial
reporting of the Company as of December 31, 2018 also excluded an evaluation of the internal control over financial reporting of
Dimelo SA.
Our report dated February 26, 2019 contains an explanatory paragraph that states the Company has changed its method of
accounting for revenue from contracts with customers and accounting for sales commissions due to the adoption of Accounting
Standards Codification (ASC) Topic 606 and Subtopic 340-40.
/s/ KPMG LLP
Santa Clara, California
February 26, 2019
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Section 6: EX-31.1 (EX-31.1)
Exhibit 31.1
Certification of Principal Executive Officer
pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a),
as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Vladimir Shmunis, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of RingCentral, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ Vladimir Shmunis
Vladimir Shmunis
Chief Executive Officer and Chairman
(Principal Executive Officer)
Date: February 26, 2019
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Section 7: EX-31.2 (EX-31.2)
Certification of Principal Financial Officer
pursuant to
Exchange Act Rules 13a-14(a) and 15d-14(a),
as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Mitesh Dhruv, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of RingCentral, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ Mitesh Dhruv
Mitesh Dhruv
Chief Financial Officer
(Principal Financial Officer)
Date: February 26, 2019
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Section 8: EX-32.1 (EX-32.1)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of RingCentral, Inc. (the “Company”) on Form 10-K for the annual period ended December 31, 2018 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vladimir Shmunis, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: February 26, 2019
/s/ Vladimir Shmunis
Vladimir Shmunis
Chief Executive Officer and Chairman
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Section 9: EX-32.2 (EX-32.2)
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of RingCentral, Inc. (the “Company”) on Form 10-K for the annual period ended December 31, 2018 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mitesh Dhruv, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: February 26, 2019
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/s/ Mitesh Dhruv
Mitesh Dhruv
Chief Financial Officer
(Principal Financial Officer)