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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36089
_________________________________________________________
RingCentral, Inc.
(Exact Name of Registrant as Specified in its Charter)
_________________________________________________________
Delaware 94-3322844
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
20 Davis Drive
Belmont, California 94002
(Address of principal executive offices)
(650) 472-4100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Class A Common Stock RNG New York Stock Exchange
par value $0.0001
_________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
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  x    No  o
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 x Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
   
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No   x
As of August 3, 2020, there were 78,147,079 shares of Class A Common Stock issued and outstanding and 10,811,099 shares of Class B Common Stock issued and outstanding.



TABLE OF CONTENTS
Page
Item 1.
5
5
6
7
8
9
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates”, “believes”, “could”, “seeks”, “estimates”, “expects”, “intends”, “may”, “plans”, “potential”, “predicts”, “projects”, “should”, “will”, “would” or similar expressions and the negatives of those terms. Forward-looking statements include, but are not limited to, statements about:
our progress against short-term and long-term goals;
our future financial performance;
our anticipated growth, growth strategies and our ability to effectively manage that growth and effect these strategies;
the impact of the coronavirus (“COVID-19”) pandemic, any associated economic downturn, and related actions by individuals, governments and private industry on our business, future operating and financial performance, and markets;
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 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 solutions 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 solutions and services;
our ability to expand our business to 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;
3

our ability to protect our intellectual property and rely on open source licenses;
our expectations regarding the growth and reliability of the internet infrastructure;
the timing of acquisitions of, or making and exiting investments in, other entities, businesses or technologies;
our ability to successfully and timely execute on, integrate, and realize the benefits of any acquisition, investment, strategic partnership, or other strategic transaction we may make or undertake;
our capital expenditure projections;
the estimates and estimate methodologies used in preparing our condensed consolidated financial statements;
the political environment and stability in the regions in which we or our subcontractors operate;
the impact of economic downturns on us and our customers;
our ability to defend our systems and our customer information from fraud and cyber-attack;
our ability to prevent the use of fraudulent payment methods for our solutions;
our ability to retain key employees and to attract qualified personnel; and
the impact of foreign currencies on our non-U.S. business as we expand our business internationally.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be significantly different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be significantly different from what we expect.
Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ significantly from those anticipated in these forward-looking statements, even if new information becomes available in the future.
4

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
RINGCENTRAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
June 30,
2020
December 31,
2019
Assets    
Current assets    
Cash and cash equivalents $ 773,756    $ 343,606   
Accounts receivable, net 142,317    129,990   
Deferred and prepaid sales commission costs 46,577    36,589   
Prepaid expenses and other current assets 39,366    25,354   
Total current assets 1,002,016    535,539   
Property and equipment, net 114,423    89,230   
Operating lease right-of-use-assets 38,107    39,269   
Long-term investments 149,337    132,188   
Deferred and prepaid sales commission costs, non-current 486,500    462,344   
Goodwill 55,287    55,278   
Acquired intangibles, net 110,090    127,338   
Other assets 8,883    9,561   
Total assets $ 1,964,643    $ 1,450,747   
Liabilities, Temporary Equity, and Stockholders' Equity
Current liabilities
Accounts payable $ 36,476    $ 34,612   
Accrued liabilities 167,721    138,729   
Current portion of convertible senior notes, net 44,417    —   
Deferred revenue 122,514    107,372   
Total current liabilities 371,128    280,713   
Convertible senior notes, net 1,008,477    386,889   
Operating lease liabilities 25,392    28,516   
Other long-term liabilities 11,314    8,929   
Total liabilities 1,416,311    705,047   
Commitments and contingencies (Note 8)
Temporary equity (Note 6) 6,756    —   
Stockholders' equity
Common stock    
Additional paid-in capital 889,987    1,033,053   
Accumulated other comprehensive income 1,102    1,948   
Accumulated deficit (349,522)   (289,310)  
Total stockholders' equity 541,576    745,700   
Total liabilities, temporary equity and stockholders’ equity $ 1,964,643    $ 1,450,747   

See accompanying notes to condensed consolidated financial statements
5

RINGCENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three Months Ended
June 30,
Six Months Ended
June 30,
2020 2019 2020 2019
Revenues        
Subscriptions $ 257,038    $ 194,792    $ 500,142    $ 377,500   
Other 20,947    20,360    45,355    39,141   
Total revenues 277,985    215,152    545,497    416,641   
Cost of revenues
Subscriptions 56,721    38,079    109,154    73,413   
Other 19,916    15,551    40,927    31,052   
Total cost of revenues 76,637    53,630    150,081    104,465   
Gross profit 201,348    161,522    395,416    312,176   
Operating expenses
Research and development 43,519    32,632    84,429    62,419   
Sales and marketing 137,633    103,590    268,945    203,141   
General and administrative 49,532    32,480    96,868    61,259   
Total operating expenses 230,684    168,702    450,242    326,819   
Loss from operations (29,336)   (7,180)   (54,826)   (14,643)  
Other income (expense), net
Interest expense (12,598)   (5,088)   (20,100)   (10,120)  
Other income, net 42,603    3,141    15,086    6,192   
Other income (expense), net 30,005    (1,947)   (5,014)   (3,928)  
Income (loss) before income taxes 669    (9,127)   (59,840)   (18,571)  
Provision for (benefit from) income taxes 160    116    372    (2,970)  
Net income (loss) $ 509    $ (9,243)   $ (60,212)   $ (15,601)  
Net income (loss) per common share
Basic $ 0.01    $ (0.11)   $ (0.69)   $ (0.19)  
Diluted $ 0.01    $ (0.11)   $ (0.69)   $ (0.19)  
Weighted-average number of shares used in computing net income (loss) per share
Basic 88,254    82,339    87,797    81,872   
Diluted 94,145    82,339    87,797    81,872   
See accompanying notes to condensed consolidated financial statements
6

RINGCENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
Three Months Ended
June 30,
Six Months Ended
June 30,
2020 2019 2020 2019
Net income (loss) $ 509    $ (9,243)   $ (60,212)   $ (15,601)  
Other comprehensive income (loss)
Foreign currency translation adjustments 771    242    (846)   (133)  
Comprehensive income (loss) $ 1,280    $ (9,001)   $ (61,058)   $ (15,734)  
See accompanying notes to condensed consolidated financial statements
7

RINGCENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands)
Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity
Shares Amount
Balance as of December 31, 2019 86,940    $   $ 1,033,053    $ 1,948    $ (289,310)   $ 745,700   
Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans, net of tax withholdings 875    —    (5,549)   —    —    (5,549)  
Share-based compensation —    —    37,001    —    —    37,001   
Equity component of 2025 convertible senior notes, net of issuance costs —    —    192,442    —    —    192,442   
Purchase of capped calls related to 2025 convertible senior notes —    —    (60,900)   —    —    (60,900)  
Equity component from partial repurchase of 2023 convertible senior notes —    —    (355,932)   —    —    (355,932)  
Changes in other comprehensive loss —    —    —    (1,617)   —    (1,617)  
Net loss —    —    —    —    (60,721)   (60,721)  
Balance as of March 31, 2020 87,815      840,115    331    (350,031)   490,424   
Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans, net of tax withholdings 870    —    8,550    —    —    8,550   
Share-based compensation —    —    52,129    —    —    52,129   
Equity component from partial settlement of 2023 convertible senior notes —    —    (4,051)   —    —    (4,051)  
Temporary equity reclassification —    —    (6,756)   —    —    (6,756)  
Changes in other comprehensive loss —    —    —    771    —    771   
Net income —    —    —    —    509    509   
Balance as of June 30, 2020 88,685    $   $ 889,987    $ 1,102    $ (349,522)   $ 541,576   
Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity
Shares Amount
Balance as of December 31, 2018 81,046    $   $ 551,078    $ 2,226    $ (235,703)   $ 317,609   
Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans, net of tax withholdings 782    —    732    —    —    732   
Share-based compensation —    —    19,616    —    —    19,616   
Changes in other comprehensive loss —    —    —    (375)   —    (375)  
Net loss —    —    —    —    (6,358)   (6,358)  
Balance as of March 31, 2019 81,828      571,426    1,851    (242,061)   331,224   
Issuance of common stock in connection with Equity Incentive and Employee Stock Purchase plans, net of tax withholdings 1,046    —    7,730    —    —    7,730   
Share-based compensation —    —    25,614    —    —    25,614   
Changes in other comprehensive loss —    —    —    242    —    242   
Net loss —    —    —    —    (9,243)   (9,243)  
Balance as of June 30, 2019 82,874    $   $ 604,770    $ 2,093    $ (251,304)   $ 355,567   

See accompanying notes to condensed consolidated financial statements

8

RINGCENTRAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
June 30,
2020 2019
Cash flows from operating activities    
Net loss $ (60,212)   $ (15,601)  
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 34,500    16,486   
Share-based compensation 85,844    44,314   
Amortization of deferred and prepaid sales commission costs 20,659    13,196   
Amortization of debt discount and issuance costs 20,018    10,031   
Loss on early extinguishment of debt 7,207    —   
Repayment of convertible senior notes attributable to debt discount (14,230)   —   
Reduction of operating lease right-of-use assets 7,754    6,708   
Unrealized gain and other related costs on investments (17,149)   —   
Foreign currency remeasurement (gain) loss 305    (323)  
Provision for bad debt 3,071    995   
Deferred income taxes (162)   (347)  
Tax benefit from release of valuation allowance —    (3,210)  
Other 116    1,427   
Changes in assets and liabilities:
Accounts receivable (15,398)   (10,804)  
Deferred and prepaid sales commission costs (53,316)   (33,032)  
Prepaid expenses and other current assets (13,728)   (9,253)  
Other assets (106)   181   
Accounts payable (973)   11,146   
Accrued liabilities 23,792    4,730   
Deferred revenue 15,142    14,835   
Operating lease liabilities (7,322)   (6,903)  
Other liabilities 4,297    (328)  
Net cash provided by operating activities 40,109    44,248   
Cash flows from investing activities
Purchases of property and equipment (15,581)   (14,994)  
Capitalized internal-use software (17,021)   (7,602)  
Cash paid for business combination, net of cash acquired —    (27,870)  
Net cash used in investing activities (32,602)   (50,466)  
Cash flows from financing activities
Proceeds from issuance of convertible senior notes, net of issuance costs 986,508    —   
Payments for 2023 convertible senior notes partial repurchase (501,039)   —   
Payments for capped calls and transaction costs (60,900)   —   
Proceeds from issuance of stock in connection with stock plans 21,604    13,509   
Payments for taxes related to net share settlement of equity awards (18,603)   (5,047)  
Payment for contingent consideration for business acquisition (3,548)   —   
Repayment of financing obligations (943)   (943)  
Net cash provided by financing activities 423,079    7,519   
Effect of exchange rate changes (436)   38   
Net increase (decrease) in cash, cash equivalents and restricted cash 430,150    1,339   
Cash, cash equivalents and restricted cash
Beginning of period 343,606    566,329   
End of period $ 773,756    $ 567,668   
Supplemental disclosure of cash flow data
Cash paid for interest $ 157    $ 189   
Cash paid for income taxes, net of refunds $ 213    $ 351   
Non-cash investing and financing activities
Cash held for future indemnity claims and other potential future payments $ —    $ 7,148   
Equipment and capitalized internal-use software purchased and unpaid at period end $ 9,414    $ 2,077   
See accompanying notes to condensed consolidated financial statements
9

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
RingCentral, Inc. (the “Company”) is a provider of software-as-a-service (“SaaS”) solutions that enables businesses to communicate, collaborate and connect. The Company was incorporated in California in 1999 and was reincorporated in Delaware on September 26, 2013.
Basis of Presentation and Consolidation
The Company's unaudited condensed consolidated financial statements and accompanying notes reflect all adjustments (all of which are normal, recurring in nature and those discussed in these notes) that are, in the opinion of management, necessary for a fair presentation of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2020. Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”).
The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 26, 2020.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made by management affect revenues, the allowance for doubtful accounts, valuation of long-term investments, deferred sales commission costs, goodwill, useful lives of intangible assets, share-based compensation, capitalization of internally developed software, liability and equity allocation of convertible senior notes, 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 may differ from these estimates.
In March 2020, the World Health Organization declared the outbreak of the novel strain of coronavirus (“COVID-19”) as a global pandemic with widespread and detrimental effect on the global economy. The extent of the impact of COVID-19 on the Company's operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on the Company's customers and sales cycles, and its employees, all of which are uncertain and cannot be predicted. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require updating significant estimates or judgments or revising the carrying value of the Company's assets or liabilities as presented in the unaudited interim condensed consolidated financial statements. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates.
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the Financial Accounting Standard Board ("FASB") issued Accounting Standard Update ("ASU") No. 2019-12, Accounting Standards Update (Topic 740): Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The ASU is effective for calendar year-end public entities on January 1, 2021. Entities may early adopt the ASU in any interim period for which financial statements have not yet been issued (or made available for issuance). The Company has not yet adopted the new guidance and is currently analyzing the tax impact but does not anticipate any material impacts upon adoption.
10

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In March 2020, the FASB issued optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform, particularly, the risk of cessation of the London Interbank Offered Rate ("LIBOR") on financial reporting. The guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are elective and are effective upon issuance for all entities through December 31, 2022. The Company is currently evaluating the impact of the new guidance.
Note 2. Revenue and Cost of Revenue
The Company derives its revenues primarily from subscriptions, sale of products, and professional services. Revenues are recognized when control of these products and services are transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products and services.
Disaggregation of revenue
The following table provides information about disaggregated revenue by primary geographical markets:
Three Months Ended
June 30,
Six Months Ended
June 30,
  2020 2019 2020 2019
Primary geographical markets        
North America 92  % 95  % 92  % 95  %
Others        
Total revenues 100  % 100  % 100  % 100  %
The Company derived over 90% of subscription revenues from RingCentral Office product for both of the three and six months ended June 30, 2020 and 2019.
Deferred revenue
During the three and six months ended June 30, 2020, the Company recognized revenue of $25.0 million and $88.0 million, respectively, that was included in the corresponding deferred revenue balance at the beginning of the year.
Remaining performance obligations
The typical subscription term ranges from one month to five years. Contracted revenue as of June 30, 2020 that has not yet been recognized was approximately $1.1 billion. This excludes contracts with an original expected length of less than one year. Of these remaining performance obligations, the Company expects to recognize revenue of 55% of this balance over the next 12 months and 45% thereafter.
Other revenues and cost of revenues
Other revenues are primarily comprised of product revenue from the sale of pre-configured phones, professional services, and phone rentals. Product revenues were $9.3 million and $9.1 million for the three months ended June 30, 2020 and 2019, respectively, and $20.1 million and $18.6 million for the six months ended June 30, 2020 and 2019, respectively. Cost of product revenues were $9.0 million and $8.3 million for the three months ended June 30, 2020 and 2019, respectively, and $19.6 million and $17.1 million for the six months ended June 30, 2020 and 2019, respectively.
11

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 3. Financial Statement Components
Cash and cash equivalents consisted of the following (in thousands):
June 30, 2020 December 31, 2019
Cash $ 76,492    $ 46,295   
Money market funds 697,264    297,311   
Total cash and cash equivalents $ 773,756    $ 343,606   
Accounts receivable, net consisted of the following (in thousands):
June 30, 2020 December 31, 2019
Accounts receivable $ 126,522    $ 114,745   
Unbilled accounts receivable 20,824    17,603   
Allowance for doubtful accounts (5,029)   (2,358)  
Accounts receivable, net $ 142,317    $ 129,990   
Prepaid expenses and other current assets consisted of the following (in thousands):
June 30, 2020 December 31, 2019
Prepaid expenses $ 19,781    $ 16,249   
Inventory 949    401   
Other current assets 18,636    8,704   
Total prepaid expenses and other current assets $ 39,366    $ 25,354   
Property and equipment, net consisted of the following (in thousands):
June 30, 2020 December 31, 2019
Computer hardware and software $ 143,593    $ 120,841   
Internal-use software development costs 66,828    48,419   
Furniture and fixtures 7,892    7,690   
Leasehold improvements 12,137    11,327   
Total property and equipment, gross 230,450    188,277   
Less: accumulated depreciation and amortization (116,027)   (99,047)  
Property and equipment, net $ 114,423    $ 89,230   
Total depreciation and amortization expense related to property and equipment was $9.4 million and $6.5 million for the three months ended June 30, 2020 and 2019, respectively, and $17.3 million and $12.3 million for the six months ended June 30, 2020 and 2019, respectively.
During the three months ended June 30, 2020, the Company financed $4.7 million of property, equipment and software licenses through vendor financing agreements at interest rates ranging up to 3.95% to be repaid over approximately three-year terms. As of June 30, 2020, $3.2 million of the related equipment is collateralized under the vendor financing arrangement. The financing arrangements and the assets purchased under these arrangements are non-cash investing and financing activities.
12

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The carrying value of goodwill is as follows (in thousands):
Balance at December 31, 2019 $ 55,278   
Foreign currency translation adjustments  
Balance at June 30, 2020 $ 55,287   
The carrying values of intangible assets are as follows (in thousands):
June 30, 2020 December 31, 2019
Estimated Lives Cost Accumulated
Amortization
Acquired
Intangibles, Net
Cost Accumulated
Amortization
Acquired
Intangibles, Net
Customer relationships
2 to 5 years
$ 21,249    $ 10,053    $ 11,196    $ 21,245    $ 8,178    $ 13,067   
Developed technology
3 to 5 years
123,549    24,655    98,894    123,547    9,276    114,271   
Total acquired intangible assets $ 144,798    $ 34,708    $ 110,090    $ 144,792    $ 17,454    $ 127,338   
Amortization expense from acquired intangible assets for the three months ended June 30, 2020 and 2019 was $8.6 million and $2.3 million, respectively, and $17.2 million and $4.2 million for the six months ended June 30, 2020 and 2019, respectively. Amortization of developed technology is included in cost of revenues and amortization of customer relationships is included in sales and marketing expenses in the Condensed Consolidated Statements of Operations. As of June 30, 2020, the weighted-average amortization period for developed technology is approximately 3.4 years and for customer relationships is approximately 2.4 years.
Estimated amortization expense for acquired intangible assets for the following fiscal years is as follows (in thousands):
2020 (remaining) $ 17,009   
2021 34,016   
2022 28,417   
2023 16,478   
2024 onwards 14,170   
Total estimated amortization expense $ 110,090   
Accrued liabilities consisted of the following (in thousands):
June 30, 2020 December 31, 2019
Accrued compensation and benefits $ 35,431    $ 30,541   
Accrued sales, use, and telecom related taxes 28,449    25,757   
Accrued marketing 24,608    17,505   
Operating lease liabilities, short-term 15,797    14,249   
Other accrued expenses 63,436    50,677   
Total accrued liabilities $ 167,721    $ 138,729   
Deferred and Prepaid Sales Commission Costs
Amortization expense for the deferred and prepaid sales commission costs was $10.9 million and $7.0 million for the three months ended June 30, 2020 and 2019, respectively, and $20.7 million and $13.2 million for the six months ended June 30, 2020 and 2019, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

13

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 4. 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):
Fair Value at June 30, 2020 Level 1 Level 2 Level 3
Cash equivalents:        
Money market funds $ 697,264    $ 697,264    $ —    $ —   
Noncurrent assets:
Long-term investments $ 149,337    $ —    $ —    $ 149,337   
Fair Value at December 31, 2019 Level 1 Level 2 Level 3
Cash equivalents:        
Money market funds $ 297,311    $ 297,311    $ —    $ —   
Noncurrent assets:
Long-term investments $ 132,188    $ —    $ —    $ 132,188   
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.
Convertible Senior Notes 
As of June 30, 2020, the fair value of the 0% convertible senior notes due 2025 (the “2025 Notes”) was approximately $1.1 billion. The fair value was determined based on the quoted price for the 2025 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.
As of June 30, 2020, the fair value of the 0% convertible senior notes due 2023 (the “2023 Notes”) was approximately $993.7 million. The fair value was determined based on the quoted price for the 2023 Notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
Long-Term Investments
As of June 30, 2020, the fair value of the Company's long-term investments in convertible and redeemable preferred stock was $149.3 million. The Company classifies its long-term investments as Level 3 in the fair value hierarchy based on the nature of the fair value inputs and judgment involved in the valuation process. The Company uses a lattice model to value these investments and relies on observable inputs including share-price and volatility. The model also incorporates judgments relating to the probability of special redemption triggers, the expected holding period of the investment and interest rates. These investments are reported at fair value in long-term investments in the Condensed Consolidated Balance Sheets. The Company's total net unrealized gain recorded in other income (expense), net, was $38.5 million and $15.3 million for the three and six
14

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
months ended June 30, 2020, respectively. Volatility in the global economic climate and financial markets, including the effects of COVID-19, could result in a significant change in the underlying share-price of the Company’s investees, resulting in a material change in the value of the long-term investments.
Note 5. Business Combinations, Strategic Partnerships, and Asset Acquisitions
Connect First Acquisition
On January 14, 2019, the Company acquired the equity interests of Connect First, Inc. (“Connect First”), a cloud-based outbound/blended customer engagement platform for midsize and enterprise companies. The acquisition complements the Company’s current Customer Engagement portfolio to provide differentiated customer experiences.
The total purchase price of approximately $36.4 million consisted of cash of $29.3 million and $7.1 million held to cover indemnity claims made by the Company after the closing date. In connection with the acquisition, the Company granted $4.0 million in restricted stock units, which vests over four years.
The allocation of the purchase price of the assets acquired and liabilities assumed based on their estimated fair values was as follows (in thousands):
Cash and cash equivalents $ 1,427   
Other tangible assets acquired 2,266   
Acquired intangible assets 13,300   
Goodwill 24,465   
Total assets acquired 41,458   
Liabilities assumed (5,013)  
Total consideration $ 36,445   

The amortizable intangible assets have a weighted average useful life of three years. The purchase price exceeded the estimated fair value of the tangible and identifiable intangible assets and liabilities acquired and, as a result of the allocation, the Company recorded goodwill of $24.5 million, which is not deductible for tax purposes. The goodwill recognized is attributable primarily to contributions of the entity's technology to the overall corporate strategy, enhancements to the Company's contact center product offerings, and assembled workforce of the acquired business.
Strategic Partnerships and Asset Purchases
In October 2019, the Company entered into certain agreements for a strategic partnership with Avaya Holdings Corp. (“Avaya”) and its subsidiaries, including Avaya Inc. In connection with the strategic partnership, the Company purchased $125.0 million aggregate principal amount of 3% convertible and redeemable preferred stock, with a conversion price of $16.00 per share, representing an approximately 6% position in Avaya on an as-converted basis. The Company also paid Avaya $345.0 million in the Company's Class A Common Stock, predominantly for future fees, which was capitalized and will be amortized over the expected benefit period. The transaction closed on October 31, 2019. The investment in preferred securities in which the Company does not have a controlling interest or significant influence are measured at fair value with changes recorded through other income (expense) in the Condensed Consolidated Statement of Operations. The advance payment represents prepayment for cost to obtain contracts with customers. The Company also purchased intellectual property rights, which have been capitalized as an intangible asset and will be amortized over the useful life of three years.
In the fourth quarter of 2019, the Company also entered into a strategic partnership with Atos SE ("Atos") and its subsidiary, Unify Software and Solutions GmbH & CO. KG ("Unify"), which, among other things, provided for a one-time upfront consideration towards the acquisition of certain intellectual property rights and a commercial arrangement. Under the commercial agreement Unify is engaged in the marketing and sale of the Company's product, which represents advance payment for cost to obtain contracts with customers.
In addition to the above transactions, the Company also separately entered into arrangements with unrelated third parties to acquire intellectual property rights during the fourth quarter of 2019.
15

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
In connection with the above transactions, the Company recorded in aggregate $105.5 million in acquired intangible assets relating to developed technology on the Condensed Consolidated Balance Sheet, which will be amortized over their respective useful life of three to five years. The Company also recorded $371.1 million as deferred and prepaid sales commission costs representing cost to obtain contracts with customers. The prepaid assets will be amortized over their useful life based on the pattern of benefit since they are considered to be incremental customer acquisition costs.
Note 6. Convertible Senior Notes
2025 Convertible Senior Notes
In March 2020, the Company issued $1.0 billion aggregate principal amount of 0% convertible senior notes due 2025 in a private placement to qualified institutional buyers (the "2025 Notes"). The 2025 Notes are senior, unsecured obligations that do not bear regular interest, and the principal amount of the 2025 Notes does not accrete. The 2025 Notes may bear special interest under specified circumstances relating to the Company's failure to comply with its reporting obligations under the indenture governing the 2025 Notes (the "2025 Indenture") or if the 2025 Notes are not freely tradeable as required by the 2025 Indenture. The 2025 Notes will mature on March 1, 2025, 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 $986.5 million.
Each $1,000 principal amount of the 2025 Notes is initially convertible into 2.7745 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 $360.43 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 2025 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 2025 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 1, 2024, the 2025 Notes will be convertible only under the following circumstances:
(1)during any calendar quarter commencing after June 30, 2020, 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) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
(2)during the five-business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of 2025 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 for the 2025 Notes on each such trading day;
(3)upon the Company’s notice that it is redeeming any or all of the 2025 Notes, but only with respect to the 2025 Notes called for redemption, 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 1, 2024, until the close of business on the scheduled trading day immediately preceding the maturity date, holders of the 2025 Notes may convert all or a portion of their 2025 Notes regardless of the foregoing conditions.
Upon conversion, the Company will pay or deliver, as the case may be, either 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 2025 Notes with cash.
During the three months ended June 30, 2020, the conditions allowing holders of the 2025 Notes to convert were not met.
16

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company may redeem the 2025 Notes, at its option, on or after March 5, 2022, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid special interest if the last reported sale price of the Company’s 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), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides written notice of redemption. No sinking fund is provided for the 2025 Notes.
Upon the occurrence of a fundamental change (as defined in the 2025 Indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the 2025 Notes for cash at a price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus any accrued and unpaid special interest to, but excluding, the fundamental change repurchase date.
The 2025 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 2025 Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated, including the 2023 Notes; 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.
In accounting for the issuance of the 2025 Notes, the Company separated the 2025 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 $195.1 million and was determined by deducting the fair value of the liability component from the par value of the 2025 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 2025 Notes.
In accounting for the transaction costs related to the 2025 Notes, the Company allocated the total amount incurred to the liability and equity components of the 2025 Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component recorded as additional debt discount were $10.9 million and will be amortized to interest expense using the effective interest method over the contractual terms of the 2025 Notes. Issuance costs attributable to the equity component of $2.6 million were netted with the equity component in stockholders’ equity.
The net carrying amount of the liability component of the 2025 Notes was as follows (in thousands):
June 30, 2020
Principal $ 1,000,000   
Unamortized discount (183,535)  
Unamortized issuance cost (10,298)  
Net carrying amount $ 806,167   
17

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The net carrying amount of the equity component of the 2025 Notes was as follows (in thousands):
June 30, 2020
Proceeds allocated to the conversion option (debt discount) $ 195,074   
Issuance cost (2,632)  
Net carrying amount $ 192,442   
The following table sets forth the interest expense recognized related to the 2025 Notes (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2020 2020
Amortization of debt discount $ 8,816    11,539   
Amortization of debt issuance costs 430    562   
Total interest expense related to the 2025 Notes $ 9,246    $ 12,101   
2025 Capped Calls
In connection with the offering of the 2025 Notes, the Company entered into privately-negotiated capped call transactions with certain counterparties (the “2025 Capped Calls”). The 2025 Capped Calls each have an initial strike price of approximately $360.43 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2025 Notes. The 2025 Capped Calls have initial cap prices of approximately $480.56 per share, subject to certain adjustments. The 2025 Capped Calls cover, subject to anti-dilution adjustments, approximately 2.8 million shares of Class A Common Stock. The 2025 Capped Calls are generally intended to reduce or offset the potential dilution to the Class A Common Stock upon any conversion of the 2025 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The 2025 Capped Calls settle in components commencing on January 31, 2024 with the last component scheduled to expire on February 28, 2024. The 2025 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 2025 Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the 2025 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 $60.9 million incurred to purchase the Capped Call transactions was recorded as a reduction to additional paid-in capital on the Company's Condensed Consolidated Balance Sheets.
2023 Convertible Senior 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 "2023 Notes"). The 2023 Notes are senior unsecured obligations of the Company, do not bear regular interest, and the principal amount of the 2023 Notes does not accrete. The 2023 Notes may bear special interest under specified circumstances as outlined in the indenture governing the 2023 Notes (the “2023 Indenture”) or if the 2023 Notes are not freely tradeable as required by the 2023 Indenture. The 2023 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.
In connection with the offering of the 2025 Notes, the Company used $509.6 million of the net proceeds from the offering of the 2025 Notes to repurchase $172.5 million aggregate principal amount of the 2023 Notes in cash through individual privately negotiated transactions (the “2023 Partial Notes Repurchase”). Of the $509.6 million net proceeds, $153.7 million and $355.9 million were allocated to the debt and equity components, respectively, utilizing an effective interest rate to determine the fair value of the liability component. This interest rate reflects the Company’s incremental borrowing rate, adjusted for the Company’s credit standing on nonconvertible debt with similar maturity. As of the repurchase date, the carrying value of the 2023 Notes subject to the 2023 Partial Notes Repurchase, net of unamortized debt discount and issuance costs, was $146.4 million. The 2023 Partial Notes Repurchase resulted in a $7.3 million loss on early debt extinguishment.
18

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Each $1,000 principal amount of the 2023 Notes is initially convertible into 12.2782 shares of the Company’s 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 2023 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 2023 Notes in connection with such make-whole fundamental change or during the relevant redemption period.
The 2023 Notes will be convertible at certain times and upon the occurrence of certain events in the future. Further, on or after December 15, 2022, until the close of business on the scheduled trading day immediately preceding the maturity date, holders of the 2023 Notes may convert all or a portion of their 2023 Notes regardless of these conditions.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Class A Common Stock, or a combination of cash and shares of Class A Common Stock, at the Company’s election. It is the Company’s current intent to settle the principal amount of the 2023 Notes with cash.
During the three months ended June 30, 2020, the stock price condition allowing holders of the 2023 Notes to convert was met. As a result, holders have the option to convert their 2023 Notes at any time during the fiscal quarter ending September 30, 2020. The 2023 Notes may be convertible thereafter if one or more of the conversion conditions specified in the 2023 Indenture is satisfied during future measurement periods.
During the three months ended June 30, 2020, the Company received conversion requests on the principal amount of the 2023 Notes totaling approximately $53.1 million, out of which approximately $1.9 million was settled in cash during the quarter ended June 30, 2020. During the quarter ended June 30, 2020, the Company recognized an immaterial gain on these conversions representing the net carrying amount in excess of the fair value of the liability component of the converted notes on the respective settlement dates. The amount is included in other income (expense), net in the Condensed Consolidated Statement of Operations.
In relation to the remaining $51.2 million principal amount of unsettled conversion requests, as of June 30, 2020, the Company reclassified a portion of equity of approximately $6.8 million representing the difference between the principal and net carrying amount of the liability component of the 2023 Notes requested for conversion, into temporary equity, as these requests will be settled during the third quarter of fiscal 2020.
The Company may redeem the 2023 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, subject to certain conditions. No sinking fund is provided for the 2023 Notes. Upon the occurrence of a fundamental change (as defined in the 2023 Indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the 2023 Notes for cash at a price equal to 100% of the principal amount of the 2023 Notes to be repurchased, plus any accrued and unpaid special interest to, but excluding, the fundamental change repurchase date.
The net carrying amount of the liability component of the 2023 Notes was as follows (in thousands):
  June 30, 2020
Principal $ 285,532   
Unamortized discount (35,708)  
Unamortized issuance cost (3,097)  
Net carrying amount (1)
$ 246,727   
(1)As of June 30, 2020, $44.4 million net carrying amount of the liability component was classified as a current liability on the Condensed Consolidated Balance Sheets.
19

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table sets forth the interest expense recognized related to the 2023 Notes (in thousands):
  Three Months Ended
June 30,
Six Months Ended
June 30,
  2020 2019 2020 2019
Amortization of debt discount $ 3,076    $ 4,700    $ 7,348    $ 9,343   
Amortization of debt issuance costs 243    349    576    688   
Total interest expense related to the 2023 Notes $ 3,319    $ 5,049    $ 7,924    $ 10,031   
        2023 Capped Calls
In connection with the offering of the 2023 Notes, the Company entered into privately-negotiated capped call transactions with certain counterparties (the “2023 Capped Calls”). The 2023 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 2023 Notes. The 2023 Capped Calls have initial cap prices of $119.035 per share, subject to certain adjustments. The 2023 Capped Calls cover, subject to anti-dilution adjustments, approximately 5.6 million shares of Class A Common Stock. The 2023 Capped Calls are generally intended to reduce or offset the potential dilution to the Class A Common Stock upon any conversion of the 2023 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The 2023 Capped Calls settle in components commencing January 13, 2023 with the last component expiring on March 13, 2023. The 2023 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 2023 Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the 2023 Capped Calls, including changes in law, insolvency filings, and hedging disruptions. The 2023 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 2023 Capped Call transactions was recorded as a reduction to additional paid-in capital on the Company's Condensed Consolidated Balance Sheets. 
Note 7. Leases
The Company primarily leases facilities for office and datacenter space under non-cancelable operating leases for its U.S. and international locations. As of June 30, 2020, non-cancellable leases expire on various dates between 2020 and 2029.
The components of leases are as follows (in thousands):
Operating leases June 30, 2020 December 31, 2019
Operating lease right-of-use assets $ 38,107    $ 39,269   
Accrued liabilities $ 15,797    $ 14,249   
Operating lease liabilities 25,392    28,516   
Total operating lease liabilities $ 41,189    $ 42,765   

Six Months Ended June 30,
Supplemental Cash Flow Information 2020 2019
Operating cash flows resulting from operating leases:
Cash paid for amounts included in the measurement of lease liabilities $ 8,373    $ 7,746   
New ROU assets obtained in exchange of lease liabilities:
Operating leases $ 6,512    $ 6,968   
On August 6, 2020, the Company entered into a second amendment to the lease agreement with Phillip H. Raiser, Trustee of the JHR Marital Trust under Trust Agreement dated October 2, 1969, as amended, Phillip H. Raiser, Trustee of the JHR Bypass Trust under Trust Agreement dated October 2, 1969, as amended, Harvey E. Chapman, Jr., Trustee of the Harvey
20

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 (individually and collectively, “Landlord”) for its corporate headquarters (the “Lease Amendment”).
The premises leased occupy approximately 84,148 rentable square feet of office building space, consisting of three office floors, located at 20 Davis Drive in Belmont, California. The Lease Amendment extends the Company’s right to occupy the premises commencing on August 1, 2021 and terminates on July 31, 2026, unless earlier terminated pursuant to the terms of the Lease Amendment. The Company has the right to extend the term for one additional five-year period under certain circumstances. The monthly base rent for the first year of the extended lease term is approximately $0.3 million and increases annually thereafter by three percent for the balance of the extended term.
Note 8. Commitments and Contingencies
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.
TCPA Matter
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 Telephone Consumer Protection Act (“TCPA”) and regulations promulgated thereunder by allegedly using an automated telephone dialing system to deliver prerecorded political messages to Hurley, an incumbent running for reelection, and others. Hurley alternatively alleged that the Company was vicariously liable for the actions of the other co-defendants. Hurley seeks statutory, compensatory, consequential, incidental and punitive damages, costs, and attorneys’ fees in connection with her claims. The Company was served with the second amended complaint on January 4, 2018. On March 23, 2018, the Company filed a motion to dismiss the complaint for lack of standing and failure to sufficiently state a claim on which relief may be granted. Hurley filed her opposition brief on April 6, 2018, and the Company filed its reply brief on April 13, 2018. On October 4, 2018, the district court issued its memorandum and opinion order granting in part and denying in part the Company’s motion to dismiss. The district court dismissed Hurley’s vicarious liability claim but allowed Hurley’s TCPA claim to proceed. The Company filed its answer and affirmative defenses to the second amended complaint on October 18, 2018. Hurley filed a motion to certify a class on July 9, 2019. The Company and another defendant filed oppositions to the motion, which have been fully briefed and is pending decision by the court. Discovery closed on October 25, 2019. The Company filed a motion for summary judgment on November 14, 2019. Hurley opposed the motion, which has been fully briefed and is pending decision by the court. The parties mediated the case before a private mediator on January 23, 2020, at which time a tentative settlement was achieved. The settlement will need to be approved by the court. Meanwhile, the court has issued an order holding the case in abeyance pending approval of the settlement. The condensed consolidated financial statements include an immaterial accrual for the estimated loss that is expected to occur.
Patent Infringement Matter
On April 25, 2017, Uniloc USA, Inc. and Uniloc Luxembourg, S.A. (together, “Uniloc”) filed in the U.S. District Court for the Eastern District of Texas two actions against the Company alleging infringement of U.S. Patent Nos. 7,804,948;
21

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 by the Company as of the date of this filing and the rules and regulations applicable to the preparation of the Company’s condensed consolidated financial statements, it is not possible to provide an estimated amount of any such loss or range of loss that may occur. The Company intends to vigorously defend against this lawsuit.
CIPA Matter
On June 16, 2020, Plaintiff Meena Reuben (“Reuben”) filed a complaint against the Company for a putative class action lawsuit in California Superior Court for San Mateo County. The complaint alleges claims on behalf of a class of individuals for whom, while they were in California, the Company allegedly intercepted and recorded communications between individuals and the Company’s customers without the individual’s consent, in violation of the California Invasion of Privacy Act (“CIPA”) Sections 631 and 632.7. Reuben seeks statutory damages of $5,000 for each alleged violation of Sections 631 and 632.7, injunctive relief, and attorneys’ fees and costs, and other unspecified amount of damages. On July 7, 2020, the Court granted the parties’ stipulation to extend time for the Company to respond to the Reuben’s complaint. The Company has not responded to the complaint. The Court has set an August 17, 2020 Case Management Conference. This litigation is still in its earliest stages. Based on the information known by the Company as of the date of this filing and the rules and regulations applicable to the preparation of the Company’s condensed consolidated financial statements, it is not possible to provide an estimated amount of any such loss or range of loss that may occur. The Company intends to vigorously defend against this lawsuit.
Other Matter
 On June 14, 2019, the Company filed suit in the Superior Court of California, County of Alameda against Bright Pattern, Inc. and two of its officers, alleging that the defendants negotiated a potential acquisition of Bright Pattern by RingCentral fraudulently and in bad faith. The Company seeks its costs incurred in negotiating under the Letter of Intent ("LOI") that the parties entered into and damages for lost opportunity as a result of forgoing another acquisition opportunity, and attorneys’ fees and costs. On August 26, 2019, Bright Pattern filed a cross-complaint against the Company and two of its executive officers alleging breach of the LOI as well as tort claims arising from the Company's allegedly inducing Bright Pattern to enter into the LOI and subsequent extensions while allegedly misstating the timeframe for the proposed transaction. As damages, Bright Pattern seeks audit fees it allegedly incurred, a $5 million break-up fee, its alleged “cash burn” during the negotiations, and unspecified lost opportunity damages. The Company filed a demurrer to Bright Pattern’s amended cross-complaint, as well as a related motion to strike. On May 7, 2020, the court denied both the motion to strike and demurrer. This litigation is still in early stages. Based on the information known by the Company as of the date of this filing and the rules and regulations applicable to the preparation of the Company’s condensed consolidated financial statements, it is not possible to provide an estimated amount of any loss or range of loss that may occur. The Company intends to vigorously prosecute and defend this lawsuit.  
Note 9. 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.
22

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 June 30, 2020 and December 31, 2019, 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 date on which the number of outstanding shares of Class B common stock represents less than 10% of the aggregate combined number of outstanding shares of Class A common stock and Class B common stock, or (iii) any time seven years after the Company's initial public offering (October 2, 2020), when a stockholder owns less than 50% of the shares of Class B common stock that such holder owned immediately prior to completion of the initial public offering.
Note 10. Share-Based Compensation
A summary of share-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Operations is as follows (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
  2020 2019 2020 2019
Cost of revenues $ 3,846    $ 2,120    $ 6,572    $ 3,761   
Research and development 9,772    5,508    17,239    9,770   
Sales and marketing 16,322    9,799    27,613    17,407   
General and administrative 19,315    7,489    34,420    13,376   
Total share-based compensation expense $ 49,255    $ 24,916    $ 85,844    $ 44,314   
A summary of share-based compensation expense by award type is as follows (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
  2020 2019 2020 2019
Options $   $ 204    $ 33    $ 739   
Employee stock purchase plan rights 1,844    1,043    3,235    1,942   
Restricted stock units 47,402    23,669    82,576    41,633   
Total share-based compensation expense $ 49,255    $ 24,916    $ 85,844    $ 44,314   
23

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Equity Incentive Plans
As of June 30, 2020, a total of 17,639,853 shares remained available for grant under the RingCentral, Inc. Amended and Restated 2013 Equity Incentive Plan (“2013 Plan”).
A summary of option activity under all of the Company’s equity incentive plans at June 30, 2020 and changes during the period then ended is presented in the following table:
Number of
Options
Outstanding
(in thousands)
Weighted-
Average
Exercise Price
Per Share
Weighted-
Average
Contractual
Term
(in Years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2019 2,257    $ 13.13    2.5 $ 351,428   
Granted —    —   
Exercised (790)   13.02   
Canceled/Forfeited —    —   
Outstanding at June 30, 2020 1,467    $ 13.19    2.0 $ 399,425   
Vested and expected to vest as of June 30, 2020 1,469    $ 13.19    2.0 $ 399,409   
Exercisable as of June 30, 2020 1,468    $ 13.18    2.0 $ 399,032   
There were no options granted during the three and six months ended June 30, 2020 and 2019. The total intrinsic value of options exercised during the three months ended June 30, 2020 and 2019 were $87.2 million and $48.2 million, respectively, and $175.8 million and $80.3 million, during the six months ended June 30, 2020 and 2019, respectively.
As of June 30, 2020, there was an immaterial amount of unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested stock option grants, which will be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately 0.4 years.
Employee Stock Purchase Plan
The Company's 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.
As of June 30, 2020, there was a total of $2.7 million of unrecognized share-based compensation expense, net of estimated forfeitures, related to the ESPP, which will be recognized on a straight-line basis over the remaining weighted-average vesting period of approximately 0.4 years. As of June 30, 2020, a total of 4,713,290 shares were available for issuance under the ESPP.
Restricted Stock Units
The 2013 Plan provides for the issuance of restricted stock units (“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 June 30, 2020, and changes during the period then ended is presented in the following table:
Number of
RSUs
Outstanding
(in thousands)
Weighted-
Average
Grant Date Fair
Value Per Share
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2019 3,249    $ 85.39    $ 548,145   
Granted 1,171    213.19   
Released (954)   89.34   
Canceled/Forfeited (150)   103.12   
Outstanding at June 30, 2020 3,316    $ 128.57    $ 945,066   
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RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
As of June 30, 2020, there was a total of $301.5 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 period of approximately 2.5 years.
Bonus Plan
In December 2018, the Company's board of directors (the "Board") adopted the Selective 2019 Key Employee Equity Bonus Plan (the "2019 KEEB Plan”), which became effective on January 1, 2019, and in December 2019, the Board adopted the Selective 2020 Key Employee Equity Bonus Plan (the "2020 KEEB Plan" and together with the 2019 KEEB Plan the "KEEB Plans"), which became effective on January 1, 2020. Both KEEB Plans allow the recipients to earn fully vested shares of the Company’s Class A Common Stock upon the achievement of quarterly service and performance conditions. During the quarter ended June 30, 2020, 25,905 RSUs were issued under the 2020 KEEB Plan. The total requisite service period of each quarterly award is approximately 0.4 years.
The unrecognized share-based compensation expense was approximately $1.9 million, which will be recognized over the remaining service period of 0.1 years. The shares issued under the KEEB Plans will be issued from the reserve of shares available for issuance under the 2013 Plan.
Note 11. Segment Reporting
The Company has determined that 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.
Concentrations
At June 30, 2020 and December 31, 2019, none of the Company’s customers accounted for more than 10% of the Company’s total accounts receivable.  
Long-lived assets by geographic location is based on the location of the legal entity that owns the asset. At June 30, 2020 and December 31, 2019, approximately 89% and 89% of the Company’s consolidated long-lived assets, respectively, were located in the U.S. France represented 7% and 8% of the Company's consolidated long-lived assets as of June 30, 2020 and December 31, 2019, respectively. No other single country outside of the U.S. represented more than 10% of the Company’s consolidated long-lived assets.
Note 12. Income Taxes
The provision for (benefit from) income taxes for the three months ended June 30, 2020 and 2019, was $0.2 million and $0.1 million, respectively, and was $0.4 million and $(3.0) million for the six months ended June 30, 2020 and 2019, respectively. The provision for (benefit from) income taxes for the three months ended June 30, 2020 and 2019 consisted primarily of state minimum taxes and foreign income taxes. The provision for (benefit from) income taxes for the six months ended June 30, 2020 consisted primarily of state minimum taxes and foreign income taxes. The provision for (benefit from) income taxes for the six months ended June 30, 2019 consisted primarily of state minimum taxes, foreign income taxes, and a one-time benefit from the release of valuation allowance as a result of the ConnectFirst acquisition. For the three and six months ended June 30, 2020 and 2019, the provision for income taxes differed from the U.S. federal statutory rate primarily due to state and foreign taxes currently payable. Due to the Connect First acquisition in January 2019, a deferred tax liability was established for the book-tax basis difference related to identifiable acquired intangibles. The net deferred tax liability from acquisitions is considered an additional source of income to support the realizability of the Company's pre-existing deferred tax asset, and as a result the Company released a portion of the valuation allowance that was established in the previous year and recorded a one-time tax benefit of $3.2 million for the six months ended June 30, 2019. The Company realized no benefit for the current year losses due to a full valuation allowance against the U.S. and foreign net deferred tax assets.
The realization of tax benefits of net deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are expected to be deductible or taxable. Based on the available objective evidence, the Company does not believe it is more likely than not that the net deferred tax assets will be realizable.
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RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Accordingly, the Company has provided a full valuation allowance against the entire domestic and the majority of the foreign net deferred tax assets as of June 30, 2020 and December 31, 2019. The Company intends to maintain the full valuation allowance on the U.S. net deferred tax assets until sufficient positive evidence exists to support a reversal of, or decrease in, the valuation allowance.
During the three and six months ended June 30, 2020, there were no material changes to the total amount of unrecognized tax benefits.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was passed into law and amended portions of relevant tax laws. The CARES Act did not have any significant impact on the provision for income taxes for the three and six months ended June 30, 2020. The Company will continue to monitor future guidance issued regarding the CARES Act.
Note 13. Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by giving effect to all potential shares of common stock, stock options, restricted stock units, ESPP, and convertible senior notes, to the extent dilutive. For the six months ended June 30, 2020 and the three and six months ended June 30, 2019, 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 income (loss) per share of common stock (in thousands, except per share data):
Three Months Ended
June 30,
Six Months Ended
June 30,
2020 2019 2020 2019
Numerator        
Net income (loss) $ 509    $ (9,243)   $ (60,212)   $ (15,601)  
Denominator:
Weighted-average common shares outstanding for basic net income (loss) per share 88,254    82,339    87,797    81,872   
Effect of dilutive securities:
Shares of common stock issuable under equity incentive awards outstanding 3,514    —    —    —   
Shares of common stock related to convertible senior notes 2,377    —    —    —   
Weighted-average common shares outstanding for diluted net income (loss) per share 94,145    82,339    87,797    81,872   
Basic net income (loss) per share $ 0.01    $ (0.11)   $ (0.69)   $ (0.19)  
Diluted net income (loss) per share $ 0.01    $ (0.11)   $ (0.69)   $ (0.19)  
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):
Three Months Ended
June 30,
Six Months Ended
June 30,
  2020 2019 2020 2019
Shares of common stock issuable under equity incentive awards outstanding 1,661    7,292    5,205    7,381   
Shares of common stock related to convertible senior notes —    1,657    2,256    1,311   
Potential common shares excluded from diluted net loss per share 1,661    8,949    7,461    8,692   
Since the Company expects to settle the principal amount of both its outstanding 2023 and 2025 Notes in cash and any excess in cash or shares of the Company’s Class A Common Stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will
26

RINGCENTRAL, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s Class A Common Stock for a given period exceeds the conversion price of $81.45 and $360.43 per share for the 2023 and 2025 Notes, respectively.
The denominator for diluted net income per share does not include any effect from the capped call transactions the Company entered into concurrently with the issuance of the 2023 and 2025 Notes as this effect would be anti-dilutive. In the event of conversion of the 2023 Note or the 2025 Note, if shares are delivered to the Company under the capped call, they will offset the dilutive effect of the shares that the Company would issue under the Notes.
Note 14. 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 June 30, 2020 and December 31, 2019 were $2.0 million and $1.5 million, respectively. Total expenses incurred from Google Inc. were $6.2 million and $4.8 million in the three months ended June 30, 2020 and 2019, respectively, and $12.5 million and $9.4 million in the six months ended June 30, 2020 and 2019, respectively.
Note 15. Subsequent Events
Strategic Partnership Agreement
In July 2020, the Company entered into a strategic partnership with a provider of communications, networking, and cloud solutions in Europe. Under the agreement, the Company paid $100.0 million in cash to gain exclusive access to the provider's customer base and for prepaid future commissions. The parties intend to introduce a new co-branded solution, which will be the exclusive Unified Communications as a Service ("UCaaS") solution marketed and sold by the strategic partner.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on February 26, 2020 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 significantly from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in the section entitled “Risk Factors” included under Part II, Item 1A below.
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 and configured and managed easily. Through our platform, we enable third-party developers and customers to integrate our solution with leading business applications to customize their own business workflows. In April 2020, we announced RingCentral Video ("RCV"), which is another component offered as part of RingCentral Office.
We have a portfolio of cloud-based offerings that are subscription based, made available at different rates varying by the specific functionalities, services, and number of users. We primarily generate revenues from the sale of subscriptions to our offerings.
Our subscription plans have monthly, annual, or multi-year contractual terms. We believe that this flexibility in contract duration is important to meet the different needs of our customers. For each of the three and six months ended June 30, 2020 and 2019, subscriptions revenues accounted for 90% or more of our total revenues. The remainder of our revenues has historically been primarily comprised of product revenues from the sale and rental of pre-configured 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 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”). In October 2019, we entered into a strategic partnership with Avaya Holdings Corp. ("Avaya"), which includes the introduction of a new solution Avaya Cloud Office by RingCentral ("ACO"), which is marketed and sold by Avaya and its subsidiaries. In December 2019, we entered into a strategic partnership with Atos SE ("Atos") and its subsidiary, Unify Software and Solutions GmbH & CO. KG ("Unify"), which includes the introduction of a new Unified Communications as a Service ("UCaaS") solution called Unify Office by RingCentral ("UO"), which will be marketed and sold as the exclusive UCaaS offering for the Atos Unify product family installed base. We intend to continue to foster this network and expand our network with resellers and other channel partners. 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 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 June 30, 2020, we had customers from a range of industries, including financial services, education, healthcare, legal services, real estate, retail, technology, insurance, construction, hospitality, and state and local government, among others. For each of the three and six months ended June 30, 2020 and 2019, the vast majority of our total revenues were generated in the U.S. and Canada, although
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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 larger customers, continue to innovate, grow revenues from our existing customer base, expand our distribution channels, and scale internationally.
In December 2019, a novel strain of Coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (the "WHO") declared the outbreak a “Public Health Emergency of International Concern.” In February 2020, the WHO raised the COVID-19 threat level from high to very high at a global level and in March 2020, the WHO characterized the COVID-19 as a pandemic. The worldwide spread of COVID-19 has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns.
During the three months ended June 30, 2020, we noted contributions from new bookings as more businesses transition to RingCentral in the current work-from-anywhere environment. In the early part of the quarter, we experienced higher churn rate mainly with small business customers in certain verticals, and we saw an improvement in churn rates through the remainder of the quarter. Further, due to the shelter-in-place, we continue to see more customers opting for the RingCentral apps on laptops and mobile devices over traditional desktop phones which impacted demand for physical phone devices. We also observed customer requests for extension in payment terms. To address customer hardships, we continue to engage with these customers providing them greater flexibility to manage challenges they are facing.
While our revenues and earnings are relatively predictable as a result of our subscription-based business model, the effect of the COVID-19 pandemic, may not be fully reflected in our results of operations and overall financial performance until future periods. The COVID-19 pandemic has created a global slowdown of economic activity which has and will likely continue to decrease demand for a broad variety of goods and services, while also disrupting sales channels and marketing activities for an unknown period of time until the disease is contained.
We may continue to experience curtailed customer demand due to reduced customer spend, shortened contract duration, higher churn, lengthened payment terms, credit card declines, potential delays in professional services implementations, and reduction in demand for desktop phones, which could adversely impact our business, results of operations and overall financial performance in future periods. We may in the future continue to experience elevated churn in certain customer verticals and customer requests for extension of payment terms.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance will also depend on certain developments, including the duration and spread of the outbreak, actions taken to contain the virus or its impact, impact on our partners, resellers and employees, impact on our customer, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. For example, to support the health and well-being of our employees, customers, partners and communities in response to the COVID-19 pandemic, a vast majority of our employees are currently working remotely and we have shifted some of our customer events to virtual-only experiences, and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. At this point, the extent to which the COVID-19 pandemic may impact our financial condition or results of operations is uncertain, but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.
Further discussion of the potential impacts of the COVID-19 pandemic on our business can be found in the section titled "Risk Factors" included in Part II, Item 1A below.
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 and free cash flows under “Liquidity and Capital Resources.” Other key business metrics are discussed below.
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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 at the end of a given month. For example, our Monthly Recurring Subscriptions at June 30, 2020 was $92.2 million. As such, our ARR at June 30, 2020 was $1.1 billion.
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 and RingCentral customer engagement solutions 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 June 30, 2020 was $1.0 billion.
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 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 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, all divided by (ii) the number of months in the period. We define our Average Monthly Recurring Subscriptions as the average of the Monthly Recurring Subscriptions at the beginning and end of the measurement period.
For example, if our Monthly Recurring Subscriptions were $118 at the end of a quarterly period and $100 at the beginning of the period, and $20 at the end of the period from new customers we added during the period, then the Dollar Net Change would be equal to ($0.67), or the amount equal to the difference of $118 minus $100 minus $20, all divided by three months. Our Average Monthly Recurring Subscriptions would equal $109, or the sum of $100 plus $118, divided by two. Our Net Monthly Subscription Dollar Retention Rate would then equal 99.4%, or approximately 99%, or one plus the quotient of the Dollar Net Change divided by the Average Monthly Recurring Subscriptions.
Our key business metrics for the five quarterly periods ended June 30, 2020 were as follows (dollars in millions):
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