UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(MARK ONE)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||
| For the fiscal year ended | December 31, | |||||||
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 Number001-33554
PROS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 76-0168604 | |||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of Principal Executive Offices) | (Zip code) | |||||||
Registrant’s telephone number, including area code:713 713 335-5151
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
| Common Stock, $0.001 par value per share | PRO | New York Stock Exchange | ||||||
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark 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 definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $2,219,582,301 $1,726,848,858 as of June 28, 201930, 2020 based upon the closing price for the registrant’s common stock on the New York Stock Exchange. This determination of affiliate status was based on publicly filed documents and is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statementproxy statement relating to its 20202021 Annual Stockholders Meeting to be filed within 120 days of the end of the fiscal year ended December 31, 2019,(the "2021 Proxy Statement"), are incorporated by reference into Part III of this Annual Report on Form 10-K. The 2021 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates.
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PROS Holdings, Inc.
Annual Report on Form 10-K
Table of Contents
For the Year Ended December 31, 20192020
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SIGNIFICANT RELATIONSHIPS REFERENCED IN THIS ANNUAL REPORT
The terms "PROS," "we," "us," and "our" refer to PROS Holdings, Inc., a Delaware corporation, and all of its subsidiaries that are consolidated in conformity with the generally accepted accounting principles in the United States of America ("GAAP").
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements in this report other than historical facts are forward-looking and are based on current estimates, assumptions, trends, and projections. Statements which include the words "believes," "seeks," "expects," "may," "should," "intends," "likely," "targets," "plans," "anticipates," "estimates," or the negative version of those words and similar expressions are intended to identify forward-looking statements. Numerous important factors, risks and uncertainties affect our operating results, including, without limitation, those contained in this report, and could cause our actual results to differ materially, from the results implied by these or any other forward-looking statements made by us or on our behalf. You should pay particular attention to the important risk factors and cautionary statements described in the section of this report entitled "Risk Factors". You should also carefully review the cautionary statements described in the other documents we file from time to time with the Securities and Exchange Commission ("SEC"), specifically all Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
You should not rely on forward-looking statements as predictions of future events, as we cannot guarantee that future results, levels of activity, performance or achievements will meet expectations. The forward-looking statements made herein are only made as of the date hereof, and we undertake no obligation to publicly update such forward-looking statements for any reason.
Part I
Item 1. Business
Overview
PROS provides solutions that optimize the processes of selling and shopping in the digital economy. PROS solutions leverage artificial intelligence ("AI") solutions, self-learning and automation to ensure that power commerce in the digital economy by providingevery transactional experience is fast, frictionless and personalized buying experiences. PROS cloud solutions enable dynamic buying experiences for every shopper, supporting both business-to-business ("B2B") and business-to-consumer ("B2C") companies across industry verticals. Companies can use our selling, pricing, revenue optimization and eCommerce solutions to assess their market environments in real time to deliver customized prices and offers. Our solutions enable buyers to move fluidly across our customers’ direct sales, partner, online, mobile and partneremerging channels with personalized experiences regardless of which channel buyers choose. Our decades of data science and AI expertise are infused into our solutions and are designed to reduce time and complexity through actionable intelligence. We provide standard configurations of our solutions based on the industries we serve and offer professional services to configure our solutions to meet the specific needs of each customer.
Our subscription-as-a-service ("SaaS") solutions are designed to achieve high levels of security, scalability, performance and availability. We believe our SaaS solutions provide an advantage over traditional enterprise software by allowing our customers to reduce their initial investment in third-party software, hardware and administration requirements, and also allow smaller customers or business units to cost-effectively leverage our enterprise class infrastructure, infrastructure management, security and other strategic services.
Before 2015, we primarily offered on-premises license solutions, for which our customers purchased the perpetual right to use our software within a specific license scope. The vast majority of theseThese license customers generally also purchased software maintenance and support, which includes unspecified software updates and enhancements on a when-and-if-available basis, maintenance releases and patches released during the term of the support period.
More than half of our revenue in 2020 and 2019 was derived from our cloud solutions, and since 2017 we have sold over 90% of our solutions as SaaS offerings. WeWe manage all updates and upgrades of software deployed on the PROS cloud on behalf of our customers, which enables us to deliver our latest product innovations to our customers in a more uniform way. We focus the vast majority of our product development efforts on our SaaS solutions, and our next-generation solutions have been built natively in the cloud.
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Our Industry
Real-time decision making is an important driver of business performance in the digital economy. Rapidly changing markets and buyer expectations make it increasingly harder for companies to compete and grow. In response to these pressures, we believe that market forces, including increasingly dynamic and complex business models, the explosion of eCommerce, and the exponential increase in the volume of enterprise and market data will accelerate the demand for software solutions that enable companies to dynamically price, configure and sell their products and services across all theiran ever-increasing set of buyer channels with speed, precision and consistency. We believe the market for solutions that can power commerce using AI and machine learning is a large, growing market that spans most major industries.
Our Solutions
Our cloud-based software solutions provide companies with AI-based predictive and prescriptive guidance on key business decisions that drive growth and profitability, including product mix optimization, price forecasting, price optimization, product configuration recommendations, new sales opportunity recommendations, cross-sell recommendations and proactive attrition detection. These insights are derived from machine learning data science based on historichistorical customer transactions, external market inputs and other data. Our cloud solutions enable a consistent buyer experience across direct, partner and eCommerce channels to support digital selling. Our solutions help increase visibility, business agility and customer engagement by aligning sales and pricing strategy across go-to-market channels. As a result, our solutions make it easier for companies to recommend and configure the correct solution(s), set the right price and quickly get a quote into the hands of a buyer.
Solutions for Selling Improvement
PROS selling solutions are designed to improve sales productivity and accelerate deal velocity by automating common sales tasks. Utilizing a foundation of AI and machine learning algorithms, PROS selling solutions empower businesses to tailor every offer for every buyer, across all sales channels, leading to more personalized and engaging customer interactions:
•PROS Smart CPQ accelerates the sales process and provides a powerful, intuitive tool for sales teams and partners to respond to customer quotes within minutes. Leveraging state-of-the-art AI and machine learning algorithms, Smart CPQ enables users to find and tailor product recommendations, customize configurations, manage approvals, price just right and generate professional proposals to increase the probability of winning the sale on the first quote. Smart CPQ supports all selling scenarios including spot-order purchases, subscription orders and setup and maintenance of negotiated sales agreements. Businesses can also integrate Smart CPQ into their eCommerce portals, empowering end users to self-serve with confidence. We also offer a Sales Agreements editionwhichautomates the quoting process when a longer-term agreement on product, price and terms is negotiated between buyer and seller, supporting increased collaboration and approvals that are required when actual order quantity is uncertain but can be estimated over the agreement term period. •PROS Opportunity Detection increases sales effectiveness and productivity while accelerating quota attainment by uncovering sales opportunities in existing accounts for sales teams. By applying AI and machine learning techniques to historical transactional activity, Opportunity Detection surfaces new opportunities to help proactively increase account penetration with existing customers while preventing customer churn. Businesses can also integrate Opportunity Detection into their eCommerce portal, providing personalized product recommendations for every end user along their eCommerce journey. |
Solutions for Pricing
PROS pricing solutions enable enterprises to optimize, personalize and harmonize pricing across the complexity of their go-to-market channels in the context of dynamic market and competitive conditions. Our pricing solutions include:
•PROS Control provides a comprehensive pricing platform that offers a single source of accuracy for price management, coordination and strategy. This platform allows businesses to harmonize pricing across go-to-market channels while simultaneously increasing price discipline and protecting price attainment. Pricing users leverage this solution to deploy formulaic price strategies that can incorporate real-time information or conditional data to ensure that every delivered price is up-to-date with the latest market and competitive conditions. With the performance, power and scalability of PROS Control’s Real-Time Pricing Engine, B2B and B2C organizations can replace price lists across commerce channels with dynamic calculations for price requests, ensuring that every delivered price is cognizant of conditions at the time of request. This engine allows businesses facing volatile price competition and underlying component costs to leverage data science |
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to systematically adjust pricing in real time.
•PROS Guidance leverages AI-powered algorithms to provide market-relevant price guidance across sales channels that is dynamically refined to adapt to changing market conditions and buyer behavior. This predictive and prescriptive price guidance provides optimized pricing for each unique buying scenario, which is designed to help businesses drive revenue growth, recover margin leakage, accelerate quote turnaround times and increase win-rates. PROS Guidance works with traditional eCommerce scenarios where a sales person is not involved, as well as where a sales person needs negotiation support, and in all cases this solution provides business-relevant analytics to promote explainability of the AI recommendation.
Airline Revenue Optimization
PROS revenue optimization solutions enable enterprises in the travel industry to drive revenue- and profit-maximizing business strategies through the application of advanced forecasting, optimization technologies and decision-support capabilities. These solutions are designed to empower companies to quickly adapt to changing market conditions, differentiate customers by market and sales channel, monitor pricing and revenue management performance, and increase customer loyalty by providing the right products and services to the right customer at the right time. Our Airline Revenue Optimization suite of products includes:
•PROS Airline Revenue Management delivers algorithmic forecasting and network optimization for the travel industry. Airlines leverage our forecasting and optimization capabilities to determine optimal capacity levels and manage booking classes inventory in order to optimize revenue at the flight/network level. •PROS Airline Real-Time Dynamic Pricing™ is a scalable solution that offers accurate booking class availability and seat prices across all channels, while keeping the rules, fares and other data in sync. The solution dynamically applies strategies to compute both booking class availability and seat prices in real time at the time of transaction so that airlines can maximize revenue. •PROS Airline Group Sales Optimizer is a group revenue optimization solution powered by dynamic pricing science that enables airlines and their travel agent partners to create and manage group bookings, contracts and policies in one location across users. |
Airline eCommerce
Our Airline eCommerce solutions power airlines to become better retailers by increasing their control and flexibility over how they sell and distribute offers. These solutions provide airlines with scalable shopping, booking and merchandising capabilities to design and distribute offers across individuals and groups. The solutions are powered by proprietary algorithms, compliant with industry pricing and distribution standards and are entirely passenger service system-independent. Our Airline eCommerce suite of products includes:
•PROS Airline Shopping powers airlines' shopping, pricing and repricing by delivering fast, accurate and comprehensive flight offers to travelers across airlines’ sales channels. •PROS Airline Merchandising increases airlines' conversion and revenues per passenger by dynamically selling ancillary services, including extra baggage, legroom and other services. Airlines can upsell with personalized offers at any time in the customer journey using rich content across the airlines' sales channels. •PROS Airline Retail offers a single, configurable end-to-end solution for airlines to optimize the user experience throughout the entire traveler journey from inspiration to post-trip. With this International Air Transport Association ("IATA") New Distribution Capability ("NDC") Level 4 capable solution, airlines can increase conversion rates and upsell opportunities while having the flexibility and control to optimize user interface across their internet booking engine and mobile application. |
Technology
Our high-performance software architecture supports real-time, high-volume transaction processing and enables us to handle the complex and demanding processing requirements of sophisticated global enterprises, including those who require sub-second response times for their customers. We provide the majority of our cloud services via cloud computing platform partners who offer Infrastructure-as-a-Service, including servers, storage, databases and networking, located in the United States, the Netherlands, Ireland, Germany, United Arab Emirates, Australia and other countries. The use of cloud computing platform partners provides us flexibility to service customers at scale and also offer options to comply with in-country data privacy requirements. We also deliver our solutions from infrastructure designed and operated by us but secured within third-party data center facilities. We offer both single-tenant and multi-tenant cloud solutions.
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Artificial Intelligence. OurMore than three decades of data science research and access to very large data sets underlies the robust machine learning and AI capabilities includeof our solutions. Our dynamic AI, including forecasting, optimization, neural networks, segmentation and reinforcement learning, and allowallows us to leverage our deep science and research expertise in our solutions. These capabilities are industry-independent and are validated using our proprietary verification and testing processes.
Configuration vs. Custom Coding. Our solutions can be configured to meet each customer's business needs through configuration rather than custom code. The configuration capabilities define both a business layer (including definition of user workflows, executive dashboards, analytics views, calculations, approval processes and alerts), as well as a data layer that permits configuration of data structures, including hierarchical dimensions, pricing levels and measures. We maintain our customers' configurations which allows them to use the latest version of our solutions.
Data Integration. The data needed to execute and power personalized digital buying typically resides in multiple sources, such as a company's enterprise resource planning ("ERP"), supply chain management ("SCM"), customer relationship management ("CRM"), eCommerce, reservations and inventory systems, external market data sources, spreadsheets and/or industry-specific transaction systems. Our platform interoperates with many different systems, including those that have been heavily customized to customer requirements. Our data integration capabilities bring data from disparate sources together into a single cohesive database, both in real time and through scheduled batch tasks. We also provide certified content for integration with SAP as well asand integration development services using industry standard tools.tools as well as adapters and integration tools for other common data sources and applications.
Micro-services Architecture. A comprehensive web services interface is at the heart of our architecture. This interface enables extension onto other platforms and the creation of rich integrated solutions.
User Interface. Our technology provides a rich and modern, browser-based interface that supports both local and remote users. This interface supports a wide variety of interactive charts and other data views, and provides a comprehensive security model based on user role and scope of responsibility. This interface operates on a variety of internet browsers, mobile devices and tablets. We also offerprovide native capabilities for multiple mobile devices, tablets,Salesforce CRM systems and client applications.Microsoft Dynamics CRM.
Subscription Services
Our subscription services provide customers access to our software via the Internet which, as compared to an on-premises software model, helps reduce their infrastructure, installation and ongoing administration requirements. We also reduce the total cost of ownership of our cloud services over the subscription term by delivering multiple feature releases per year that automatically introduce new features, while preserving previous customizations configurations and integrations that minimize additional customer investment for compatibility. We also offer cloud-based services to allow existing customers who previously purchased licenses to our software to have access to that software within a cloud-based IT environment that we manage.
Sales and Marketing
We sell and market our software solutions primarily through our direct global sales force and indirectly through go-to-market partners, resellers and systems integrators. Our sales force is organized by our target markets, including automotive and industrial manufacturing, transportation and logistics, chemicals and energy, food and beverage, healthcare, high tech and travel. Our marketing activities consist of a variety of programs designed to generate sales leads, accelerate sales opportunities and build awareness of our solutions. We also use digital channels including search and content syndication to reach our target market. We host an annual customer conference, Outperform, where our customers and prospects are invited to learn about best practices from thought leaders, executives and other practitioners in using technology to compete in the digital economy, hear about our latest innovations, and network with peers across industries. We also host other smaller conferences throughout the year, host informational web seminars and participate in and sponsor other industry and trade conferences and organizations.
We provide software-related professional services, including implementation, and configuration, services, consulting and training services. Our software solution implementations have a standardized and tested implementation process developed through years of experience implementing our software solutions in global enterprises across multiple industries. We also offer an array of training on all aspects of our software solutions, from introductory on-demand mini-courses to multi-day hands-on deep
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technical classroom sessions. In addition to our own internal professional services team, we also work with many globally diverse partners who have been certified to implement our software.
Maintenance and Support
Customers maintaining implementations under on-premises licenses may purchase, at their discretion, maintenance and support services. Maintenance enrollment entitles a customer to solicit support through a web-based interface to submit and track issues, access our online knowledge base, and receive unspecified upgrades, maintenance releases and bug fixes during the term of the support period.
Revenue from maintenance and support services has declinedcontinued to decline as a percentage of our total revenue since we announcedtransitioned to our cloud strategy as customers have purchasedand sold fewer on-premises licenses to our software. We expect our maintenance revenue to continue to decrease further as more existing customers migrate from our legacy on-premises solutions to our cloud solutions. Revenue from maintenance and support services comprisedcomprised 18%, 23%, 33%, and 41%33% of our total revenue in 2020, 2019 and 2018, and 2017, respectively.
Customers
We sell our solutions to customers across many industries, including automotive and industrial manufacturing, transportation and logistics, chemicals and energy, food and beverage, healthcare, high tech and travel. Our customers are generally large global enterprises and medium-sized businesses, although we also have customers that are smaller in scope of operations. In each of 2020, 2019 2018 and 2017,2018, we had no single customer that accounted for 10% or more of our revenue. Our customers are also geographically diverse, as approximatelyapproximately 67%, 66%, 65%, and 63%65% of our total revenue came from customers outside the U.S. for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
We provide our customers with several service options including a customer success team to help our customers accelerate the value of their investments in our solutions; a professional services ecosystem of both our professional service teams and certified third-party system integrators; 24x7 support; and an online community to facilitate collaboration among our customers and our product development teams.
Competition
The markets for our solutions are competitive, fragmented and rapidly evolving. For example, we have seen consolidation in the quoting software market with large vendors acquiring smaller quoting companies as they attempt to provide end-to-end solutions. Today, we are increasingly competing in a sales ecosystem with competitors that all aim to drive effectiveness and efficiency in selling, although we believe we are unmatched in our ability to deliver sales and pricing AI with speed, scale and precision. We face collective competition from a number ofboth larger and smaller companies,competitors, including vendors that providethose providing industry specific software, for specific industries, vendors that compete against a portion of our pricing solutions, vendors that compete against a portion of our selling solutions, and vendors that compete against a portion of our revenue management, retail, shopping and merchandising solutions in the airline industry. To a lesser extent, we compete against large enterprise application providers that have developed offerings that include competing functionality and custom solutions developed internally by businesses, which generally include some combination of spreadsheets, manual processes, external consultants, and internally developed software tools.
The number of companies that we compete with has increased in recent years as we expanded into adjacent technologies. We believe our customers consider the following factors when evaluating our solutions versus competitive solutions:
•product architecture, functionality, performance, data security, reliability and scalability;
•strength of AI embedded in offerings;
•real-time capabilities;
•customer base and references;
•return on investment, total cost of ownership and time-to-value;
•breadth and depth of product and service offerings;
•depth of expertise in data and pricing science;
•industry domain expertise;
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•investment in research and development;
•services and customer support quality;
•size and quality of partner ecosystem;
•existing customer relationships; and
•vendor viability.
We believe that none of our competitors can provide a competitive level of all of the functionality needed to support an organization interested in optimizing sales growth through AI-based omnichannel pricing, selling and revenue management. Our competitors generally compete on price or by bundling their applications with other enterprise applications, and we expect that this will continue in the
future. We distinguish ourselves from these vendors through our long history of providing software solutions incorporating AI and/or machine learning, the breadth and depth of the functionality we offer, the robust integration and configuration capabilities of our solutions, our ability to handle large data volumes at scale, and our proven ability to provide high-value dynamic science-based optimization software to our global customer base across industries. In the future, we believe our competition will continue to increase as we expand into adjacent market segments.
Intellectual Property
Our success and ability to compete is dependent, in part, on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing upon the proprietary rights of others. We protect our intellectual property with a combination of trade secrets, confidentiality procedures, contractual provisions, patents, trademarks, copyrights and other similar measures. We believe that reliance upon trade secrets and unpatented proprietary know-how are generally the most advantageous methods for us to protect our proprietary information.
Research and Development
We believe our software innovation is the foundation of our business and accordingly have made, and continue to make, significant investments in research and development for the enhancement of existing solutions and the development of solutions. We also believe that our long-term investments in AI and machine learning to power pricing and revenue management differentiate us from our competitors. We are committed to continuing the further development of these high-value solutions as evidenced by our continued investment in research and development. In fiscal 2020, 2019 2018 and 2017,2018, we incurred expenses of $75.6 million, $67.2 million and $55.7 million and $56.0 million, respectively, in research and development, net of capitalized internal-use software cost, to enhance our existing portfolio of solutions and to develop new solutions. Our research and development expenses include costs associated with our product management, product development and science and research groups. We conduct research and development activities predominantly in Bulgaria, France and the U.S., and also utilize third-party contractors in Bolivia, Colombia, France, India, Romania and Mexico.
We employ data scientists, most of whom are Ph.D.'s, to advance sales, pricing, and revenue management technology and its implementation in our software solutions. These scientists have specialties including, but not limited to, AI, machine learning, operations research, management science, statistics, econometrics and computational methods. Our data scientists regularly interact with our customers, product development, sales, marketing and professional services team to help keep our science efforts relevant to real-world demands.
Our mission is to help people and companies outperform. To fulfill that mission, we believe we must attract, develop, motivate and retain exceptional employees to maintain our culture and uphold our high ethical standards. As innovation is one of our core values, we believe that our commitment to innovation begins with our commitment to create an environment where our employees can do their best work. To accomplish this, we offer competitive total rewards, invest in ongoing learning and development, promote diversity and inclusion, and focus on employee health, safety and well-being. Oversight of our approach to and investment in human capital management and leadership and talent development are thus key governance matters for the Board of Directors ("Board"). Directly, and through its Compensation and Leadership Development Committee, the Board engages regularly with management on human capital matters. As of December 31, 2019,2020, we had 1,4131,403 full-time personnel, which included 1,2151,235 employees and 198168 outsourced personnel. Our team spans 10+ countries, reflecting various backgrounds, ages, gender identities and ethnicities.
At PROS, our values and culture are embedded in everything we do. We proactively look for ways to maintain our collaborative and open company culture and further improve our organizational health, including through regular employee and
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management communication, and periodic team events, as well as through employee pulse surveys. We use insights from our pulse surveys and other employee feedback, including through town halls, leader forums and other communication channels, to inform our human capital resources plans. Our most recent U.S. engagement survey, conducted during the COVID-19 pandemic and virtual work, shows the impact of our efforts, with 94% of our U.S.-based team members recommending PROS as a great place to work. Following the conclusion of this survey and submission of other required elements, PROS was designated as a 2020-2021 Great Place to Work-Certified™ company.
We encourage you to visit our website for more detailed information regarding our Human Capital programs and initiatives. Nothing on our website shall be deemed incorporated by reference into this Annual Report on Form 10-K.
Total Rewards. We require a talented workforce to drive innovation, operational excellence, and long-term stockholder value. We also believe that employees should be paid for what they do and how they do it, regardless of their gender, race, or other personal characteristics, and we constantly strive for pay parity. We define pay parity as ensuring that employees in the same job and location are paid fairly regardless of their gender or ethnicity. To attract and retain a talented workforce, we provide total rewards programs, practices and policies designed to be market-competitive, including by benchmarking and setting pay ranges based on market data, and also considering factors such as an employee’s role, skills, experience, job location and performance. We have invested in analysis and transparency to demonstrate our commitment to fair compensation and opportunity.
Our human resources management philosophy goes beyond traditional compensation and benefits. We design our total rewards to meet the needs of the whole person, not experienced anyjust the employee, recognizing that life events and circumstances that occur outside of work stoppagesmay impact what happens at work. For example, during 2020 we adopted a trusted time off approach in the U.S. to give employees more flexibility and considercontrol over their schedules. Our investments in employee mental health and wellness programs are also cornerstones of this philosophy. During COVID-19 we have added specific employee well-being initiatives discussed below.
Diversity and Inclusion. We believe diversity and inclusion drive innovation and ownership. We are committed to fostering a diverse and inclusive workplace that attracts and retains exceptional talent and upholds high ethical standards. We strive to maintain a working environment that celebrates diverse perspectives, cultures and experiences. We are proud of what we have accomplished to advance diversity and inclusion, but we recognize we still have work to do, including beyond the virtual walls of PROS.
Our commitment to diversity and inclusion starts at the top with a skilled and diverse Board which provides oversight for our human capital resources efforts, including our diversity and inclusion programs and initiatives. As of December 31, 2020, the majority of our Board was comprised of either female and/or ethnically diverse directors, with both female and ethnically diverse representation on our Board for more than 10 years. As of December 31, 2020, women represent 36% of our global employees, and in the U.S., more than half our employees represent minority groups, with underrepresented minorities (defined as those who identify as Black/African American, Hispanic/Latinx, Native American, Pacific Islander and/or two or more races) representing 26% of our U.S. employees.
We have a heritage of fostering inclusion and belonging, awareness and education, and social interaction and camaraderie through our employee relationsresource groups. Sponsored and funded by PROS, these employee-led groups are open to any interested employee and create spaces for our people to connect from all walks of life, grow together and build relationships and community. Additional information on our diversity and inclusion strategy, diversity metrics and programs can be found on our website at pros.com/about-pros/diversity-and-inclusion. Nothing on our website shall be deemed incorporated by reference into this Annual Report on Form 10-K.
Learning and Development. We believe that continuous learning cultivates innovation and that the development of our most important assets, our people, is foundational to fulfill our mission. We regularly invest in our employees’ career growth and provide our employees opportunities for training on a wide range of skills designed to help them to be good.more effective in their current and future roles. In 2020, over 95% of employees participated in learning and development activities, including thousands of courses across a broad range of categories – leadership, inclusion and diversity, professional skills, technical and compliance. Because the development of our employees and next generation of leaders is critical to our long-term success, we annually engage in a comprehensive talent evaluation and succession planning process, including manager evaluations of all employees and detailed succession planning for all director and above roles with Board oversight for senior management and other key roles.
Pandemic Response. Our top priority during the ongoing COVID-19 pandemic remains protecting the health and well-being of our employees, customers, partners and communities. Since the onset of the COVID-19 pandemic, we have maintained
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a work-from-home policy for substantially all our employees, materially limited business travel, and we have taken an integrated approach to helping our employees manage their work and personal responsibilities, with a strong focus on employee physical and mental health. Recognizing that working virtually across a global company is a new and sudden way for all to interact, we instituted several company-wide initiatives to assist our employees in managing through the unprecedented situation, including a mental health awareness day, monthly recharge days and "wellness Wednesdays" with limited scheduled meetings. Additional information on our pandemic response and related wellness initiatives will be included in the 2021 Proxy Statement.
Corporate Information
We were incorporated in Texas in 1985. We reincorporated as a Delaware corporation in 1998. In 2002, we reorganized as a holding company in Delaware. Our principal executive offices are located at 3100 Main Street,3200 Kirby Drive, Suite 900,600, Houston, Texas 77002.77098. We report as one operating segment with our Chief Executive Officer acting as our chief operating decision maker. Our telephone number is (713) 335-5151. Our website is www.pros.com. Our website and the information that can be accessed through our website are not part of this report.
Available Information
We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits thereto, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. Our reports that are filed with, or furnished to, the SEC are also available at the SEC's website at www.sec.gov.
Annual CEO Certification
Pursuant to Section 303A.12(a) of the New York Stock Exchange ("NYSE") Listed Company Manual, on May 3, 2019,14, 2020, we submitted to the NYSE an annual certification signed by our Chief Executive Officer certifying that he was not aware of any violation by us of NYSE corporate governance listing standards.
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Item 1A. Risk Factors
We operate in a dynamic environment that involves numerous risks and uncertainties. The following section describes some of the risks that may adversely affect our business, financial condition or results of operations, and the trading price of our common stock; these risks are categories and not necessarily listed in terms of their importance or level of risk.
Strategic, Commercial and Operational Risks relating
We must successfully navigate the demand, supply and operational challenges associated with the ongoing coronavirus (COVID-19) pandemic, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
The COVID-19 pandemic has adversely impacted, and we expect will continue to adversely impact, many aspects of our business. Governmental authorities have implemented or reinstated numerous severe measures in an attempt to contain the spread of COVID-19, including travel bans and restrictions, quarantines, physical distancing, shelter-in-place orders, and business limitations and shutdowns. Compliance with these measures by us and by our prospects, customers, suppliers and other counterparties has impacted our business, and this impact could last for an indefinite period of time. The economic impact of COVID-19 has adversely impacted a number of our prospects and customers, who have experienced, and may continue to experience, downturns or uncertainty in their own businesses. In particular, our travel industry customers experienced unprecedented declines in demand globally in 2020, which may remain suppressed for some time. To address these financial difficulties, some prospects and customers decreased, and may continue to decrease, spending on technology initiatives, stalled or halted implementation projects, and in limited cases filed for bankruptcy protection. As a result, we may be unable to collect receivables from or renew subscription agreements with those customers significantly impacted by COVID-19. In addition, certain customers have requested, and we expect will continue to request, concessions from existing contracts, and the extent and impact of future requests is uncertain. If a significant number of our customers are unable to make their contractually obligated payments to us, file for bankruptcy protection, or elect to renew their current contracts with us at lower usage levels, this would have an adverse impact on our subscription revenue, business and financial condition.COVID-19 may also have the effect of heightening many of the other risks described herein, including risks associated with our customers and supply chain.
As compared to our expectations prior to COVID-19, the economic impact of COVID-19 adversely impacted our revenue, customer bookings, bad debt expense and operating cash flow during the year ended December 31, 2020. We expect that customer bookings and the related revenue and cash flows will continue to be lower than anticipated during the pandemic, particularly new demand for our airline solutions. In response, we have postponed or canceled, and may continue to postpone or cancel, planned investments in our business, which may impact our product development and rate of innovation, either of which could seriously harm our business. The impact of COVID-19 will likely continue even after the pandemic is contained. For example, airline travel demand may remain suppressed and recovery may not follow a linear path. As there are no comparable recent events that provide guidance as to the effect, extent or duration of the current pandemic, or the resultant personal, economic and governmental reactions, we are unable to forecast the impact of COVID-19 on our bookings, revenue, results from operations, financial condition, liquidity and cash flows, and may have to take additional actions in the future that could further harm our business and financial performance. Although we expect that current cash and cash equivalent balances and cash flows that are generated from operations will be sufficient to meet our working capital needs and other capital and liquidity requirements for at least the next 12 months, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted.
To support the health and well-being of our employees and communities, we implemented and expect to continue a work-from-home policy for substantially all our employees and materially limited business travel, and we may take further actions that alter our operations as required by governmental authorities, or which we determine are in our best interests. While almost all of our operations have been performed remotely since March 2020, and we have not experienced any material interruptions to our operations to date, there is no guarantee that we will continue to be as effective while working remotely. The disruptions caused by COVID-19, including the limitations on meeting in-person with existing and potential customers and amongst our teams because our team is dispersed, may result in inefficiencies, delays and additional costs in our product development, sales, marketing, product implementations and customer service efforts that we cannot fully mitigate through remote work arrangements. Many employees have additional personal needs to attend to such as looking after children as a result of school closures or adjusted school calendars or family who become sick, and employees may continue to become sick themselves and be unable to work. To date, employee illnesses have not materially impacted our operations. However, if one or more of our senior leaders were unable to carry our their duties due to COVID-19, it could have a significant adverse impact on our operations. Similarly, our business practice modifications in response to the pandemic could present challenges to maintaining our corporate culture, including employee engagement, development and productivity. Where local regulations permit, we have provided limited access to our offices for our employees, and when appropriate, we anticipate that we will fully
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reopen our offices. Planning for the reopening of our offices has required and will likely continue to require non-trivial investments to manage additional risks and operational challenges, including in the design, implementation and enforcement of new workplace safety protocols. These efforts may divert management attention, and the protocols may create logistical challenges for our employees which could adversely impact employee productivity and morale. Even if we follow what we believe to be best practices, our measures may not prevent the transmission of COVID-19. Any incidents of actual or perceived transmission may expose us to liability from employee claims, adversely impact employee productivity and morale, and result in negative publicity and reputational harm.
The impacts of COVID-19 on our business continue to be uncertain, evolving, dynamic and dependent on numerous unpredictable factors outside of our control, including:
•the spread, duration and severity of COVID-19 and the mutations or variations thereof as a public health matter and its impact on governments, businesses and society generally and our clients, partners and our business;
•the duration, impact and effectiveness of measures taken by governments, businesses and society in response to COVID-19, including the effectiveness of vaccines, the rate at which vaccines are administered, and the effectiveness of fiscal and monetary stimulus programs and other legislative and regulatory measures;
•the impact of COVID-19 on overall long-term demand for air travel, including the impact on demand for business travel as a result of increased usage of videoconferencing and other technologies;
•the impact of COVID-19 on the financial health and operations of our current and prospective customers and partners, including the increase in business failures among our customers and other businesses;
•the pace and extent to which our customers and other businesses reduce their personnel;
•the possibility of failure of our operating facilities, computer systems or communication systems;
•the willingness of current and prospective clients to invest in our products and services; and
•the satisfaction of current and prospective customers with product and service remote delivery and support.
If we are not able to respond to and manage the impact of such events effectively, our results of operations, financial performance, and overall business will be harmed. We continue to evaluate the nature and extent of the impact of COVID-19 to our business.
If our security measures are breached and unauthorized access is obtained to a customer’s data, our data or our IT systems, our solutions may be perceived as not being secure, customers may limit or stop using our solutions and we may incur significant legal and financial exposure and liabilities.
Our solutions involve the storage, and to a more limited extent, the transmission of our customers’ proprietary information, including personal and other sensitive data. We have incurred, and expect to continue to incur significant costs to maintain security measures designed to prevent, eliminate or alleviate known security vulnerabilities, data theft, data corruption, computer viruses, malicious software programs, attacks by third parties or similar disruptive problems (each a "Security Incident"), and obtain third-party security attestations regarding those security measures. Despite the implementation of these security measures and third-party security attestations, if these measures are breached as a result of third-party action, employee error or misconduct or otherwise, we could experience a Security Incident that could result in someone obtaining unauthorized access to our IT systems, customers’ data or our data, including our intellectual property and other confidential business information. Because the techniques used to compromise systems change frequently, may exploit vulnerabilities, in third party systems or software which we interoperate with, and may not be recognized until launched, we may be unable to anticipate these techniques or to implement adequate preventative measures. We cannot predict the extent, frequency or impact of these problems on us. Any Security Incident could result in interruptions, delays, cessation of service and loss of existing or potential customers, as well as loss of confidence in the security of our solutions and services, damage to our reputation, negative impact to our future sales, disruption of our business, increases to our information security costs, and could lead to indemnity obligations, legal liability and other costs. In the normal course of our business, we experience Security Incidents.Incidents and have increased risk given our all remote workforce due to COVID-19. To date, however, the identified Security Incidents have neither been material or significant to us, including to our business operations, nor had a material financial impact. There can be no assurance that future Security Incidents will not be material or significant.
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Failure to increase business from our customers and sustain our historical renewal rates and pricing could adversely affect our future revenue and operating results.
Many of our existing customers initially purchase our software solutions for a specific business segment or geographic location within their organization, and over time we partner with them to add business segments and geographic locations within their organization. These customers might not choose to make additional purchases of our software solutions or to expand their existing software solutions to other business segments. In addition, as we deploy new applications and features for our software solutions or introduce new software solutions, our current customers may not purchase these new offerings. If we fail to generate additional business from our existing customers, our revenue could grow at a slower rate or even decrease.
Our subscription agreements are typically for an initial term of three years, and our legacy maintenance and support agreements are typically renewed for annual terms. Our customers have no obligation to renew their software subscriptions after the expiration of their initial term, and some customers elect not to renew. Subscription revenue represented the majority of our total revenue for the year ended December 31, 2019. Historically, maintenance2020. Maintenance and support revenue represented a more significant portion offrom our total revenue. Aslegacy on-premises software products continues to decline as a percentage of total revenue, maintenancerepresenting approximately 18%, 23% and support revenue for our legacy on-premises software products has been declining as it represented approximately 23%, 33% and 41% of our total revenue for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
We may not accurately predict future customer renewal rates, which can decline or fluctuate as a result of a number of factors, including customers’ level of satisfaction with our services, our ability to continue to regularly add functionality, the reliability (including uptime) of our subscription services, the prices of our services, the actual or perceived information security of our systems and services, mergers and acquisitions of our customers, reductions in our customers’ spending levels, or declines in customer activity as a result of economic downturns or uncertainty in financial markets. COVID-19 has had a negative impact on our revenue retention, particularly for our travel industry customers. If our customers choose not to renew their subscription, maintenance and support agreements with us on favorable terms or at all, our business, operating results and financial condition could be harmed.
If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service and operational controls or adequately address competitive challenges.
We depend on third-party data centers, software, data and other unrelated service providers and any disruption from such third partythird-party providers could impair the delivery of our service and negatively affect our business.
Our cloud products are dependent upon third-party hardware, software and cloud hosting vendors, including Microsoft Azure, IBM Softlayer and Amazon Web Services, all of which must inter-operate for end users to achieve their computing goals. We utilize third-party data center hosting facilities, cloud platform providers, and other service providers to host and deliver our subscription services as well as for our own business operations. We host our cloud products from data centers in a variety of countries, including the United States, the Netherlands, Ireland, Germany, United Arab Emirates, Australia and Australia.other countries. While we control and generally have exclusive access to our servers and all of the components of our network that are located in our external data centers, we do not control the operation of these facilities and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to Security Incidents, break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite our failover capabilities, standard protocols and other precautions, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. In addition, these providers have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms or at all, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so.
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Certain of our applications are essential to our customers’ ability to quote, price, and/or sell their products and services. Any interruptionInterruption in our service may affect the availability, accuracy or timeliness of quotes, pricing or other information and as a result could require us to issue service credits to our customers, damage our reputation, cause our customers to terminate their use of our solutions, require us to indemnify our customers against certain losses, and prevent us from gaining additional business from current or future customers. In addition, certain of our applications require access to our customer’s data which may be held by third parties, some of whom are, or may become, our competitors. For example, many of our travel industry products rely upon access to airline data held by large airline IT providers which compete against certain of our travelairline products. Certain of these competitors have in the past, and may again in the future, make it difficult for our airline customers to access their data in a timely and/or cost-effective manner.
Any disruption from our third-party data center, software, data or other service providers could impair the delivery of our service and negatively affect our business, and could damage our reputation, negatively impact our future sales and lead to legal liability and other costs.
If we fail to manage our cloud operations, we may be subject to liabilities and our reputation and operating results may be adversely affected.
We have experienced substantial growth in the number of customers and data volumes serviced by our cloud infrastructure in recent years. While we have designed our cloud infrastructure to meet the current and anticipated future performance and accessibility needs of our customers, we must manage our cloud operations in order to handle changes in hardware and software parameters, spikes in customer usage and new versions of our software. We have experienced, and may in the future experience, system disruptions, outages and other cloud infrastructure performance problems. These problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks (internal or external), fraud, spikes in customer usage, denial of service issues and other Security Incidents. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. Our customer agreements typically provide service level commitments on a monthly basis and for certain of our products we also offer response time commitments. If we are unable to meet the stated service level or response time commitments, or if we suffer extended periods of unavailability for our solutions, we may be contractually obligated to issue service credits or refunds to customers for prepaid and unused subscription services, or customers may choose to terminate or not renew contracts. Any extended service outages or other performance problems could also result in damage to our reputation or our customers’ businesses, cause our customers to elect not to renew or to delay or withhold payment to us, loss of future sales, lead to customers making other claims against us that could harm our subscription revenues, result in an increase in our provision for doubtful accounts, increase collection cycles for our accounts receivable or lead to the expense and risk of litigation.
If we fail to protect our intellectual property adequately, our business may be harmed.
Our success and ability to compete depends in part on our ability to protect our intellectual property. We rely upon a combination of trade secrets, confidentiality policies, nondisclosure and other contractual arrangements, and patent, copyright and trademark laws to protect our intellectual property rights. We cannot, however, be certain that steps we take to protect our intellectual property are adequate.
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We may be required to spend significant resources to protect our intellectual property rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. The procurement and enforcement of certain intellectual property rights involves complex legal and factual considerations, and the associated legal standards are not always applied predictably or uniformly, can change, and may not provide adequate remedies. As a result, we may not be able to obtain or adequately enforce our intellectual property rights, and other companies may be better able to develop products that compete with ours. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand, competitive business position, business prospects, operating results and financial condition.
Our use of third-party software creates dependencies outside of our control.
We use third-party software in our software solutions. If our relations with any of these third parties are impaired, or if we are unable to obtain or develop a replacement for the software, our business could be harmed. The operation of our solutions could be impaired if errors occur in the third-party software that we utilize. It may be more difficult for us to correct any defects in third-party software because the software is not within our control. Accordingly, our business could be adversely affected in the event of any errors in this software. There can be no assurance that these third parties continue to invest the appropriate levels of resources in their products and services to maintain and enhance the capabilities of their software.
We may enter into acquisitions that may be difficult to integrate, fail to achieve our strategic objectives, disrupt our business, dilute stockholder value or divert management attention.
We have completed four acquisitions since 2013, and we plan to continue to acquire other businesses, technologies and products that we intend to complement or enhance our existing business, solutions, services and technologies. We cannot provide assurance that the acquisitions we have made or may make in the future will provide us with the benefits or achieve the results we anticipated when entering into the transaction(s). Acquisitions are typically accompanied by a number of risks, including:
•difficulties in integrating the operations and personnel of the acquired companies;
•difficulties in maintaining acceptable standards, controls, procedures and policies, including integrating financial reporting and operating systems, particularly with respect to foreign and/or public subsidiaries;
•disruption of ongoing business and distraction of management;
•inability to maintain relationships with customers of the acquired business;
•impairment of relationships with employees and customers as a result of any integration of new management and other personnel;
•difficulties in incorporating acquired technology and rights into our solutions and services;
•unexpected expenses resulting from the acquisition; and
•potential unknown liabilities associated with the acquisition.
In addition, we may incur debt, acquisition-related costs and expenses, restructuring charges and write-offs as a result of acquisitions. Acquisitions may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges. In addition, we have in the past, and may in the future, enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If we fail to evaluate and execute acquisitions successfully, we may not be able to achieve our anticipated level of growth and our business and operating results could be adversely affected.
Catastrophic events may disrupt our operations.
Our headquarters are located in Houston, Texas, and we conduct business in other domestic and international locations. We also rely on our network and third-party infrastructure and enterprise applications for our sales, marketing, development, services, operational support and hosted services. A disruption, infiltration or failure of these systems or third-
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party hosted services in the event of a major hurricane, earthquake, fire, flood or other weather event, power loss, telecommunications failure, software or hardware malfunctions, pandemics (including the COVID-19 pandemic), cyber-attack, war, terrorist attack or other catastrophic event that our business continuity and disaster recovery plans do not adequately address, could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data. Any of these events could prevent us from fulfilling our customer obligations or could negatively impact a country or region in which we sell our products, which could in turn decrease that country’s or region’s demand for our products. Even though we carry business interruption insurance and typically have provisions in our contracts that protect us in certain events, we might suffer losses from business interruptions that exceed the coverage under our insurance policies or for which we do not have coverage. Any natural disaster or other catastrophic event could create a negative perception in the marketplace, delay our product innovations, or lead to lengthy interruptions in our services, breaches of data security, and losses of critical data, all of which could have an adverse effect on our operating results.
We are a multinational corporation exposed to risks inherent in international operations.
The majority of our revenues are derived from our customers outside the U.S. To date, the majority of our sales have been denominated in U.S. dollars, although the majority of our expenses that we incur in our international operations are denominated in local currencies. To date, we have not used risk management techniques or "hedged" the risks associated with fluctuations in foreign currency exchange rates. Consequently, our results of operations and financial condition, including our revenue and operating margins, can be subject to losses from fluctuations in foreign currency exchange rates, as well as regulatory, political, social and economic developments or instability in the foreign jurisdictions in which we operate.For additional financial information about geographic areas, see Note 19 of the Notes to the Consolidated Financial Statements.
Our operations outside the U.S. are subject to risks inherent in doing business internationally, requiring resources and management attention, and may subject us to new or larger levels of regulatory, economic, foreign currency exchange, tax and political risks. We have customers in over 60 countries internationally, which we service through our operations in the U.S., Australia, Bulgaria, Canada, France, Germany, Ireland, United Arab Emirates and United Kingdom. We expect our international operations to continue to grow. Among the risks we believe are most likely to affect us with respect to our international operations are:
•economic conditions in various parts of the world;
•sustained disruption to international travel from the COVID-19 pandemic and variations or mutations thereof as well as any other outbreaks of contagious diseases;
•differing labor and employment regulations, especially where labor laws are generally more advantageous to employees as compared to the U.S.;
•the difficulty of managing and staffing our international operations and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
•unexpected changes in regulatory requirements, including changes in laws governing the flow of data across international borders;
•less favorable intellectual property laws;
•new and different sources of competition;
•compliance with multiple, conflicting, ambiguous or evolving governmental laws and regulations, including privacy, anti-corruption, import/export, antitrust, and industry-specific laws and regulations and our ability to identify and respond timely to compliance issues when they occur;
•vetting and monitoring our third-party business partners in new and evolving markets to confirm they maintain standards consistent with our brand and reputation;
•multiple, conflicting and changing tax laws and regulations that may affect both our international and domestic tax liabilities and result in increased complexity and costs;
•availability of sufficient network connectivity required for certain of our products;
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•difficulties in enforcing contracts and collecting accounts receivable, especially in developing countries; and
•tariffs and trade barriers, data sovereignty, import and export controls and other regulatory or contractual limitations on our ability to sell or develop our solutions in certain foreign markets.
If we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
Market and Competition Risks
Any downturn in sales to our target markets could adversely affect our operating results.
Our success is highly dependent upon our ability to sell our software solutions to customers in our target industries, including automotive and industrial manufacturing, transportation and logistics, chemicals and energy, food and beverage, healthcare, high tech and travel. If we are unable to sell our software solutions effectively to customers in these industries, we may not be able to grow our business. For example, COVID-19 has had a dramatic adverse impact on the travel industry and the timing and pace of recovery is unpredictable as further described above.
We have historically been subject to lengthy sales cycles, and delays or failures to complete sales may harm our business and cause our revenue and operating income to decline in the future.
While our sales cycle times have continued to improve relative to our historical averages since we shifted to a cloud strategy in 2015, our sales cycles may take a month to over a year for large enterprise customers. A large enterprise customer’s decision to use our solutions typically involves a number of internal approvals, and sales to those prospective customers generally require us to provide greater levels of education about the benefits of our solutions. We expend substantial resources during our sales cycles with no assurance that a sale may ultimately result. The length of each individual sales cycle depends on many factors, a number of which we cannot control, including the prospective customer's internal evaluation and approval process requirements, as well as the prospective customer's budget and/or resource constraints. Any unexpected lengthening of the sales cycle or failure to secure anticipated orders could negatively affect our revenue. Any significant failure to generate sales after incurring costs related to our sales process could also have a material adverse effect on our business, financial condition and results of operations.
If we fail to develop or acquire new functionality and software solutions, we may not be able to grow our business and it could be harmed.
Because the markets in which we compete are characterized by rapid technological developments, newly emerging and changing customer requirements, and frequent solution introductions, updates and functional enhancements, we spend substantial amounts of time and money to enhance our existing software solutions and research and develop new solutions. We must introduce enhancements to our existing software solutions and bring new solutions to the market to meet our business plan, maintain or improve our competitive position, keep pace with technological developments, satisfy increasing customer requirements and increase awareness for our software. New functionality and solutions we develop may not be introduced timely and may not achieve market acceptance sufficient to generate material revenue. Furthermore, our competitors could be heavily investing in research and development and may develop and market new solutions that may compete with, and may reduce the demand for, our software solutions. We may not be successful in developing or acquiring, marketing and selling new functionality or solutions, or delivering updates and upgrades that meet changing industry standards and customer demands. In addition, we may experience difficulties that could delay or prevent the successful development, marketing and selling of such functionality or solutions. If we are unable to develop or acquire new functionality, enhance our existing software solutions, develop and market new solutions or adapt to changing industry requirements to meet market demand, we may not be able to grow our business and our revenue and operating results would be adversely affected. Furthermore, because our software solutions are intended to interoperate with a variety of third-party enterprise software solutions, we must continue to modify and enhance our software to keep pace with changes in such solutions. Any inability of our software to operate effectively with third-party software necessary to provide effective solutions to our customers, could reduce the demand for our software solutions, result in customer dissatisfaction and limit our revenue.
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The markets in which we participate are intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The markets for enterprise software applications for selling improvement (including configure-price-quote solutions and pricing), airline revenue optimization (including revenue management solutions), and airline eCommerce (including shopping, merchandising and retail solutions) are competitive, fragmented and rapidly evolving. We expect additional competition from other established and emerging companies as the markets in which we compete continue to develop and expand, as well as through industry consolidation, including through a merger or partnership of two or more of our competitors or the acquisition of a competitor by a larger company. Some of our current and potential competitors may have larger installed bases of users, longer operating histories, broader distribution, greater name recognition, and have significantly greater resources than we have. As a result, these companies may be able to respond more quickly to new or emerging technologies and changes in customer demands, and devote greater resources to the development, promotion and sale of their products.
Competition could seriously impede our ability to sell our software solutions and services on terms favorable to us. Our current and potential competitors may develop and market new technologies that render our existing or future solutions obsolete, unmarketable or less competitive. In addition, if these competitors develop solutions with similar or superior functionality to our solutions, or if they offer solutions with similar functionality at a substantially lower prices than our solutions, we may need to decrease the prices for our solutions in order to remain competitive. If we are unable to maintain our current pricing due to competitive pressures, our margins could be reduced and our operating results could be adversely affected. If we do not compete successfully against current or future competitors, competitive pressures could materially and adversely affect our business, financial condition and operating results.
We focus primarily on selling improvement, pricing, revenue management and airline eCommerce software, and if the markets for this software develop more slowly than we expect, our business could be harmed.
We derive most of our revenue from providing our software solutions for selling improvement (including our configure-price-quote solutions), pricing, airline revenue optimization (including our revenue management solutions), and airline eCommerce (including our shopping, merchandising and retail solutions), as well as providing implementation services and ongoing customer support. The selling improvement, pricing, revenue management and airline eCommerce markets are evolving rapidly, and it is uncertain whether software for these markets will achieve and sustain high levels of demand. Our success depends on the willingness of businesses in our target markets to use selling improvement, pricing, revenue management and airline eCommerce software. Some businesses may be reluctant or unwilling to implement such software for a number of reasons, including failure to understand the potential returns of improving their processes and lack of knowledge about the potential benefits that such software may provide. Some businesses may elect to improve their sales and pricing processes through solutions obtained from their existing enterprise software providers, whose solutions are designed principally to address functional areas other than what our solutions provide. If businesses do not embrace the benefits of selling improvement, pricing, revenue management and airline eCommerce software, the market for such software may not continue to develop or may develop more slowly than we expect, either of which would significantly and adversely affect our revenue and operating results.
Human Capital Risks
If we cannot maintain our corporate culture, we could lose the innovation, teamwork and passion that we believe contribute to our success, and our business may be harmed.
We invest substantial time and resources in building and maintaining our culture and developing our personnel; however, as we continue to scale our business both organically and through potential acquisitions, it may be increasingly difficult to maintain our culture. As stated above, since March 2020 our workforce has been primarily working virtually from home during the COVID-19 pandemic, and we plan to evolve to a more flexible, virtual first workforce over time post-pandemic. While we have implemented many wellness, development and supportive programs for our workforce, the dramatic shift in workplace and workstyle increases the risk to our culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively pursue our strategic objectives.
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We may lose key members of our management team or sales, development or operations personnel, and may be unable to attract and retain employees we need to support our operations and growth.
Our future success depends upon the performance and service of our executive officers and other key personnel. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives. For example, Mr. Rechan joined as our Chief Operating Officer in 2020, and two of our previous executive officers retired in the past twelve months. Changes in our executive management team may be disruptive to our business. Our future success depends on our ability to continue to timely identify, attract and retain highly qualified personnel and effectively plan for succession for key roles, and there can be no assurance that we will be able to do so. We have continued to add a significant number of new personnel to support our continued growth, and their ability to learn our business and manage it effectively is important to our continued growth and expansion. In addition, given the highly sophisticated artificial intelligence included in our solutions, the pool of data scientists and software developers qualified to work on our solutions is limited. The implementation of certain of our software solutions requires highly-qualified personnel, and hiring and retaining such personnel to support our growth may be challenging. Competition for qualified personnel is intense, and we compete for these individuals with other companies that may have greater resources than we do. If our key personnel are unable to effectively manage our business, or if we fail to identify, attract and retain additional qualified personnel, our operating results could be adversely affected.
Failure to adequately expand and train our direct and indirect sales force may impede our growth.
To date, substantially all of our revenue has been attributable to the efforts of our direct sales force. We believe that our future growth will depend, to a significant extent, on the continued development of our direct sales force, and our sales team's ability to manage and retain our existing customer base, expand our sales to existing customers and obtain new customers. Our ability to achieve significant revenue growth in the future will depend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New hires require significant training and may take a number of months before becoming fully productive, if at all. If we are unable to develop sufficient numbers of productive direct sales personnel, our growth may be impeded.
In addition to our direct sales force, we have developed, and expect to expand, our indirect sales force via channel partners, such as management consulting firms, systems integrators and other resellers, to market, sell and/or implement our solutions. We anticipate that channel partners will become an increasingly important driver of our sales growth, particularly as more channel partners become resellers of our solutions. We expect to invest significant resources to identify, establish, train and retain successful strategic resell partner relationships. If we are unable to establish and maintain our partner relationships, or otherwise develop and expand our indirect distribution channel, our sales growth rates may be limited.
Regulatory, Compliance and Litigation Risks
Evolving data privacy, cyber security and data localization laws impact our business and expose us to increased liability.
Personal privacy, data localization and data security have become significant issues in the United States, Europe, and in many other jurisdictions. We provide our cloud software solutions globally, including in countries that have, or may adopt in the future, stringent data privacy, cyber security or data localization laws. For example, the EU’s General Data Protection Regulation (“GDPR”) imposes substantial requirements regarding the handling of personal data and provides for robust regulatory enforcement and sanctions for non-compliance. As another example, the California Consumer Privacy Act (“CCPA”) provides data privacy rights for consumers which creates new and uncertain operational requirements for our business.
Privacy, data localization and data security laws may be subject to interpretation, may be applied differently across jurisdictions resulting in inconsistent or conflicting requirements, and are likely to continue to evolve in the future. For example, in July 2020 the Court of Justice of the European Union ("CJEU") invalidated the U.S./EU Privacy Shield framework that allowed participating companies to transfer personal data from EU member states to the U.S. While we instead rely on Standard Contractual Clauses for such transfers, the CJEU ruling made clear that these transfer mechanisms will be subject to additional scrutiny. Although we have implemented measures designed to comply with the laws and regulations applicable to our business, our ongoing efforts to comply with the GDPR, the CCPA and other changes in laws and regulations entail substantial expenses and may divert resources from other initiatives. These changes have in the past increased, and may continue to increase, our cost of providing our products and services, could limit us from offering certain solutions in certain jurisdictions, could adversely affect our sales cycles, and could impact our new technology innovation. In addition, our cloud software solutions store data on behalf of our customers, and if our customers fail to comply with contractual obligations or applicable laws and regulations, such non-compliance could result in litigation or reputational harm to us. Any perceived
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inability to adequately address privacy, data localization or cyber security compliance or to comply with more complex and numerous laws and regulations, even if unfounded, could result in liability to us and indemnification obligations, damage our reputation, inhibit sales of our solutions or harm our business, financial condition and results of operations.
Any unauthorized, and potentially improper, actions of our personnel could adversely affect our business, operating results and financial condition.
The recognition of our revenue depends on, among other things, the terms negotiated in our contracts with our customers. Our personnel may act outside of their authority and negotiate additional terms without our knowledge. We have implemented policies to help prevent and discourage such conduct, but there can be no assurance that such policies would be followed. For instance, in the event that our sales personnel negotiate terms that do not appear in the contract and of which we are unaware, whether such additional terms are written or verbal, we could be prevented from recognizing revenue in accordance with our plans. Furthermore, depending on when we learn of unauthorized actions and the size of the transactions involved, we may have to restate revenue for a previously reported period, which could seriously harm our business, operating results, financial condition and reputation with current and potential customers and investors.
Intellectual property litigation and infringement claims may cause us to incur significant expense or prevent us from selling our software solutions.
Our industry is characterized by the existence of a large number of patents, trademarks and copyrights, and by litigation based on allegations of infringement or other violations of intellectual property rights. A third-party may assert that our technology violates its intellectual property rights, or we may become the subject of a material intellectual property dispute. Selling improvement (including configure-price-quote), pricing, airline revenue optimization (including revenue management) and airline eCommerce (including shopping, merchandising and retail) solutions may become increasingly subject to infringement claims as the number of such commercially available solutions increases and the functionality of these solutions overlaps. In addition, changes in patent laws in the U.S. may affect the scope, strength and enforceability of our patent rights or the nature of proceedings which may be brought by us related to our patent rights. Future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own potential patents may therefore provide little or no deterrence. Regardless of the merit of any particular claim that our technology violates the intellectual property rights of others, responding to such claims may require us to:
•incur substantial expenses and expend significant management efforts to defend such claims;
•pay damages, potentially including treble damages, if we are found to have willfully infringed such parties’ patents or copyrights;
•cease making, selling or using products that are alleged to incorporate the intellectual property of others;
•distract management and other key personnel from performing their duties for us;
•enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies; and
•expend additional development resources to redesign our solutions.
Any licenses required as a result of litigation under any patent may not be made available on commercially acceptable terms, if at all. In addition, some licenses may be nonexclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be unable to effectively develop or market our solutions, which could limit our ability to generate revenue or maintain profitability.
Our contract terms generally obligate us to indemnify and hold our customers harmless from certain costs arising from third partythird-party claims brought against our customers alleging that the use of our solutions infringe intellectual property rights of others. If we are unable to resolve our legal obligations by settling or paying an infringement claim, we may be required to compensate our customers.
We use open source software in our solutions and may use more open source software in the future.solutions. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be
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subject to lawsuits by parties claiming ownership of what we believe to be open source software. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If we combine our proprietary software solutions with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software solutions. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. In addition, open source license terms may be ambiguous and many of the risks associated with usage of open source cannot be eliminated, and could, if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source software, we may be required to seek licenses from third parties in order to continue offering our software, to re-engineer our solutions, to discontinue the sale of our solutions in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, operating results and financial condition.
Defects or errors in our software solutions could harm our reputation, impair our ability to sell our solutions and result in significant costs to us.
Our software solutions are complex and may contain undetected defects or errors. Several of our solutions have recently been developed and may therefore be more likely to contain undetected defects or errors. In addition, we frequently develop enhancements to our software solutions that may contain defects. We utilize third-partyhave not suffered significant harm from any defects or errors to date. We have in the past issued, and may in the future need to issue, corrective releases of our solutions to correct defects or errors. The occurrence of any defects or errors could result in:
•delayed market acceptance and lost sales of our software that we incorporate intosolutions;
•delays in payment to us by customers;
•damage to our reputation;
•diversion of our resources;
•legal claims, including product liability claims, against us;
•increased maintenance and support expenses; and
•increased insurance costs.
Our agreements with our customers typically contain provisions designed to limit our liability for defects and errors in our software solutions and impaired relations withdamages relating to such defects and errors, but these third parties, defectsprovisions may not be enforced by a court or otherwise effectively protect us from legal claims. Our liability insurance may not be adequate to cover all of the costs resulting from these legal claims. Moreover, we cannot provide assurance that our current liability insurance coverage would continue to be available on acceptable terms. In addition, the insurer may deny coverage on any future claims. The successful assertion against us of one or more large claims that exceeds available insurance coverage, or the occurrence of changes in third-party softwareour insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a third party’s inability or failurematerial adverse effect on our business and operating results. Furthermore, even if we prevail in any litigation, we are likely to enhance their software over time couldincur substantial costs and our management’s attention may be diverted from our operations.
Business Model and Capital Structure Risks
We incurred indebtedness by issuing convertible notes, and our debt repayment obligations may adversely affect our operatingfinancial condition and cash flows from operations in the future.
In September 2020, we issued $150.0 million principal amount of 2.25% convertible senior notes ("2027 Notes") due September 15, 2027, unless earlier redeemed, purchased or converted in accordance with their terms prior to such date. Interest is payable semi-annually in arrears on March 15 and September 15 of each year. As of December 31, 2020, the entire $150.0 million of aggregate principal amount of 2027 Notes are outstanding.
In May 2019, we issued $143.8 million principal amount of 1.0% convertible senior notes ("2024 Notes" and together with the 2027 Notes, the "Notes") due May 15, 2024, unless earlier redeemed, purchased or converted in accordance with their
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terms prior to such date. Interest is payable semi-annually in arrears on May 15 and November 15 of each year. As of December 31, 2020, the entire $143.8 million of aggregate principal amount of 2024 Notes are outstanding.
Our indebtedness could have important consequences because it may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate or other purposes. Our ability to meet our debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and financial condition.
other factors. We incorporate and include third-party software intocannot control many of these factors. Our future operations may not generate sufficient cash to enable us to repay our software solutions.debt. If our relationswe fail to comply with any covenants contained in the agreements governing any of these third parties are impaired,our debt, or ifmake a payment on any of our debt when due, we could be in default on such debt, which could, in turn, result in such debt and our other indebtedness becoming immediately payable in full. If we are at any time unable to obtain or develop a replacement for the software,pay our business could be harmed. The operation of our solutions could be impaired if errors occur in the third-party software thatindebtedness when due, we utilize. It may be more difficult for usrequired to correct any defects in third-party software becauserenegotiate the software is not within our control. Accordingly, our business could be adversely affected interms of the eventindebtedness, seek to refinance all or a portion of any errors in this software.the indebtedness, and/or obtain additional financing. There can be no assurance that, these third partiesin the future, we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.
Our quarterly results may vary and may not fully reflect the performance of our business.
We generally recognize revenue from customers ratably over the terms of their subscription agreements. As a result, most of the revenue we report in each quarter is the result of agreements entered into during prior quarters. Consequently, a decline in new or renewed subscriptions in any quarter may not be reflected in our revenue for that quarter, but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales, our failure to achieve our internal sales targets, a decline in the market demand of our services or decreases in our retention rate may not be fully reflected in our operating results until future periods. For example, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as subscription revenue from additional sales must be recognized over the applicable subscription term. We may be unable to timely adjust our cost structure to reflect changes in revenues. In addition, a significant majority of our costs are expensed as incurred, while subscription revenues are recognized over the term of the customer agreement. As a result, increased sales growth could result in our recognition of more costs than revenues in the earlier periods of the terms of our agreements. In addition, we expect to continue to invest the appropriate levels of resources in their products and services to maintain and enhance the capabilities of their software.
If we fail to migrate customers with on-premises software licenses to our latest cloud software solutions, our future revenue may be limited and our costs to provide support to those customers may increase.
Customers with on-premises licenses for our legacy software may need to migrate to our current cloud solutions to take advantage of our latest features, functionality and security which are only available via the PROS cloud. Although we intend to continue to maintainsupport our legacy on-premises software customers under perpetual licenses for the foreseeable future, we continue to focus on migrating such customers to our cloud solutions. Historically, customers who purchased on-premises licenses for our solutions may have invested substantial personnel and financial resources in our legacy software. In addition, when considering whether to migrate, these customers may evaluate alternative solutions due to the additional change management and implementation costs associated with migrating to cloud-based applications. When on-premises software customers delay or decline to migrate to our cloud solutions, our internal controls over financial reporting in accordancedevelopment and customer support teams find it increasingly difficult and costly to support a declining number of on-premises customers. In addition, if our legacy on-premises license customers delay or decline to migrate to our cloud solutions, choose alternative solutions or otherwise choose to not continue doing business with Section 404 of the Sarbanes-Oxley Act,us by, for example, canceling maintenance, our market pricefuture revenue may be adversely affected.limited.
We expect our managementexpenses to assesscontinue to exceed our revenues in the effectivenessnear term as we continue to make investments as part of our internal control over financial reportingcloud strategy, particularly in new product development, sales, marketing, security, privacy and cloud operations. Our ability to provide a report byreturn to profitability depends on our registered independent public accounting firm addressing the effectiveness ofability to: continue to drive subscription sales, enhance our internal control over financial reporting.existing products and develop new products, scale our sales and marketing and product development organizations, successfully execute our marketing and sales strategies, renew our subscription agreements with existing customers, and manage our expenses. If we are unablenot able to continue to assert thatexecute on these actions, our internal controls over financial reporting are effective, if a material weakness is identified inbusiness may not grow as we anticipate, our internal controls over financial reporting, or if we are unable to implement internal controls over financial reporting for our acquisitions, our financialoperating results maycould be adversely affected and we could lose investor confidencemay continue to incur net losses in the reliabilityfuture. Additionally, our new initiatives may not generate sufficient
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revenue and cash flows to recoup our investments in them. If any of these events were to occur, it could adversely affect our business, results of operations and financial condition.
If our goodwill or amortizable intangible assets become impaired, we could be required to record a significant charge to earnings.
Under GAAP, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. GAAP requires us to test for goodwill impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include declines in stock price, market capitalization or cash flows and slower growth rates in our industry. We could be required to record a significant charge to earnings in our financial statements. Accordingly failure to maintain effective controls over financial reporting may have an adverse effect onstatements during the market priceperiod in which any impairment of our common stock.goodwill or amortizable intangible assets were determined, negatively impacting our results of operations.
Risks relating to ownershipOwnership of our common stock and the 2024 NotesCommon Stock
Market volatility may affect our stock price and the value of your investment.
The market price for our common stock, and the software industry generally, has been and is likely to continue to be volatile. Volatility could make it difficult to trade shares of our common stock at predictable prices or times. Many factors could cause the market price of our common stock to be volatile, including the following:
•variations in our quarterly or annual operating results;
•decreases in market valuations of comparable companies;
•fluctuations in stock market prices and volumes;
•decreases in financial estimates by equity research analysts;
•announcements by our competitors of significant contracts, new solutions or enhancements, acquisitions, distribution partnerships, joint ventures or capital commitments;
•departure of key personnel;
•changes in governmental regulations and standards affecting the software industry and our software solutions;
•sales of common stock or other securities by us in the future;
•damages, settlements, legal fees and other costs related to litigation, claims and other contingencies;
•deterioration of the general U.S. and global economic condition; and
•other risks described elsewhere in this section.
In the past, securities class action litigation often has been initiated against a company following a period of volatility in the market price of the company’s securities. If class action litigation is initiated against us, we may incur substantial costs and our management’s attention could be diverted from our operations. All of these factors could cause the market price of our stock to decline, and you may lose some or all of your investment.
Our directors, executive officers, and certain significant stockholders hold a significant portion of our outstanding shares.
At December 31, 2019,2020, our directors and executive officers collectively control approximately 9.6%10% of our issued and outstanding common shares, and together with certain significant stockholders, including investment funds associated with Brown Capital Management, LLC, Vanguard Group Inc., PrimecapBlackRock, Inc., Conestoga Capital Advisors, LLC and Fred Alger Management, Company, BlackRock, Inc. and D.F. Dent & Company,LLC, control approximately 52%53% of our issued and outstanding common shares. In the event that these stockholders each independently decided to vote for or against matters requiring stockholder approval, they could influence such matters in ways that may not align with your specific interests as a stockholder, including the election of directors and
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approval of significant corporate transactions. This concentration of ownership could affect the market price of our shares if there is a sale by this group of stockholders, and could also have the effect of delaying or preventing a change in control of us even if such change of control could be beneficial to you as a stockholder.
Anti-takeover provisions in our Certificate of Incorporation and Bylaws and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Our Certificate of Incorporation and Bylaws and Section 203 of the Delaware General Corporation Law contain provisions that might enable our management to resist a takeover of our company. These provisions include the following:
•the division of our board of directors into three classes to be elected on a staggered basis, one class each year;
•a prohibition on actions by written consent of our stockholders;
•the elimination of the right of stockholders to call a special meeting of stockholders;
•a requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders;
•a requirement that a supermajority vote be obtained to amend or repeal certain provisions of our certificate of incorporation; and
•the ability of our board of directors to issue preferred stock without stockholder approval.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain higher bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if an offer were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.
We do not intend to pay dividends for the foreseeable future.
We do not currently anticipate paying any cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital, repayment of debt and for other general corporate purposes. Consequently, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future gains on their investment.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are located in Houston, Texas, where we lease approximately 98,000 square feet of office space. In November 2018, we entered into a new lease for approximately 118,000 square feet of office space in Houston, Texas, and we planspace; however, due to relocateCOVID-19 our headquarters to this new location.workforce remained primarily remote during most of the year. We also lease a number of smaller regional offices. We believe our existing facilities are sufficient for our current needs. WeBased on the effectiveness of our all remote workforce during COVID-19, we plan to evolve to a virtual first workforce over time post-pandemic which we expect will impact our needs for leased office space. However, we may add new facilities and expand our existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.
Item 3. Legal Proceedings
In the ordinary course of our business, we may be involved in various legal proceedings and claims. The outcomes of these matters are inherently unpredictable. We are not currently involved in any outstanding litigation that we believe, individually or in the aggregate, will have a material adverse effect on our business, results of operations or financial condition.
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Item 4. Mine Safety Disclosures
Not applicable.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities
Market Information, Holders and Dividends
Our common stock is listed on the NYSE under the symbol "PRO". On February 10, 20208, 2021 there were 4543 stockholders of record of our common stock. Since 2007, we have not declared or paid any dividends on our common stock. We currently expect to retain all remaining available funds and any future earnings for use in the operation and development of our business. Accordingly, we do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future.
Performance Graph
The following shall not be deemed "soliciting material" or "filed" with the SEC, or incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
The graph below presents a five-year comparison of the relative investment performance of our common stock, the Standard & Poor’s 500 Stock Index ("S&P 500"), and the Russell 2000 Index for the period commencing on December 31, 2014,2015, and ending December 31, 2019.2020. The graph is not meant to be an indication of our future performance.
| Company/Index | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | |||||||||||||||||
| PRO | $ | 100.00 | $ | 83.84 | $ | 78.31 | $ | 96.25 | $ | 114.26 | $ | 218.05 | |||||||||||
| S&P 500 | $ | 100.00 | $ | 99.27 | $ | 108.74 | $ | 129.86 | $ | 121.76 | $ | 156.92 | |||||||||||
| Russell 2000 Index | $ | 100.00 | $ | 94.29 | $ | 112.65 | $ | 127.46 | $ | 111.94 | $ | 138.50 | |||||||||||
| Company/Index | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | ||||||||||||||||||||||||||||||||
| PRO | $ | 100.00 | $ | 93.40 | $ | 114.80 | $ | 136.28 | $ | 260.07 | $ | 220.36 | ||||||||||||||||||||||||||
| S&P 500 | $ | 100.00 | $ | 109.54 | $ | 130.81 | $ | 122.65 | $ | 158.07 | $ | 183.77 | ||||||||||||||||||||||||||
| Russell 2000 Index | $ | 100.00 | $ | 119.48 | $ | 135.18 | $ | 118.72 | $ | 146.89 | $ | 173.86 | ||||||||||||||||||||||||||
Issuer Purchase of Equity Securities
On August 25, 2008, we announced that the Board of Directors authorized a stock repurchase program for the purchase of up to $15.0 million of our common stock. Under the board-approved repurchase program, share purchases may be made from time to time in the open market or through privately negotiated transactions depending on market conditions, share price, trading volume and other factors, and such purchases, if any, will be made in accordance with applicable insider trading and other securities laws and regulations. These repurchases may be commenced or suspended at any time or from time to time without prior notice.
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During 2019,2020, we did not make any purchases of our common stock under this program. As of December 31, 2019,2020, $10.0 million remains available under the stock repurchase program.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities for the year ended December 31, 2019.2020.
Item 6. Selected Financial Data
The following selected consolidated financial data presented under the captions "Selected consolidated statement of operations data" and "Selected consolidated balance sheet data" are derived from our Consolidated Financial Statements. The selected consolidated financial data set forth below should be read in conjunction with, and is qualified by reference to, "Management’s Discussion and Analysis of Financial Condition and Result of Operations" and our Consolidated Financial Statements and the related notes included elsewhere in this report. As presented in the table, amounts are in thousands (except per share data).
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||
| Selected consolidated statement of operations data: | ||||||||||||||||||||||||||||||||
| Total revenue | $ | 252,424 | $ | 250,334 | $ | 197,024 | $ | 168,816 | $ | 153,276 | ||||||||||||||||||||||
| Gross profit | 147,791 | 151,217 | 119,845 | 100,250 | 89,923 | |||||||||||||||||||||||||||
| Loss from operations | (66,080) | (53,338) | (49,215) | (64,943) | (65,398) | |||||||||||||||||||||||||||
| Net loss | (76,984) | (69,081) | (64,246) | (77,926) | (75,225) | |||||||||||||||||||||||||||
| Net loss per share: | ||||||||||||||||||||||||||||||||
| Basic and diluted | (1.78) | (1.72) | (1.86) | (2.46) | (2.47) | |||||||||||||||||||||||||||
| Weighted average number of shares: | ||||||||||||||||||||||||||||||||
| Basic and diluted | 43,301 | 40,232 | 34,465 | 31,627 | 30,395 | |||||||||||||||||||||||||||
| Selected consolidated balance sheet data: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents, unrestricted | $ | 329,134 | $ | 306,077 | $ | 295,476 | $ | 160,505 | $ | 118,039 | ||||||||||||||||||||||
| Working capital | 246,382 | 189,811 | 71,393 | 100,031 | 76,936 | |||||||||||||||||||||||||||
| Total assets | 539,971 | 513,307 | 436,967 | 288,683 | 227,654 | |||||||||||||||||||||||||||
| Long-term obligations | 275,016 | 152,177 | 107,318 | 233,637 | 134,327 | |||||||||||||||||||||||||||
| Total stockholders’ equity | $ | 117,037 | $ | 164,996 | $ | 54,899 | $ | (46,979) | $ | (3,394) | ||||||||||||||||||||||
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| Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
| Selected consolidated statement of operations data: | ||||||||||||||||||||
| Total revenue | $ | 250,334 | $ | 197,024 | $ | 168,816 | $ | 153,276 | $ | 168,246 | ||||||||||
| Gross profit | 151,217 | 119,845 | 100,250 | 89,923 | 106,836 | |||||||||||||||
| Loss from operations | (53,338 | ) | (49,215 | ) | (64,943 | ) | (65,398 | ) | (55,497 | ) | ||||||||||
| Net loss | (69,081 | ) | (64,246 | ) | (77,926 | ) | (75,225 | ) | (65,811 | ) | ||||||||||
| Net loss per share: | ||||||||||||||||||||
| Basic and diluted | (1.72 | ) | (1.86 | ) | (2.46 | ) | (2.47 | ) | (2.23 | ) | ||||||||||
| Weighted average number of shares: | ||||||||||||||||||||
| Basic and diluted | 40,232 | 34,465 | 31,627 | 30,395 | 29,578 | |||||||||||||||
| Selected consolidated balance sheet data: | ||||||||||||||||||||
| Cash and cash equivalents, unrestricted | $ | 306,077 | $ | 295,476 | $ | 160,505 | $ | 118,039 | $ | 161,770 | ||||||||||
| Working capital | 189,811 | 71,393 | 100,031 | 76,936 | 124,571 | |||||||||||||||
| Total assets | 513,307 | 436,967 | 288,683 | 227,654 | 263,211 | |||||||||||||||
| Long-term obligations | 152,177 | 107,318 | 233,637 | 134,327 | 121,443 | |||||||||||||||
| Total stockholders’ equity | $ | 164,996 | $ | 54,899 | $ | (46,979 | ) | $ | (3,394 | ) | $ | 55,414 | ||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
In 2019,2020, we continued to achieve important milestones ingrow through our cloud transformation which began in 2015, while continuing to enablesubscription-based revenue model, by enabling our customers to leverage our AI-driven solutions to help them compete in the digital economy. In 2019, our subscription revenue surpassed 50%economy, while managing the impact of total revenue and our total revenue increased by 27% year-over-year.the coronavirus ("COVID-19") Opandemic. ther notableNotable items for the year 2020 included:
•Subscription revenue increased by 48%17% in 20192020 over 2018,2019, and accounted for 56%68%, 48%58% and 36%50% of total revenue for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively;
•Recurring revenue, which consists of subscription and maintenance and subscriptionsupport revenue, accounted for 80%85% of our total revenue and grew by 25%6% in 20192020 over 2018;2019;
•Annual recurring revenue ("ARR") was $220.4$209.7 million on a constant currency basis ($219.8 million on an as reported basis) as of December 31, 2020, down 5% year-over-year;
•Designated as a 2020-2021 Great Place to Work-Certified™ company;
•Delivered the record-breaking, virtual PROS 2020 Outperform Customer Conference, with registration exceeding more than 600% as compared with our 2019 up 16% (16% as reported) year-over-year;Outperform conference;
•Completed an offering of $143.8$150.0 million aggregate principal amount of 20242027 Notes in a private placement;placement in September 2020.
While COVID-19 continued to spread throughout the world, our focus remained on promoting employee health and
ARR is one of our key performance metrics to assess the health and trajectory of our overall business. ARR, a non-GAAP financial measure, is defined, as of a specific date, as contracted recurring revenue, including contracts with a future start date, together with annualized overage fees incurred above contracted minimum transactions, and excluding perpetual and term license agreements recognized as license revenue in accordance with GAAP. ARR should be viewed independently of revenue, deferred revenue and other GAAP measures, and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any material exchange rate changes. Our constant currency ARR is based on currency rates set at the start of the year and held constant throughout the year, and the same rates are used to measure both 2019 and 2018 ARR. Total ARR on a constant currency basisas of December 31, 2020 was $209.7 million, down from $219.8 million as of December 31, 2019, a decrease of 5%, due to the impact of COVID-19.
Cash used in operating activities was $220.4$49.4 million up from $190.5 million as offor the year ended December 31, 2018, an increase of 16%. Total ARR on an2020, as reported basis as of December 31, 2019 was $219.8 million, or approximately $0.6 million lower than our constant currency ARR.
Free cash flow is another key metric to assess the strength of our business. We define free cash flow, a non-GAAP financial measure, as net cash provided by (used in) operating activities minus capital expenditures (excluding expenditures for PROS new headquarters), purchases of other (non-acquisition-related) intangible assets and capitalized internal-use software development costs. We believe free cash flow may be useful to investors and other users of our financial information in evaluating the amount of cash generated by our business operations. Free cash flow used for the year ended December 31, 20192020 was $0.9$53.3 million, compared to $0.5$0.9 million for the year ended December 31, 2018. The slight increase was primarily attributable to a $0.5 million decrease in net cash provided by operating activities primarily due to higher cash operating expenses driven mainly by an increase in headcount partially offset by an increase in sales and related cash collections.2019. The following is a reconciliation of free cash flow to the most comparable GAAP measure, net cash provided by (used in) operating activities:
| Year Ended December 31, | ||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||
| Net cash provided by operating activities | $ | (49,389) | $ | 5,245 | ||||||||||||||||||||||
| Purchase of property and equipment (excluding new headquarters) | (2,248) | (4,626) | ||||||||||||||||||||||||
| Purchase of intangible asset | — | (50) | ||||||||||||||||||||||||
| Capitalized internal-use software development costs | (1,686) | (1,436) | ||||||||||||||||||||||||
| Free cash flow | $ | (53,323) | $ | (867) | ||||||||||||||||||||||
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| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net cash provided by operating activities | $ | 5,245 | $ | 5,703 | ||||
| Purchase of property and equipment (excluding new headquarters) | (4,626 | ) | (1,475 | ) | ||||
| Purchase of intangible asset | (50 | ) | (125 | ) | ||||
| Capitalized internal-use software development costs | (1,436 | ) | (4,613 | ) | ||||
| Free cash flow | $ | (867 | ) | $ | (510 | ) | ||
Financial Performance Summary
Recurring revenue, which is comprised of our subscription and maintenance and support revenue, accounted for 80%85% of our total revenue for the year ended December 31, 2019.2020. Total recurring revenue was $199.3$215.2 million for the year ended December 31, 2020 as compared to $203.5 million for the year ended December 31, 2019, as compared to $160.0 million for the year ended December 31, 2018, an increase of approximately $39.4$11.7 million, or 25%6%. This increase in recurring revenue was primarily attributable to a 48%17% increase in subscription revenue from new and existing customers.
Revenue by Geography
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| Revenue | Percent | Revenue | Percent | Revenue | Percent | ||||||||||||||||||||||||||||||
| United States of America | $ | 82,299 | 32 | % | $ | 85,963 | 34 | % | $ | 68,482 | 35 | % | |||||||||||||||||||||||
| Europe | 74,936 | 30 | % | 73,914 | 30 | % | 60,947 | 31 | % | ||||||||||||||||||||||||||
| The rest of the world | 95,189 | 38 | % | 90,457 | 36 | % | 67,595 | 34 | % | ||||||||||||||||||||||||||
| Total revenue | $ | 252,424 | 100 | % | $ | 250,334 | 100 | % | $ | 197,024 | 100 | % | |||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||
| Revenue | Percent | Revenue | Percent | Revenue | Percent | |||||||||||||||
| United States of America | $ | 85,963 | 34 | % | $ | 68,482 | 35 | % | $ | 63,097 | 37 | % | ||||||||
| Europe | 73,914 | 30 | % | 60,947 | 31 | % | 51,273 | 30 | % | |||||||||||
| The rest of the world | 90,457 | 36 | % | 67,595 | 34 | % | 54,446 | 32 | % | |||||||||||
| Total revenue | $ | 250,334 | 100 | % | $ | 197,024 | 100 | % | $ | 168,816 | 100 | % | ||||||||
Convertible Debt
In September 2020, we issued the 2027 Notes in an aggregate principal amount of $150.0 million. The interest rate for the 2027 Notes is fixed at 2.25% per year and interest is payable semiannually in arrears in cash on March 15 and September 15 of each year, beginning on March 15, 2021. The 2027 Notes mature on September 15, 2027 unless redeemed or converted in accordance with their terms prior to such date.
In May 2019, the Companywe issued the 2024 Notes in an aggregate principal amount of $143.8 million. The CompanyWe used a portion of the net proceeds of the offering of the 2024 Notes to exchange and retire approximately $122.1 million in aggregate principal of 2.0% convertible senior notes due December 2019 (the "2019 Notes") for an aggregate cash consideration of $76.0 million and approximately 2.2 million shares of the Company'sour common stock (the "Exchange Transactions"). The CompanyWe recorded a $2.3 million loss on debt extinguishment related to the Exchange Transactions. In the fourth quarter of 2019, at maturity, the Companywe settled the remaining principal of the 2019 Notes in cash and distributed approximately 0.3 million shares of itsour common stock to the notes holders, which represented the conversion value in excess of the principal amount.
In August 2019, the Companywe issued a notice of redemption to the holders of itsour outstanding 2.0% convertible senior notes due June 2047 (the "2047 Notes", and together with the 2019 Notes and the 2024 Notes, the "Notes"), and during the third and fourth quarter of 2019, the Companywe converted the entire aggregate principal of $106.3 million of the 2047 Notes and delivered approximately 2.3 million shares of itsour common stock upon conversion. The CompanyWe recorded a $3.4 million loss on debt extinguishment related to the Redemption. The loss on extinguishment is included in the other (expense) income, net in the the Consolidated Statements of Comprehensive Income (Loss).
Factors Affecting Our Performance
Key factors and trends that have affected and we believe will continue to affect our operating results include:
•COVID-19 Global Impact. The global economy has been significantly and negatively impacted by COVID-19, and the scope and duration of the outbreak and timeframe for economic recovery is uncertain. The travel industry, a sector served by our solutions, has been particularly adversely impacted. For example, unprecedented declines in travel demand have forced airlines, including some of our customers, to respond by significantly reducing capacity, grounding flights, reducing personnel, adjusting corporate liquidity and, in certain cases, filing for bankruptcy protection. The global workplace environment has also substantially changed in the wake of COVID-19. To support the health and well-being of our employees, customers, partners and communities, our global workforce has been primarily working remotely since March 16, 2020. Many of our customers are also working remotely, which in some cases has delayed, and may continue to impact the timing of new business and implementations of our solutions. The duration and extent of the impact of COVID-19 continues to be unknown and could continue to impact the pace and timing of adoption and implementation of our solutions, cash flow from operations and customer retention. 28 •COVID-19 Financial Impact. As compared to our expectations prior to COVID-19, the global economic impact of COVID-19 adversely impacted our revenue, bad debt expense and operating cash flow during the year ended December 31, 2020. We expect customer bookings and the related revenue and cash flows will continue to be lower than anticipated prior to the pandemic as a result of decreased demand for new subscriptions and services, delays to projects during the COVID-19 pandemic, and increased scrutiny on new large software purchases. In addition, certain customers have requested, and we expect will continue to request, relief to existing contracts and the impact of those is uncertain. •Buying Preferences Driving Technology Adoption. Corporate buyers are increasingly demanding the same type of digital buying experience that they enjoy as consumers. Buyers often prefer not to interact with sales representatives as their primary source of research, and increasingly prefer to buy online when they have already decided what to buy. This trend has accelerated during the current pandemic environment. In response, we believe that businesses are increasingly modernizing their sales process to compete in digital commerce by adopting technologies which provide fast, frictionless, and personalized buying experiences across sales channels. We believe we are uniquely positioned to help power these buying experiences with our AI-powered solutions that enable buyers to move fluidly and with personalized experiences across our customers’ direct sales, online, mobile and partner channels. •Continued Investments. As a result of the economic impact of COVID-19, we are continuing to be measured in our investments and focused on cost control efforts across our organization, while continuing to create awareness for our solutions, expand our customer base and grow our subscription revenues. For example, we are slowing our overall rate of employee hiring, emphasizing hiring for strategic positions and cross training our travel implementation personnel to serve prospects and customers in other existing industry verticals. While we incurred losses in 2020, we believe our market is large and underpenetrated and intend to continue investing in sales, marketing, customer success, cloud support, security, privacy, infrastructure and other long-term initiatives to expand our ability to sell and renew our subscription offerings globally. We also plan to continue investing in product development to enhance our existing technologies, including initiatives to accelerate customer time-to-value and provide out-of-the-box integration with third-party commerce solutions, and develop new applications and technologies. •Cloud Migrations. Sales of our cloud-based solutions have, and we expect future sales of our cloud-based solutions will continue to reduce our future maintenance and support revenue, as long-term customers continue to migrate from our legacy licensed solutions to our current cloud solutions. |
Description of Key Components of our Operating Results
Revenue
We derive our revenues primarily from recurring revenue, which includes subscription and maintenance and support services. Recurring revenues accounted for 80%85% of our total revenue in 2019.
Maintenance and support. Maintenance and support revenue includes customer support for our on-premises software and the right to unspecified software updates and enhancements. We recognize revenue from maintenance arrangements ratably over the period in which the services are provided. Our maintenance and support contracts are generally one year in length, billed annually in advance, and non-cancelable.
Services revenue varies from period to period depending on different factors, including the level of services required to implement our solutions, the timing of services revenue recognition on certain subscription contracts and any additional services requested by our customers during a particular period.
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Significant judgments are required in determining whether professional services that are contained in our customer subscription services contracts are considered distinct, including whether the professional services are capable of being distinct and whether they are separately identifiable in the customer contract. Professional services that areidentifiable. Services deemed to be distinct are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If determined that the professional services are not considered distinct, the professional services and the subscription services are determined to be a single performance obligation and revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer.
Cost of Revenue
Cost of subscription. Cost of subscription includes those costs related to supporting our subscription services, primarily employee-related costs, third-party contractors,consists of infrastructure costs to support our current subscription customer base including third-party hosting services and expenses related to operating our network infrastructure, including depreciation expense and operating lease payments, salaries and related expenses, amortization of capitalized software and an allocation of depreciation, amortization of intangibles, facilitiescertain intangible assets and information technology ("IT") support costs.allocated overhead.
Cost of maintenance and support. Cost of maintenance and support consists largely of employee-related costs and an allocation of depreciation, amortization of intangibles, facilities and IT support costs.allocated overhead.
Cost of services. Cost of services includes those costs related to professional services and implementation of our solutions, primarily employee-related costs and third-party contractors, billable and non-billable travel amortization of capitalized software for internal use, and an allocation of depreciation facilities and IT support costs.allocated overhead. Cost of providing professional services may vary from quarter to quarter depending on a number of factors, including the amount of professional services required to implement and configure our solutions.
Services gross profit varies period to period depending on different factors, including the level of services required to implement our solutions, our mix of employees and third-party contractors, our effective billable man-day rates, our use of third-party system integrators and the billable utilization of our services personnel.
Operating Expenses
Selling and marketing. Selling and marketing expenses primarily consist of employee-related costs, third-party contractors, sales commissions, sales and marketing programs such as lead generation programs, company awareness programs, our annual Outperform conference, participation in industry trade shows, and other sales and marketing programs, travel, amortization expenses associated with acquired intangible assets and an allocation of depreciation, facilities and IT support costs.allocated overhead. Sales commissions are deferred and amortized on a straight-line basis over the period of benefit, which we have determined to be five to eight years.
General and administrative. General and administrative expenses primarily consist of employee-related costs for executive, accounting, and finance, legal, human resources and internal IT support functions professional fees, other corporate expenses and an allocation of depreciation facilities and third-party IT support costs.allocated overhead. General and administrative expenses also include outside legal and accounting fees and provision for bad debts.
Research and development. Research and development expenses primarily consist of employee-related costs and third-party contractors who work on enhancements of existing solutions, the development of new solutions, scientific research, quality assurance and testing, and an allocation of depreciation, facilities and IT support costs and other costs.allocated overhead.
Results of Operations
Comparison of year ended December 31, 20192020 with year ended December 31, 20182019
Revenue:
| For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | |||||||||||||||||||||||||||||
| Subscription | $ | 170,473 | 67 | % | $ | 145,327 | 58 | % | $ | 25,146 | 17 | % | |||||||||||||||||||||||
| Maintenance and support | 44,692 | 18 | % | 58,184 | 23 | % | (13,492) | (23) | % | ||||||||||||||||||||||||||
| Total subscription, maintenance and support | 215,165 | 85 | % | 203,511 | 81 | % | 11,654 | 6 | % | ||||||||||||||||||||||||||
| Services | 37,259 | 15 | % | 46,823 | 19 | % | (9,564) | (20) | % | ||||||||||||||||||||||||||
| Total revenue | $ | 252,424 | 100 | % | $ | 250,334 | 100 | % | $ | 2,090 | 1 | % | |||||||||||||||||||||||
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| For the Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | ||||||||||||||
| Subscription | $ | 141,165 | 56 | % | $ | 95,192 | 48 | % | $ | 45,973 | 48 | % | ||||||||
| Maintenance and support | 58,184 | 23 | % | 64,760 | 33 | % | (6,576 | ) | (10 | )% | ||||||||||
| Total subscription, maintenance and support | 199,349 | 80 | % | 159,952 | 81 | % | 39,397 | 25 | % | |||||||||||
| License | 4,162 | 2 | % | 3,516 | 2 | % | 646 | 18 | % | |||||||||||
| Services | 46,823 | 19 | % | 33,556 | 17 | % | 13,267 | 40 | % | |||||||||||
| Total revenue | $ | 250,334 | 100 | % | $ | 197,024 | 100 | % | $ | 53,310 | 27 | % | ||||||||
Subscription revenue. Subscription revenue increased primarily due to an increase in theincreased number of subscriptions purchased by new and existing customers duringcustomer subscription contracts as compared to the prior year. For the year ended December 31, 2019.2020, our subscription revenue was negatively impacted by a decrease in customer revenue retention attributed to the impact of COVID-19, and primarily driven by the impact of COVID-19 on our travel customers. Our ability to maintain consistentconsistently high customer attritionretention rates will directly impact our ability to continue to grow our subscription revenue. Due to the ongoing uncertain economic conditions caused by COVID-19, we expect subscription revenue to grow at a slower pace in the near term.
Maintenance and support revenue. Maintenance and support revenue decreased primarily as a result of customer maintenance churn and migrating existing maintenance contractscustomers migrating to our cloud solutions and a decrease in customer retention due to the cloud during the year ended December 31, 2019.impact of COVID-19. We expect maintenance revenue to continue to decline over time as we continue to migrate existing maintenance customers to our cloud solutions.
Services revenue. Services revenue increaseddecreased primarily as a result of performing implementationlower sales of services for a greater number of customersrelated to subscription contracts than in 2019 due to the prior year. Services revenue varies from period to period depending on different factors, including the levelimpact of professional services required to implement our solutions, the timing of services revenue recognition on certain subscription contracts and any additional professional services requested by our customers during a particular period.COVID-19.
Cost of revenue and gross profit.
| For the Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | ||||||||||||||
| Cost of subscription | $ | 42,090 | 17 | % | $ | 35,368 | 18 | % | $ | 6,722 | 19 | % | ||||||||
| Cost of maintenance and support | 11,052 | 4 | % | 11,602 | 6 | % | (550 | ) | (5 | )% | ||||||||||
| Total cost of subscription, maintenance and support | 53,142 | 21 | % | 46,970 | 24 | % | 6,172 | 13 | % | |||||||||||
| Cost of license | 249 | — | % | 251 | — | % | (2 | ) | (1 | )% | ||||||||||
| Cost of services | 45,726 | 18 | % | 29,958 | 15 | % | 15,768 | 53 | % | |||||||||||
| Total cost of revenue | $ | 99,117 | 40 | % | $ | 77,179 | 39 | % | $ | 21,938 | 28 | % | ||||||||
| Gross profit | $ | 151,217 | 60 | % | $ | 119,845 | 61 | % | $ | 31,372 | 26 | % | ||||||||
| For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | |||||||||||||||||||||||||||||
| Cost of subscription | $ | 51,673 | 20 | % | $ | 42,339 | 17 | % | $ | 9,334 | 22 | % | |||||||||||||||||||||||
| Cost of maintenance and support | 9,880 | 4 | % | 11,052 | 4 | % | (1,172) | (11) | % | ||||||||||||||||||||||||||
| Total cost of subscription, maintenance and support | 61,553 | 24 | % | 53,391 | 21 | % | 8,162 | 15 | % | ||||||||||||||||||||||||||
| Cost of services | 43,080 | 17 | % | 45,726 | 18 | % | (2,646) | (6) | % | ||||||||||||||||||||||||||
| Total cost of revenue | $ | 104,633 | 41 | % | $ | 99,117 | 40 | % | $ | 5,516 | 6 | % | |||||||||||||||||||||||
| Gross profit | $ | 147,791 | 59 | % | $ | 151,217 | 60 | % | $ | (3,426) | (2) | % | |||||||||||||||||||||||
Cost of subscription. Cost of subscription increased primarily due to increases inincreased infrastructure costs to support our current subscription customer base increases inand increased employee-related costs driven by higher headcount and increases in amortization expense associated with our internal-use software.headcount. Our subscription gross profit percentage was 70% and 63%71%, respectively, for the years ended December 31, 20192020 and 2018. The increase in gross profit percentage was primarily attributable to a 48% increase in subscription revenue combined with a smaller increase in cost of subscription driven by efficiencies we achieved in our cloud infrastructure.2019.
Cost of maintenance and support. The costCost of maintenance and support declined primarily due to a decrease in employee-relatedpersonnel costs mainly dueas a result of the need to support a decrease in contract labor.smaller maintenance customer base as we migrate customers to our subscription solutions. Maintenance and support gross profit percentages for the years ended December 31, 2020 and 2019, were 78% and 2018, were 81% and 82%, respectively.
Cost of services. Cost of services increaseddecreased primarily due to an increase inthe lower utilization of third-party contractors and reduced travel expenses due to the COVID-19 pandemic, partially offset by increased employee-related costs driven by higher headcount and third party system integrators to support our current customer implementations, related travel expenses, other facility and overhead expenses.headcount. Services gross profit percentages for the years ended December 31, 2020 and 2019, were (16)% and 2018, were 2% and 11%, respectively. The decrease in services gross profit percentages was primarily attributeddue to anthe decrease in services revenues and the increase in third party system integrators to support an increased number of customer implementations in 2019 as compared to 2018. Services gross profit percentages vary period to period depending on different factors, including the level of professional services required to implement our solutions, our effective man-day rates, our utilization of third party system integrators and the utilization of our professional services personnel.headcount.
Gross profit. Overall gross profit increaseddecreased for the year ended December 31, 20192020 principally attributable to the slower growth in revenue due to an increasethe impact of 27% in total revenue as compared to the same period in 2018 mainly due to an increase in our subscription revenue.COVID-19.
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Operating expenses:
| For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | |||||||||||||||||||||||||||||
| Selling and marketing | $ | 87,182 | 35 | % | $ | 89,553 | 36 | % | $ | (2,371) | (3) | % | |||||||||||||||||||||||
| General and administrative | 51,075 | 20 | % | 47,254 | 19 | % | 3,821 | 8 | % | ||||||||||||||||||||||||||
| Research and development | 75,614 | 30 | % | 67,246 | 27 | % | 8,368 | 12 | % | ||||||||||||||||||||||||||
| Acquisition-related | — | — | % | 502 | — | % | (502) | (100) | % | ||||||||||||||||||||||||||
| Total operating expenses | $ | 213,871 | 85 | % | $ | 204,555 | 82 | % | $ | 9,316 | 5 | % | |||||||||||||||||||||||
| For the Year Ended December 31, | ||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | ||||||||||||||
| Selling and marketing | $ | 89,553 | 36 | % | $ | 72,006 | 37 | % | $ | 17,547 | 24 | % | ||||||||
| General and administrative | 47,254 | 19 | % | 41,302 | 21 | % | 5,952 | 14 | % | |||||||||||
| Research and development | 67,246 | 27 | % | 55,657 | 28 | % | 11,589 | 21 | % | |||||||||||
| Acquisition-related | 502 | — | % | 95 | — | % | 407 | 428 | % | |||||||||||
| Total operating expenses | $ | 204,555 | 82 | % | $ | 169,060 | 86 | % | $ | 35,495 | 21 | % | ||||||||
Selling and marketing expenses. Sales and marketing expenses increaseddecreased primarily due to a decrease of travel expense of $7.0 million due to the COVID-19 pandemic, partially offset by an increase of $13.9$4.2 million in employee-related costs driven by higher sales and marketing headcount, as we continue to focus on adding new customers and increasing penetration within our existing customer base. In addition, there wasbase, an increase of $3.6$0.3 million in expenses for sales and marketing events, and sales related travel.a $0.1 million increase in allocated overhead.
General and administrative expenses. General and administrative expenses increased primarily due to a $3.7 million increase in employee-related costs driven by higher headcount and an increase of $3.1$5.3 million in professional fees bad debt expense recognized as a result of increased credit risk from uncertain economic conditions caused by COVID-19and facility expenses,the bankruptcy of several customers in the travel industry, partially offset by a decrease of $0.8 millionin professional fees in 2020 as compared to 2019 related to a bad debt recoveryour acquisition of Travelaer in 2019.
Research and development expenses. Research and development expenses increased primarily due to a $9.3an increase of $8.3 million increase in employee-related costs driven by higher headcount and a $2.3 millionslight increase in facility and other overhead expenses.allocated overhead.
Acquisition-related expenses. Acquisition-related expenses were $0.5 million and $0.1 million for the yearsyear ended December 31, 2019, and 2018, respectively, and consisted primarily of integration costs, professional fees and retention bonuses for our acquisition of Travelaer in 2019 and PROS Travel Commerce, Inc. (formerly Vayant Travel Technologies, Inc.) ("Vayant") in 2018.2019.
Other income (expense) income,, net:
| For the Year Ended December 31, | |||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | |||||||||||||||
| Convertible debt interest and amortization | $ | (14,765 | ) | (6 | )% | $ | (16,986 | ) | (9 | )% | $ | 2,221 | (13 | )% | |||||||
| Other (expense) income, net | $ | (354 | ) | — | % | $ | 2,155 | 1 | % | $ | (2,509 | ) | (116 | )% | |||||||
| For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | ||||||||||||||||||||||||||||||||
| Convertible debt interest and amortization | $ | (11,125) | (4) | % | $ | (14,765) | (6) | % | $ | 3,640 | (25) | % | ||||||||||||||||||||||||||
| Other income (expense), net | $ | 897 | — | % | $ | (354) | — | % | $ | 1,251 | (353) | % | ||||||||||||||||||||||||||
Convertible debt interest and amortization. Convertible debt interest and amortization expense for each of the years ended December 31, 20192020 and 20182019 related to coupon interest and amortization of debt discount and issuance costs attributable to our
Notes. Convertible debt interest and amortization decreased primarily as a result of our settlement of the 2019 Notes and 2047 Notes during 2019, partially offset by an increase due to the period.
Other income (expense) income,, net. The decreasechange in other income (expense) income,, net for the year ended December 31, 2019,2020, primarily related to a $5.7 million loss on debt extinguishment related to our 2019 Notes and 2047 Notes recognized in 2019. This decrease2019 which was partially offset by an increasea decrease in interest income and the impact of movements in foreign currency exchange rates during the period.
Income tax provision:
| For the Year Ended December 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | Variance $ | Variance % | |||||||||||||||||||
| Effective tax rate | (0.9) | % | (0.9) | % | n/a | — | % | ||||||||||||||||
| Income tax provision | $ | 676 | $ | 624 | $ | 52 | 8 | % | |||||||||||||||
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For the Year Ended December 31, | ||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | Variance $ | Variance % | ||||||||||
| Effective tax rate | (1 | )% | — | % | n/a | (1 | )% | |||||||
| Income tax provision | $ | 624 | $ | 200 | $ | 424 | 212 | % | ||||||
Our tax provision for the year ended December 31, 20192020 included both foreign income and withholding taxes, and state taxes not based on pre-tax income.taxes. No tax benefit was recognized on jurisdictions with a projected loss for the year due to the valuation allowances on our deferred tax assets.
Our 20192020 and 20182019 effective tax rates had an unusual relationship to pretax loss from operations due to a valuation allowance on our net deferred tax assets. Our income tax provisions in 20192020 and 20182019 only included foreign income and withholding taxes, and state taxes not based on pre-tax income, resulting in an effective tax rate of (0.9)% and (0.3)(0.9)%, respectively. The difference between the effective tax rates and the federal statutory rate of 34%21% for the years ended December 31, 20192020 and 20182019 was primarily due to the increase in our valuation allowance ofof $24.3 millionand $12.4 million, and $20.4 million, respectively.
As of December 31, 20192020 and 2018,2019, we had a valuation allowance on our net deferred tax assets of $106.5$130.7 million and $94.2$106.5 million, respectively. The increase in the valuation allowance was principally attributable to an additional valuation allowance recorded on our current year's tax loss.
Comparison of year ended December 31, 20182019 with year ended December 31, 20172018
| For the Year Ended December 31, | ||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | ||||||||||||||
| Subscription | $ | 95,192 | 48 | % | $ | 60,539 | 36 | % | $ | 34,653 | 57 | % | ||||||||
| Maintenance and support | 64,760 | 33 | % | 69,408 | 41 | % | (4,648 | ) | (7 | )% | ||||||||||
| Total subscription, maintenance and support | 159,952 | 81 | % | 129,947 | 77 | % | 30,005 | 23 | % | |||||||||||
| License | 3,516 | 2 | % | 5,562 | 3 | % | (2,046 | ) | (37 | )% | ||||||||||
| Services | 33,556 | 17 | % | 33,307 | 20 | % | 249 | 1 | % | |||||||||||
| Total revenue | $ | 197,024 | 100 | % | $ | 168,816 | 100 | % | $ | 28,208 | 17 | % | ||||||||
Revenue:
| For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | |||||||||||||||||||||||||||||
| Subscription | $ | 145,327 | 58 | % | $ | 98,708 | 50 | % | $ | 46,619 | 47 | % | |||||||||||||||||||||||
| Maintenance and support | 58,184 | 23 | % | 64,760 | 33 | % | (6,576) | (10) | % | ||||||||||||||||||||||||||
| Total subscription, maintenance and support | 203,511 | 81 | % | 163,468 | 83 | % | 40,043 | 24 | % | ||||||||||||||||||||||||||
| Services | 46,823 | 19 | % | 33,556 | 17 | % | 13,267 | 40 | % | ||||||||||||||||||||||||||
| Total revenue | $ | 250,334 | 100 | % | $ | 197,024 | 100 | % | $ | 53,310 | 27 | % | |||||||||||||||||||||||
Cost of revenue and gross profit:
| For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | |||||||||||||||||||||||||||||
| Cost of subscription | $ | 42,339 | 17 | % | $ | 35,619 | 18 | % | $ | 6,720 | 19 | % | |||||||||||||||||||||||
| Cost of maintenance and support | 11,052 | 4 | % | 11,602 | 6 | % | (550) | (5) | % | ||||||||||||||||||||||||||
| Total cost of subscription, maintenance and support | 53,391 | 21 | % | 47,221 | 24 | % | 6,170 | 13 | % | ||||||||||||||||||||||||||
| Cost of services | 45,726 | 18 | % | 29,958 | 15 | % | 15,768 | 53 | % | ||||||||||||||||||||||||||
| Total cost of revenue | $ | 99,117 | 40 | % | $ | 77,179 | 39 | % | $ | 21,938 | 28 | % | |||||||||||||||||||||||
| Gross profit | $ | 151,217 | 60 | % | $ | 119,845 | 61 | % | $ | 31,372 | 26 | % | |||||||||||||||||||||||
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| For the Year Ended December 31, | ||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | ||||||||||||||
| Cost of subscription | $ | 35,368 | 18 | % | $ | 27,858 | 17 | % | $ | 7,510 | 27 | % | ||||||||
| Cost of maintenance and support | 11,602 | 6 | % | 11,693 | 7 | % | (91 | ) | (1 | )% | ||||||||||
| Total cost of subscription, maintenance and support | 46,970 | 24 | % | 39,551 | 23 | % | 7,419 | 19 | % | |||||||||||
| Cost of license | 251 | — | % | 282 | — | % | (31 | ) | (11 | )% | ||||||||||
| Cost of services | 29,958 | 15 | % | 28,733 | 17 | % | 1,225 | 4 | % | |||||||||||
| Total cost of revenue | $ | 77,179 | 39 | % | $ | 68,566 | 41 | % | $ | 8,613 | 13 | % | ||||||||
| Gross profit | $ | 119,845 | 61 | % | $ | 100,250 | 59 | % | $ | 19,595 | 20 | % | ||||||||
Operating expenses:
| For the Year Ended December 31, | ||||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | ||||||||||||||
| Selling and marketing | $ | 72,006 | 37 | % | $ | 68,116 | 40 | % | $ | 3,890 | 6 | % | ||||||||
| General and administrative | 41,302 | 21 | % | 40,336 | 24 | % | 966 | 2 | % | |||||||||||
| Research and development | 55,657 | 28 | % | 56,021 | 33 | % | (364 | ) | (1 | )% | ||||||||||
| Acquisition-related | 95 | — | % | 720 | — | % | (625 | ) | (87 | )% | ||||||||||
| Total operating expenses | $ | 169,060 | 86 | % | $ | 165,193 | 98 | % | $ | 3,867 | 2 | % | ||||||||
| For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | |||||||||||||||||||||||||||||
| Selling and marketing | $ | 89,553 | 36 | % | $ | 72,006 | 37 | % | $ | 17,547 | 24 | % | |||||||||||||||||||||||
| General and administrative | 47,254 | 19 | % | 41,302 | 21 | % | 5,952 | 14 | % | ||||||||||||||||||||||||||
| Research and development | 67,246 | 27 | % | 55,657 | 28 | % | 11,589 | 21 | % | ||||||||||||||||||||||||||
| Acquisition-related | 502 | — | % | 95 | — | % | 407 | 428 | % | ||||||||||||||||||||||||||
| Total operating expenses | $ | 204,555 | 82 | % | $ | 169,060 | 86 | % | $ | 35,495 | 21 | % | |||||||||||||||||||||||
Other (expense) income, net:
| For the Year Ended December 31, | |||||||||||||||||||||
| 2018 | 2017 | ||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | |||||||||||||||
| Convertible debt interest and amortization | $ | (16,986 | ) | (9 | )% | $ | (13,218 | ) | (8 | )% | $ | (3,768 | ) | 29 | % | ||||||
| Other income, net | $ | 2,155 | 1 | % | $ | 384 | — | % | $ | 1,771 | 461 | % | |||||||||
| For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Percentage of total revenue | Amount | Percentage of total revenue | Variance $ | Variance % | ||||||||||||||||||||||||||||||||
| Convertible debt interest and amortization | $ | (14,765) | (6) | % | $ | (16,986) | (9) | % | $ | 2,221 | (13) | % | ||||||||||||||||||||||||||
| Other (expense) income, net | $ | (354) | — | % | $ | 2,155 | 1 | % | $ | (2,509) | (116) | % | ||||||||||||||||||||||||||
Income tax provision:
| For the Year Ended December 31, | |||||||||||||||||||||||
| (Dollars in thousands) | 2019 | 2018 | Variance $ | Variance % | |||||||||||||||||||
| Effective tax rate | (1) | % | — | % | n/a | (1) | % | ||||||||||||||||
| Income tax provision | $ | 624 | $ | 200 | $ | 424 | 212 | % | |||||||||||||||
| For the Year Ended December 31, | ||||||||||||||
| (Dollars in thousands) | 2018 | 2017 | Variance $ | Variance % | ||||||||||
| Effective tax rate | — | % | — | % | n/a | — | % | |||||||
| Income tax provision | $ | 200 | $ | 149 | $ | 51 | 34 | % | ||||||
Liquidity and Capital Resources
At December 31, 2019,2020, we had $329.1 million of cash and cash equivalents and $246.4 million of working capital as compared to $306.1 million of cash and cash equivalents and $189.8 million of working capital as compared to $295.5 million of cash and cash equivalents and $71.4 million of working capital at December 31, 2018.2019.
Our principal sources of liquidity are our cash and cash equivalents, cash flows generated from operations and potential borrowings under our $50 million secured Credit Agreement ("Revolver") with the lenders party thereto and Wells Fargo Bank, National Association as agent for the lenders party thereto. The facility expires in July 2022. We issued the 2027 Notes in September 2020, the 2024 Notes in May 2019 and completed our Secondary Offering in August 2018 to supplement our overall liquidity position. Our material drivers or variants of operating cash flow are net income (loss), noncash expenses (principally share-based compensation, intangible amortization and amortization of debt discount and issuance costs) and the timing of periodic invoicing and cash collections related to licenses, subscriptions and support for our software and related services. Our operating cash flows are also impacted by the timing of payments to our vendors and the payments of our other liabilities.liabilities and customer concessions. We generally pay our vendors and service providers in accordance with the invoice terms and conditions.
We believe our existing cash, and cash equivalents, including funds provided by the issuance of our Notes and our Secondary Offering, funds available under our Revolver, and our current estimates of future operating cash flows, will provide adequate liquidity and capital resources to meet our operational requirements, anticipated capital expenditures and principal and coupon interest payments for our Notes for the next twelve months. Our future working capital requirements will depend on many factors, including the operations of our existing business, potential growth of our subscription services, future acquisitions we might undertake, and expansion into complementary businesses.businesses and the impact of COVID-19, including the pace and timing of adoption and implementation of our solutions, relief to existing contracts and customer retention. If such need arises, we may raise additional funds through equity or debt financings. However, the recent COVID-19 pandemic caused some disruption in the capital markets and further disruption could make financing more difficult and/or expensive and we may not be able to obtain such financing on terms acceptable to us or at all. During the period of uncertainty and volatility related to COVID-19, we will continue to monitor our liquidity.
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The following table presents key components of our Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 2018 and 2017:2018:
| For the Year Ended December 31, | |||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Net cash (used in) provided by operating activities | $ | (49,389) | $ | 5,245 | $ | 5,703 | |||||||||||
| Net cash used in investing activities | (30,460) | (17,560) | (6,258) | ||||||||||||||
| Net cash provided by financing activities | 102,914 | 22,991 | 135,352 | ||||||||||||||
| Cash and cash equivalents (beginning of period) | 306,077 | 295,476 | 160,505 | ||||||||||||||
| Cash and cash equivalents (end of period) | $ | 329,134 | $ | 306,077 | $ | 295,476 | |||||||||||
| For the Year Ended December 31, | |||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2017 | ||||||||
| Net cash provided by (used in) operating activities | $ | 5,245 | $ | 5,703 | $ | (25,313 | ) | ||||
| Net cash used in investing activities | (17,560 | ) | (6,258 | ) | (22,346 | ) | |||||
| Net cash provided by financing activities | 22,991 | 135,352 | 90,654 | ||||||||
| Cash and cash equivalents (beginning of period) | 295,476 | 160,505 | 118,039 | ||||||||
| Cash and cash equivalents (end of period) | $ | 306,077 | $ | 295,476 | $ | 160,505 | |||||
Operating Activities
Cash used in operating activities in 2020 was $49.4 million and increased as compared to cash provided by operating activities in 2019 of $5.2 million. The increase was primarily attributable to higher cash operating expenses driven mainly by an increase in headcount year-over-year, higher annual incentive payment as compared to 2019, customer requests during the pandemic to defer payments into 2021, and a decrease in customer revenue retention attributed to the impact of COVID-19.
Cash provided by operating activities in 2019 was $5.2 million and declined slightly as compared to $5.7 million in 2018. The decrease was primarily attributable to higher cash operating expenses driven mainly by an increase in headcount and partially offset by an increase in sales and related cash collections.
Investing Activities
Net cash used in investing activities for 2019 was $17.6 million, which was primarily related to our acquisition of Travelaer. In addition, we incurred capitalized internal-use software development costs on our subscription service solutions of $1.4 million, capital expenditures of $5.3 million, investment in equity securities of $0.3 million and intangible (non-acquisition) asset of $0.1 million.
Net cash provided by financing activities for 20182020 was $6.3$102.9 million, which was primarilyattributable to the proceeds of $146.9 million from the issuance of our 2027 Notes and proceeds from the exercise of employee stock plans of $2.8 million, partially offset by the purchase of Capped Call of $25.3 million, a payment of $20.5 million for tax withholdings on vesting of employee share-based awards and a $1.0 million payment for debt issuance costs related to cash outflow related to capitalized internal-use software development costs on our subscription service solutions of $4.6 million, capital expenditures of $1.5 million and intangible (non-acquisition) asset of $0.1 million.the 2027 Notes.
termination of warrant of $45.2 million, a payment of $23.8 million for tax withholdings on vesting of employee share-based awards, the purchase of Capped Call of $16.4 million and a $0.9 million payment for debt issuance costs related to the 2024 Notes.
Stock Repurchases
In August 2008, our Board of Directors authorized a stock repurchase program for the purchase of up to $15.0 million of our common stock. No shares were repurchased under the program during the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. As of December 31, 2019,2020, $10.0 million remained available in the stock repurchase program. The repurchase of stock, if continued, will be funded primarily with existing cash balances. The timing of any repurchases will depend upon various factors including, but not limited to, market conditions, the market price of our common stock and management’s assessment of our liquidity and cash flow needs. For additional information on the stock repurchase program see Item 5, "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
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Off-Balance Sheet Arrangements and Contractual Obligations
We do not have any relationships with unconsolidated entities or financial partnerships, such as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Our principal commitments as of December 31, 20192020 consist of obligations under operating leases and various service agreements. See Note 18 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2019:2020:
| Payment due by period | |||||||||||||||||||||||||||||
| (Dollars in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||
| Notes, including interest | $ | 322,350 | $ | 4,813 | $ | 9,625 | $ | 151,162 | $ | 156,750 | |||||||||||||||||||
| Operating leases | 72,882 | 9,580 | 21,752 | 9,683 | 31,867 | ||||||||||||||||||||||||
| Purchase and contractual commitments | 39,259 | 30,148 | 9,111 | — | — | ||||||||||||||||||||||||
| Total contractual obligations | $ | 434,491 | $ | 44,541 | $ | 40,488 | $ | 160,845 | $ | 188,617 | |||||||||||||||||||
| Payment due by period | |||||||||||||||||||
| (Dollars in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
| Notes, including interest | $ | 150,163 | $ | 1,438 | $ | 2,875 | $ | 145,850 | $ | — | |||||||||
| Operating leases | 67,281 | 6,965 | 16,947 | 9,310 | 34,059 | ||||||||||||||
| Purchase and contractual commitments | 65,968 | 26,195 | 39,210 | 563 | — | ||||||||||||||
| Total contractual obligations | $ | 283,412 | $ | 34,598 | $ | 59,032 | $ | 155,723 | $ | 34,059 | |||||||||
Notes
As of December 31, 2019,2020, our outstanding Notes consist of the 2024 and 2027 Notes. Interest on the 2024 Notes is payable semi-annually, in arrears on May 15 and November 15 of each year. Interest on the 2027 Notes is payable semiannually in arrears in cash on March 15 and September 15 of each year, beginning on March 15, 2021. At December 31, 2019,2020, our maximum commitment for interest payments under the 2024 and 2027 Notes was $6.4 $28.6 million for their remaining duration.
Covenants
Our Revolver contains affirmative and negative covenants, including covenants which restrict our ability to, among other things, create liens, incur additional indebtedness and engage in certain other transactions, in each case subject to certain exclusions. In addition, our Revolver contains certain financial covenants which become effective in the event our liquidity falls below $50 million or upon the occurrence of an event of default. As of December 31, 2019,2020, we were in compliance with all financial covenants in the Revolver.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Actual results could differ from those estimates.
We believe the critical accounting policies listed below affect significant judgment and estimates used in the preparation of our Consolidated Financial Statements.
Revenue Recognition
We derive our revenues primarily from subscription services, professional services perpetual licensing of our software products and associated software maintenance and support services.
We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the customer contract(s);
•Determination of the transaction price;
•Allocation of the transaction price to each performance obligation in the customer contract(s); and
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•Recognition of revenue when, or as, we satisfy a performance obligation.
Subscription services revenue
Subscription servicesrevenue primarily include customerconsists of fees that give customers access to one or more of our cloud applications and associatedwith related customer support. Subscription servicesWe primarily recognize subscription revenue is generally recognized ratably over the contractual subscription term beginning on the date that our subscription service is made available to the customer. Our subscription contracts do not provide customers with the right to take possession of the software supporting the service and, asarrangement beginning with commencement of service. Subscription revenue related to certain offerings, where fees are based on a result,number of transactions, are accounted for as service contracts. Our subscription contracts are generally two to five years in length, billed annually in advance, and non-cancelable.recognized on a usage basis.
Maintenance and support revenue
Maintenance and support revenue includes post-implementation customer support for our on-premises licensessoftware and the right to unspecified software updates and enhancements. We recognize revenue from maintenance and support arrangements ratably over the period in which the services are provided. Our maintenance and support contracts are generally one to three yearsyear in length, billed annually in advance, and non-cancelable.
SProfessional serviceservices revenue primarily consists of fees for deployment and configuration services, as well as training services. Professionalconsulting and training. We typically sell our services on either a fixed-fee or time-and-materials basis. Services revenue is generally recognized as the services are renderedperformed for time and material contracts, or on a proportional performance basis for fixed feefixed-price contracts. The majority of our professional services contracts are on a fixed feefixed-fee basis. Training revenue isrevenues are recognized as the services are rendered.performed.
Significant judgment isjudgments are required in determining whether professional services that are contained in aour customer subscription contracts are considered distinct, including whether the services contract are capable of being distinct and whether they are separately identifiable in the customer contract. Professional services determinedidentifiable. Services deemed to be distinct are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If the professionaldetermined services are not determined to beconsidered distinct, the professional services and the subscription services are accounted for asdetermined to be a single performance obligation and revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer.
Customer contracts with multiple performance obligations
A portion of our customer contracts contain multiple performance obligations. Significant judgment is required in determining whether multiple performance obligations contained in a single customer contract are capable of being distinct and are separately identifiable. An obligation determined to be distinct is accounted for as a separate performance obligation and revenue for that separate performance obligation is recognized when, or as, we satisfy the performance obligation. If obligations are not determined to be distinct, those obligations are accounted for as a single, combined performance obligation. The transaction price is allocated to each performance obligation on a relative standalone selling price basis.
Allowance for Doubtful Accounts
In addition to our initial credit evaluations upon entering into a new customer contract, we regularly assess our ability to collect outstanding customer invoices. The allowance is based on both specific and general reserves. To do so, we make estimates of the collectability of accounts receivable. We provide an allowance for doubtful accounts when we determine that the collection of an outstanding customer receivable is not probable. We also analyze accountsregularly review our trade receivables allowance by considering factors such as historical experience, the age of the trade receivable balances and historical bad debt experience, customer creditworthiness, changes in customer payment history and industry concentration on an aggregate basis. If any of these factors change, our estimatescurrent economic conditions that may also change, which could affect the level of our future provision for doubtful accounts.a customer’s ability to pay.
Deferred Costs
Sales commissions earned by our sales representatives are considered incremental and recoverable costs of obtaining a customer contract. Sales commissions are deferred and amortized on a straight-line basis over the period of benefit, which we have determined to be five to eight years. We determined the period of benefit by taking into consideration our customer contracts, expected renewals of those customer contracts (as we currently do not pay an incremental sales commission)commission for renewals), our technology and other factors. We also defer amounts earned by employees other than sales representatives who earn incentive payments under compensation plans that are also tied to the value of customer contracts acquired.
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Deferred Implementation Costs
We capitalize certain contract fulfillment costs, including employee-relatedpersonnel and other costs (such as hosting, employee salaries, benefits and payroll taxes), that are associated with arrangements where professional services are not distinct from other undelivered obligations in our customer contracts. We analyze implementation costs and capitalize those costs that are directly related to customer contracts that are expected to be recoverable and enhance the resources which will be used to satisfy the undelivered performance obligations in those contracts. Deferred implementation costs are amortized ratably over the remaining contract term once the revenue recognition criteria for the respective performance obligation has been met and revenue recognition commences.
Deferred Revenue
Deferred revenue primarily consists of customer invoicing in advance of revenues being recognized. We generally invoice our customers annually in advance for subscription services and maintenance and support services. Deferred revenue that is anticipated to be recognized during the next twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Noncash Share-Based Compensation
We have two noncash share-based compensation plans, the 2007 equity incentive plan and the 2017 equity incentive plan which authorize the discretionary granting of various types of stock awards to key employees, officers, directors and consultants. Our 2007 equity incentive plan expired in March 2017, and in May 2017, we adopted our 2017 equity incentive plan which serves as the successor to our 2007 equity incentive plan. Under the 2017 equity incentive plan, we may provide noncash share-based compensation through the grant of: (i) restricted stock awards; (ii) restricted stock unit awards - time, performance and market-based ("RSUs"); (iii) stock options; (iv) stock appreciation rights ("SARs"); (v) phantom stock; and (vi) performance awards, such as market stock units ("MSUs"). To date, we have granted stock options, SARs, RSUs and MSUs.
Noncash share-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
The fair value of the RSUs (time and performance-based) is based on the closing price of our stock on the date of grant. The fair value and the derived service period of the market-based RSUs is estimated on the date of grant using a Monte Carlo simulation model. The model requires the use of a number of assumptions including the expected volatility of our stock, our risk-
We estimate the fair value of the stock options and SARs using the Black-Scholes option pricing model, which requires us to use significant judgment to make estimates regarding the expected life of the award, volatility of our stock price, the risk-free interest rate and the dividend yield of our stock over the life of the award. The expected life of the award is a historical weighted average of the expected lives of similar securities of comparable public companies. We estimate volatility using our historical volatility. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our expectation of paying no dividends.
As we issue stock options and SARs, we evaluate the assumptions used to value our stock option awards and SARs. If factors change and we employ different assumptions, noncash share-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned noncash share-based compensation expense. Future noncash share-based compensation expense and unearned noncash share-based compensation will increase to the extent that we grant additional equity awards to employees.
We estimate the number of awards that will be forfeited and recognize expense only for those awards that ultimately are expected to vest. Significant judgment is required in determining the adjustment to noncash share-based compensation expense for estimated forfeitures. Noncash share-based compensation expense in a period could be impacted, favorably or unfavorably, by differences between forfeiture estimates and actual forfeitures.
MSUs are performance-based awards that cliff vest based on our shareholder return relative to the total shareholder return of the Russell 2000 Index ("Index") over the three-year periods ending February 28, 2019, February 28, 2020, October 9, 2020 and December 31, 2020 ("Performance Period"), respectively. The MSUs vested on March 1, 20192020 and October 9, 2020 and are
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scheduled to vest on March 1, 2020, October 9, 2020 and January10,January 10, 2021, respectively. The maximum number of shares issuable upon vesting is 200% of the MSUs initially granted based on the average price of our common stock relative to the Index during the Performance Period. We estimate the fair value of MSUs on the date of grant using a Monte Carlo simulation model. The determination of the fair value of the MSUs is affected by our stock price and a number of assumptions including the expected volatilities of our stock and the Index, the risk-free interest rate and expected dividends. Our expected volatility at the date of grant was based on the historical volatilities of our stock and the Index over the Performance Period.
We record deferred tax assets for share-based compensation awards that will result in future deductions on our income tax returns, based on the amount of share-based compensation recognized at the statutory tax rate in the jurisdiction in which we will receive a tax deduction. Because the deferred tax assets we record are based upon the share-based compensation expenses in a particular jurisdiction, the aforementioned inputs that affect the fair values of our stock awards may also indirectly affect our income tax expense. In addition, differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax returns are recorded in our income tax (expense) income.
At December 31, 2019,2020, we had $43.1$55.9 million of total unrecognized compensation costs related to noncash share-based compensation arrangements for stock awards granted. These costs will be recognized over a weighted-average period of 2.5 years.
Accounting for Income Taxes
We estimate our income taxes based on the various jurisdictions where we conduct business and we use estimates in determining our provision for income taxes. We estimate separately our deferred tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the U.S. Internal Revenue Service or other taxing jurisdictions. We estimate our current tax liability and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we show on our balance sheet. At December 31, 2019,2020, our deferred tax assets consisted primarily of temporary differences related to noncash share-based compensation, interest expense limited under Section 163(j), Research and Experimentation ("R&E&E") tax credit carryforwards and net operating losses.
We review the realizability of our deferred tax asset on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to our valuation
allowances may be necessary. We continually perform an analysis related to the realizability of our deferred tax assets. As a result, and after considering tax planning initiatives and other positive and negative evidence, we determine that it is more likely than not that our net deferred tax assets will not be realized. During 2019,2020, there was not sufficient positive evidence to outweigh the current and historic negative evidence to determine that it was more likely than not that our net deferred tax assets would not be realized. Therefore, we continue to have a valuation allowance against net deferred tax assets as of December 31, 2019.2020.
We account for uncertain income tax positions recognized in our financial statements in accordance with the Income Tax Topic of the Accounting Standards Codification ("ASC"), issued by the FASB. This interpretation requires companies to use a prescribed model for assessing the financial recognition and measurement of all tax positions taken or expected to be taken in their tax returns. This guidance provides clarification on recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. Please see Note 15 to the Consolidated Financial Statements for more information.
Business Combinations
We record tangible and intangible assets acquired and liabilities assumed in business combinations under the purchase method of accounting. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill. If the fair value of the assets acquired exceeds our purchase price, the excess is recognized as a gain.
39
Significant management judgments and assumptions are required in determining the fair value of acquired assets and liabilities, particularly acquired intangible assets. The valuation of purchased intangible assets is based upon estimates of the future performance and cash flows from the acquired business. Each asset is measured at fair value from the perspective of a market participant.
If different assumptions are used, it could materially impact the purchase price allocation and adversely affect our results of operations, financial condition and cash flows.
Intangible Assets, Goodwill and Long-Lived Assets
When we acquire a business, a portion of the purchase consideration is typically allocated to acquired technology and other identifiable intangible assets, such as customer relationships. The excess of the purchase consideration over the net of the acquisition-date fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill. We estimate fair value primarily utilizing the market approach, which calculates fair value based on the market values of comparable companies or comparable transactions. The amounts allocated to acquired technology and other intangible assets represent our estimates of their fair values at the acquisition date. We amortize our intangible assets that have finite lives using either the straight-line method or, if reliably determinable, the pattern in which the economic benefit of the asset is expected to be consumed utilizing expected undiscounted future cash flows. Amortization is recorded over the estimated useful lives ranging from two to eight years.
We review our intangible assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, we will write down the carrying value of the intangible asset to its fair value in the period identified. In assessing recoverability, we must make assumptions regarding estimated future cash flows and discount rates. If these estimates or related assumptions change in the future, we may be required to record impairment charges. If the estimate of an intangible asset’s remaining useful life is changed, we will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.
We assess goodwill for impairment as of November 30 of each fiscal year, or more frequently if events or changes in circumstances indicate that the fair value of our reporting unit has been reduced below its carrying value. When conducting our annual goodwill impairment assessment, we use a two-step process. The first step is to perform an optional qualitative evaluation as to whether it is more likely than not that the fair value of our reporting unit is less than its carrying value, using an assessment of relevant events and circumstances. In performing this assessment, we are required to make assumptions and judgments including, but not limited to, an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, as well as the overall future financial performance of our reporting unit and future opportunities in the markets in which it operates. If we determine that it is not more likely than not that the fair value of our reporting unit is less than its carrying value, we are not required to perform any additional tests in assessing goodwill for impairment. However, if we conclude otherwise or elect not to perform the qualitative assessment, we perform a second step for our reporting unit, consisting of a quantitative assessment of
goodwill impairment. This quantitative assessment requires us to compare the fair value of our reporting unit with its carrying value. If the carrying amount exceeds the fair value, an impairment charge will be recognized, however, loss cannot exceed the total amount of goodwill allocated to the reporting unit.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in this report, regarding the impact of certain recent accounting pronouncements on our Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
Our contracts are predominately denominated in U.S. dollars; however, we have contracts denominated in foreign currencies and therefore a portion of our revenue is subject to foreign currency risks. The primary market risk we face is from foreign currency exchange rate fluctuations. Our cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The effect of an immediate 10% adverse change in exchange rates on foreign denominated receivables as of December 31, 2019,2020, would have resulted in a $0.8 $0.4 million loss. We are also exposed to foreign currency risk due to our operating subsidiaries in France, United Kingdom, Canada, Germany, Ireland, Australia, Bulgaria and United Arab Emirates. A hypothetical 10% adverse change in the value of the U.S. dollar in relation to the Euro, which is our single most significant
40
foreign currency exposure, would have changed revenue for the year ended December 31, 20192020 by approximately $1.1 $1.6 million. However, due to the relatively low volume of payments made and received through our foreign subsidiaries, we do not believe that we have significant exposure to foreign currency exchange risks. Fluctuations in foreign currency exchange rates could harm our financial results in the future.
We currently do not use derivative financial instruments to mitigate foreign currency exchange risks. We continue to review this issue and may consider hedging certain foreign exchange risks through the use of currency futures or options in future years.
Exposure to Interest Rates
Our exposure to market risk for changes in interest rates relates to the variable interest rate on borrowings under our Revolver. As of December 31, 2019,2020, we had no borrowings under the Revolver.
As of December 31, 2019,2020, we had an outstanding principal amountamounts of $150.0 million and $143.8 million of the 2027 and the 2024 Notes, respectively, which are fixed rate instruments. Therefore, our results of operations are not subject to fluctuations in interest rates. The fair value of the 2024 Notes may change when the market price of our stock fluctuates.
We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates due to the short term nature of our cash equivalents.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements required to be filed are indexed on page F-1 and are incorporated herein by reference. See Item 15(a)(1) and (2).
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation as of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in
reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
We implemented internal controls to ensure we adequately evaluated our lease contracts and properly assessedprovisions for credit losses in light of the impact of our adoption of Topic 842326 on January 1, 2019.2020. There were no significant changes to our internal control over financial reporting due to the adoption of Topic 842.326.
41
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting is a framework that includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2019,2020, based on the criteria in Internal Control — Integrated Framework (2013) issued by COSO. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 20192020 based upon the COSO criteria.
The effectiveness of our internal control over financial reporting as of December 31, 20192020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
Item 9B. Other Information
None.
42
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference from our proxy statement in connection with our 20202021 Annual Meeting of Stockholders, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2019.2020.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from our proxy statement in connection with our 20202021 Annual Meeting of Stockholders, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2019.2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from our proxy statement in connection with our 20202021 Annual Meeting of Stockholders, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2019.2020.
Item 13. Certain Relationships, Related Transactions and Director Independence
The information required by this item is incorporated by reference from our proxy statement in connection with our 20202021 Annual Meeting of Stockholders, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2019.2020.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from our proxy statement in connection with our 20202021 Annual Meeting of Stockholders, which proxy statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2019.2020.
43
Part IV
Item 15. Exhibits and Financial Statements Schedules
(a)(1) Financial Statements
Reference is made to the Index to Financial Statements in the section entitled "Financial Statements and Supplementary Data" in Part II, Item 8 of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules
Reference is made to Schedule II, Valuation and Qualifying Accounts, as indexed on page F-37.F-35.
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
(a)(3) Exhibits
Exhibits are as set forth below in the Exhibit Index. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference rooms maintained by the SEC in Washington, D.C., New York, New York, and Chicago, Illinois, and are also available to the public from commercial document retrieval services and at the website maintained by the SEC at http://www.sec.gov.
44
PROS Holdings, Inc.
Index to the Consolidated Financial Statements
| Page | |||||
1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PROS Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of PROS Holdings, Inc. and its subsidiaries (the(the “Company”) as of December 31, 20192020 and 2018, 2019,and the related consolidated statements of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20192020 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018, 2019,and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 2020in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’sManagement's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
2
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition -– Identifying distinct performance obligations within customer contracts
As described in Note 2 to the consolidated financial statements, for the year ended December 31, 2019,2020, the Company recognized revenue of $250.3$252.4 million from customer contracts. A portion of these customer contracts contain multiple performance obligations. Significant judgment is required by management in determining whether multiple performance obligations contained in a single customer contract are capable of being distinct and are separately identifiable. An obligation determined to be distinct is accounted for as a separate performance obligation and revenue for that separate performance obligation is recognized when, or as, the Company satisfies the performance obligation. If obligations are not determined to be distinct, those obligations are accounted for as a single, combined performance obligation.
The principal considerations for our determination that performing procedures relating to identifying distinct performance obligations within customer contracts is a critical audit matter are there was athe significant amount of judgment by management in determining whether multiple performance obligations contained in a single customer contract are capable of being distinct and are separately identifiable. This in turn led to significant auditor judgment and effort in performing procedures to evaluate whether the distinct performance obligations within a single customer contract were appropriately identified by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the identification of distinct performance obligations. These procedures also included, among others, examining customer contracts on a test basis to identify whether the performance obligations were capable of being distinct and were separately identifiable, and evaluating management’s conclusions through tests of underlying information.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 19, 202012, 2021
We have served as the Company’s auditor since 2002.
3
PROS Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| December 31, | December 31, | |||||||||||||||||
| 2019 | 2018 | 2020 | 2019 | |||||||||||||||
| Assets: | Assets: | |||||||||||||||||
| Current assets: | Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 306,077 | $ | 295,476 | Cash and cash equivalents | $ | 329,134 | $ | 306,077 | |||||||||
| Trade and other receivables, net of allowance of $214 and $978, respectively | 65,074 | 41,822 | ||||||||||||||||
| Trade and other receivables, net of allowance of $4,122 and $214, respectively | Trade and other receivables, net of allowance of $4,122 and $214, respectively | 49,578 | 65,074 | |||||||||||||||
| Deferred costs, current | 5,756 | 4,089 | Deferred costs, current | 5,941 | 5,756 | |||||||||||||
| Prepaid and other current assets | 9,038 | 4,756 | Prepaid and other current assets | 9,647 | 9,038 | |||||||||||||
| Total current assets | 385,945 | 346,143 | Total current assets | 394,300 | 385,945 | |||||||||||||
| Property and equipment, net | 14,794 | 14,676 | Property and equipment, net | 36,504 | 14,794 | |||||||||||||
| Operating lease right-of-use assets | 26,550 | — | Operating lease right-of-use assets | 30,689 | 26,550 | |||||||||||||
| Deferred costs, noncurrent | 15,478 | 13,373 | Deferred costs, noncurrent | 12,544 | 15,478 | |||||||||||||
| Intangibles, net | 14,605 | 19,354 | Intangibles, net | 8,341 | 14,605 | |||||||||||||
| Goodwill | 49,104 | 38,231 | Goodwill | 50,044 | 49,104 | |||||||||||||
| Other assets, noncurrent | 6,831 | 5,190 | Other assets, noncurrent | 7,549 | 6,831 | |||||||||||||
| Total assets | $ | 513,307 | $ | 436,967 | Total assets | $ | 539,971 | $ | 513,307 | |||||||||
| Liabilities and Stockholders’ Equity: | Liabilities and Stockholders’ Equity: | |||||||||||||||||
| Current liabilities: | Current liabilities: | |||||||||||||||||
| Accounts payable and other liabilities | $ | 9,098 | $ | 6,934 | Accounts payable and other liabilities | $ | 4,246 | $ | 9,098 | |||||||||
| Accrued liabilities | 22,748 | 9,506 | Accrued liabilities | 13,065 | 22,748 | |||||||||||||
| Accrued payroll and other employee benefits | 32,656 | 22,519 | Accrued payroll and other employee benefits | 25,514 | 32,656 | |||||||||||||
| Operating lease liabilities, current | 7,173 | — | Operating lease liabilities, current | 5,937 | 7,173 | |||||||||||||
| Deferred revenue, current | 124,459 | 99,262 | Deferred revenue, current | 99,156 | 124,459 | |||||||||||||
| Current portion of convertible debt, net | — | 136,529 | ||||||||||||||||
| Total current liabilities | 196,134 | 274,750 | Total current liabilities | 147,918 | 196,134 | |||||||||||||
| Deferred revenue, noncurrent | 17,801 | 17,903 | Deferred revenue, noncurrent | 11,372 | 17,801 | |||||||||||||
| Convertible debt, net, noncurrent | 110,704 | 88,661 | Convertible debt, net, noncurrent | 218,028 | 110,704 | |||||||||||||
| Operating lease liabilities, noncurrent | 22,391 | — | Operating lease liabilities, noncurrent | 44,099 | 22,391 | |||||||||||||
| Other liabilities, noncurrent | 1,281 | 754 | Other liabilities, noncurrent | 1,517 | 1,281 | |||||||||||||
| Total liabilities | 348,311 | 382,068 | Total liabilities | 422,934 | 348,311 | |||||||||||||
| Commitments and contingencies (Note 18) | Commitments and contingencies (Note 18) | 0 | 0 | |||||||||||||||
| Stockholders’ equity: | Stockholders’ equity: | |||||||||||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized none issued | — | — | ||||||||||||||||
| Common stock, $0.001 par value, 75,000,000 shares authorized; 47,310,846 and 41,573,491 shares issued, respectively; 42,630,123 and 37,155,906 shares outstanding, respectively | 47 | 42 | ||||||||||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized NaN issued | Preferred stock, $0.001 par value, 5,000,000 shares authorized NaN issued | 0 | 0 | |||||||||||||||
Common stock, $0.001 par value, 75,000,000 shares authorized; 48,142,267 and 47,310,846 shares issued, respectively; 43,461,544 and 42,630,123 shares outstanding, respectively | Common stock, $0.001 par value, 75,000,000 shares authorized; 48,142,267 and 47,310,846 shares issued, respectively; 43,461,544 and 42,630,123 shares outstanding, respectively | 48 | 47 | |||||||||||||||
| Additional paid-in capital | 560,496 | 364,877 | Additional paid-in capital | 589,040 | 560,496 | |||||||||||||
| Treasury stock, 4,680,723 and 4,417,585 common shares, at cost, respectively | (29,847 | ) | (13,938 | ) | ||||||||||||||
| Treasury stock, 4,680,723 common shares, at cost | Treasury stock, 4,680,723 common shares, at cost | (29,847) | (29,847) | |||||||||||||||
| Accumulated deficit | (361,789 | ) | (292,708 | ) | Accumulated deficit | (438,773) | (361,789) | |||||||||||
| Accumulated other comprehensive loss | (3,911 | ) | (3,374 | ) | Accumulated other comprehensive loss | (3,431) | (3,911) | |||||||||||
| Total stockholders’ equity | 164,996 | 54,899 | Total stockholders’ equity | 117,037 | 164,996 | |||||||||||||
| Total liabilities and stockholders’ equity | $ | 513,307 | $ | 436,967 | Total liabilities and stockholders’ equity | $ | 539,971 | $ | 513,307 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
PROS Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share data)
| For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Revenue: | Revenue: | |||||||||||||||||||||||||||||||
| Subscription | $ | 141,165 | $ | 95,192 | $ | 60,539 | Subscription | $ | 170,473 | $ | 145,327 | $ | 98,708 | |||||||||||||||||||
| Maintenance and support | 58,184 | 64,760 | 69,408 | Maintenance and support | 44,692 | 58,184 | 64,760 | |||||||||||||||||||||||||
| Total subscription, maintenance and support | 199,349 | 159,952 | 129,947 | Total subscription, maintenance and support | 215,165 | 203,511 | 163,468 | |||||||||||||||||||||||||
| License | 4,162 | 3,516 | 5,562 | |||||||||||||||||||||||||||||
| Services | 46,823 | 33,556 | 33,307 | Services | 37,259 | 46,823 | 33,556 | |||||||||||||||||||||||||
| Total revenue | 250,334 | 197,024 | 168,816 | Total revenue | 252,424 | 250,334 | 197,024 | |||||||||||||||||||||||||
| Cost of revenue: | Cost of revenue: | |||||||||||||||||||||||||||||||
| Subscription | 42,090 | 35,368 | 27,858 | Subscription | 51,673 | 42,339 | 35,619 | |||||||||||||||||||||||||
| Maintenance and support | 11,052 | 11,602 | 11,693 | Maintenance and support | 9,880 | 11,052 | 11,602 | |||||||||||||||||||||||||
| Total cost of subscription, maintenance and support | 53,142 | 46,970 | 39,551 | Total cost of subscription, maintenance and support | 61,553 | 53,391 | 47,221 | |||||||||||||||||||||||||
| License | 249 | 251 | 282 | |||||||||||||||||||||||||||||
| Services | 45,726 | 29,958 | 28,733 | Services | 43,080 | 45,726 | 29,958 | |||||||||||||||||||||||||
| Total cost of revenue | 99,117 | 77,179 | 68,566 | Total cost of revenue | 104,633 | 99,117 | 77,179 | |||||||||||||||||||||||||
| Gross profit | 151,217 | 119,845 | 100,250 | Gross profit | 147,791 | 151,217 | 119,845 | |||||||||||||||||||||||||
| Operating expenses: | Operating expenses: | |||||||||||||||||||||||||||||||
| Selling and marketing | 89,553 | 72,006 | 68,116 | Selling and marketing | 87,182 | 89,553 | 72,006 | |||||||||||||||||||||||||
| General and administrative | 47,254 | 41,302 | 40,336 | General and administrative | 51,075 | 47,254 | 41,302 | |||||||||||||||||||||||||
| Research and development | 67,246 | 55,657 | 56,021 | Research and development | 75,614 | 67,246 | 55,657 | |||||||||||||||||||||||||
| Acquisition-related | 502 | 95 | 720 | Acquisition-related | 0 | 502 | 95 | |||||||||||||||||||||||||
| Loss from operations | (53,338 | ) | (49,215 | ) | (64,943 | ) | Loss from operations | (66,080) | (53,338) | (49,215) | ||||||||||||||||||||||
| Convertible debt interest and amortization | (14,765 | ) | (16,986 | ) | (13,218 | ) | Convertible debt interest and amortization | (11,125) | (14,765) | (16,986) | ||||||||||||||||||||||
| Other (expense) income, net | (354 | ) | 2,155 | 384 | ||||||||||||||||||||||||||||
| Other income (expense), net | Other income (expense), net | 897 | (354) | 2,155 | ||||||||||||||||||||||||||||
| Loss before income tax provision | (68,457 | ) | (64,046 | ) | (77,777 | ) | Loss before income tax provision | (76,308) | (68,457) | (64,046) | ||||||||||||||||||||||
| Income tax provision | 624 | 200 | 149 | Income tax provision | 676 | 624 | 200 | |||||||||||||||||||||||||
| Net loss | (69,081 | ) | (64,246 | ) | (77,926 | ) | Net loss | (76,984) | (69,081) | (64,246) | ||||||||||||||||||||||
| Net loss per share: | Net loss per share: | |||||||||||||||||||||||||||||||
| Basic and diluted | (1.72 | ) | (1.86 | ) | (2.46 | ) | Basic and diluted | (1.78) | (1.72) | (1.86) | ||||||||||||||||||||||
| Weighted average number of shares: | Weighted average number of shares: | |||||||||||||||||||||||||||||||
| Basic and diluted | 40,232 | 34,465 | 31,627 | Basic and diluted | 43,301 | 40,232 | 34,465 | |||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | (537 | ) | (558 | ) | 2,107 | Foreign currency translation adjustment | 480 | (537) | (558) | |||||||||||||||||||||||
| Unrealized gain on short-term investments | — | — | (13 | ) | ||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (537 | ) | (558 | ) | 2,094 | Other comprehensive loss, net of tax | 480 | (537) | (558) | |||||||||||||||||||||||
| Comprehensive (loss) income | $ | (69,618 | ) | $ | (64,804 | ) | $ | (75,832 | ) | Comprehensive (loss) income | $ | (76,504) | $ | (69,618) | $ | (64,804) | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
PROS Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating activities: | |||||||||||||||||
| Net loss | $ | (76,984) | $ | (69,081) | $ | (64,246) | |||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 14,334 | 13,870 | 13,055 | ||||||||||||||
| Amortization of debt discount and issuance costs | 8,743 | 11,115 | 12,027 | ||||||||||||||
| Share-based compensation | 24,399 | 24,680 | 21,453 | ||||||||||||||
| Deferred income tax, net | 0 | (119) | (463) | ||||||||||||||
| Provision for doubtful accounts | 4,783 | (754) | 212 | ||||||||||||||
| Loss on disposal of assets | 0 | 0 | 37 | ||||||||||||||
| Loss on debt extinguishment | 0 | 5,660 | 0 | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts and unbilled receivables | 10,450 | (22,273) | (9,550) | ||||||||||||||
| Deferred costs | 2,749 | (3,772) | (4,086) | ||||||||||||||
| Prepaid expenses and other assets | (1,376) | (5,044) | 87 | ||||||||||||||
| Operating lease right-of-use assets and liabilities | 16,974 | (61) | 0 | ||||||||||||||
| Accounts payable and other liabilities | (4,817) | 2,550 | 3,931 | ||||||||||||||
| Accrued liabilities | (9,848) | 15,455 | 2,764 | ||||||||||||||
| Accrued payroll and other employee benefits | (7,106) | 7,937 | 5,830 | ||||||||||||||
| Deferred revenue | (31,690) | 25,082 | 24,652 | ||||||||||||||
| Net cash (used in) provided by operating activities | (49,389) | 5,245 | 5,703 | ||||||||||||||
| Investing activities: | |||||||||||||||||
| Purchase of property and equipment | (28,493) | (5,271) | (1,475) | ||||||||||||||
| Purchase of equity securities | (281) | (293) | (45) | ||||||||||||||
| Acquisition of Travelaer, net of cash acquired | 0 | (10,510) | 0 | ||||||||||||||
| Capitalized internal-use software development costs | (1,686) | (1,436) | (4,613) | ||||||||||||||
| Purchase of intangible asset | 0 | (50) | (125) | ||||||||||||||
| Net cash used in investing activities | (30,460) | (17,560) | (6,258) | ||||||||||||||
| Financing activities: | |||||||||||||||||
| Exercise of stock options | 0 | 0 | 1,142 | ||||||||||||||
| Proceeds from employee stock plans | 2,824 | 1,995 | 1,720 | ||||||||||||||
| Tax withholding related to net share settlement of stock awards | (20,481) | (23,753) | (9,410) | ||||||||||||||
| Proceeds from Secondary Offering, net | 0 | 0 | 141,954 | ||||||||||||||
| Payments of notes payable | 0 | 0 | (54) | ||||||||||||||
| Proceeds from issuance of convertible debt, net | 146,925 | 140,156 | 0 | ||||||||||||||
| Debt issuance costs related to convertible debt | (1,019) | (860) | 0 | ||||||||||||||
| Purchase of Capped Call | (25,335) | (16,445) | 0 | ||||||||||||||
| Settlement of convertible debt | 0 | (97,678) | 0 | ||||||||||||||
| Proceeds from termination of Note Hedges | 0 | 64,819 | 0 | ||||||||||||||
| Payment for termination of Warrants | 0 | (45,243) | 0 | ||||||||||||||
| Net cash provided by financing activities | 102,914 | 22,991 | 135,352 | ||||||||||||||
| Effect of foreign currency rates on cash | (8) | (75) | 174 | ||||||||||||||
| Net change in cash and cash equivalents | 23,057 | 10,601 | 134,971 | ||||||||||||||
6
PROS Holdings, Inc. Consolidated Statements of Cash Flows (In thousands) | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Operating activities: | |||||||||||
| Net loss | $ | (69,081 | ) | $ | (64,246 | ) | $ | (77,926 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 13,870 | 13,055 | 10,531 | ||||||||
| Amortization of debt discount and issuance costs | 11,115 | 12,027 | 9,264 | ||||||||
| Share-based compensation | 24,680 | 21,453 | 22,796 | ||||||||
| Deferred income tax, net | (119 | ) | (463 | ) | (520 | ) | |||||
| Provision for doubtful accounts | (754 | ) | 212 | — | |||||||
| Loss on disposal of assets | — | 37 | 59 | ||||||||
| Loss on debt extinguishment | 5,660 | — | — | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts and unbilled receivables | (22,273 | ) | (9,550 | ) | 2,022 | ||||||
| Deferred costs | (3,772 | ) | (4,086 | ) | — | ||||||
| Prepaid expenses and other assets | (5,044 | ) | 87 | (3,715 | ) | ||||||
| Accounts payable and other liabilities | 2,489 | 3,931 | 700 | ||||||||
| Accrued liabilities | 15,455 | 2,764 | (1,055 | ) | |||||||
| Accrued payroll and other employee benefits | 7,937 | 5,830 | (2,344 | ) | |||||||
| Deferred revenue | 25,082 | 24,652 | 14,875 | ||||||||
| Net cash provided by (used in) operating activities | 5,245 | 5,703 | (25,313 | ) | |||||||
| Investing activities: | |||||||||||
| Purchase of property and equipment | (5,271 | ) | (1,475 | ) | (1,286 | ) | |||||
| Purchase of equity securities | (293 | ) | (45 | ) | — | ||||||
| Acquisition of Travelaer, net of cash acquired | (10,510 | ) | — | — | |||||||
| Acquisition of Vayant, net of cash acquired | — | — | (34,130 | ) | |||||||
| Capitalized internal-use software development costs | (1,436 | ) | (4,613 | ) | (2,797 | ) | |||||
| Purchase of intangible asset | (50 | ) | (125 | ) | (125 | ) | |||||
| Proceeds from maturities of short-term investments | — | — | 15,992 | ||||||||
| Net cash used in investing activities | (17,560 | ) | (6,258 | ) | (22,346 | ) | |||||
| Financing activities: | |||||||||||
| Exercise of stock options | — | 1,142 | 6,331 | ||||||||
| Proceeds from employee stock plans | 1,995 | 1,720 | 1,535 | ||||||||
| Tax withholding related to net share settlement of stock awards | (23,753 | ) | (9,410 | ) | (7,375 | ) | |||||
| Proceeds from Secondary Offering, net | — | 141,954 | — | ||||||||
| Payments of Notes payable | — | (54 | ) | (209 | ) | ||||||
| Proceeds from issuance of convertible debt, net | 140,156 | — | 93,500 | ||||||||
| Debt issuance costs related to convertible debt | (860 | ) | — | (2,978 | ) | ||||||
| Purchase of Capped Call | (16,445 | ) | — | — | |||||||
| Settlement of convertible debt | (97,678 | ) | — | — | |||||||
| Proceeds from termination of Note Hedges | 64,819 | — | — | ||||||||
| Payment for termination of Warrants | (45,243 | ) | — | — | |||||||
| Debt issuance costs related to Revolver | — | — | (150 | ) | |||||||
| Net cash provided by financing activities | 22,991 | 135,352 | 90,654 | ||||||||
PROS Holdings, Inc. Consolidated Statements of Cash Flows (In thousands) | ||||||||||||||||||||||||||||
| Effect of foreign currency rates on cash | (75 | ) | 174 | (529 | ) | |||||||||||||||||||||||
| Net change in cash and cash equivalents | 10,601 | 134,971 | 42,466 | |||||||||||||||||||||||||
| Cash and cash equivalents: | Cash and cash equivalents: | |||||||||||||||||||||||||||
| Beginning of period | 295,476 | 160,505 | 118,039 | Beginning of period | 306,077 | 295,476 | 160,505 | |||||||||||||||||||||
| End of period | $ | 306,077 | $ | 295,476 | $ | 160,505 | End of period | $ | 329,134 | $ | 306,077 | $ | 295,476 | |||||||||||||||
| Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | |||||||||||||||||||||||||||
| Cash (paid) refund during period for: | Cash (paid) refund during period for: | |||||||||||||||||||||||||||
| Taxes | $ | (308 | ) | $ | (262 | ) | $ | (271 | ) | Taxes | $ | (341) | $ | (308) | $ | (262) | ||||||||||||
| Interest | $ | (3,499 | ) | $ | (5,252 | ) | $ | (4,013 | ) | Interest | $ | (1,680) | $ | (3,499) | $ | (5,252) | ||||||||||||
| Noncash investing activities: | Noncash investing activities: | |||||||||||||||||||||||||||
| Purchase of property and equipment accrued but not paid | $ | 891 | $ | 247 | $ | 38 | Purchase of property and equipment accrued but not paid | $ | 341 | $ | 891 | $ | 247 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
PROS Holdings, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated (Deficit) Retained Earnings | Accumulated other comprehensive loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated (Deficit) Retained Earnings | Accumulated other comprehensive loss | Total Stockholders’ Equity | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 30,583,651 | $ | 35 | $ | 175,678 | 4,417,585 | $ | (13,938 | ) | $ | (160,259 | ) | $ | (4,910 | ) | $ | (3,394 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 651,607 | 1 | 6,330 | — | — | — | — | 6,331 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock awards net settlement | 611,708 | — | (7,375 | ) | — | — | — | — | (7,375 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from employee stock plans | 92,209 | — | 1,535 | — | — | — | — | 1,535 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity component of the convertible debt issuance, net | — | — | 8,846 | — | — | — | — | 8,846 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncash share-based compensation | — | — | 22,910 | — | — | — | — | 22,910 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | 2,094 | 2,094 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (77,926 | ) | — | (77,926 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 31,939,175 | $ | 36 | $ | 207,924 | 4,417,585 | $ | (13,938 | ) | $ | (238,185 | ) | $ | (2,816 | ) | $ | (46,979 | ) | Balance at December 31, 2017 | 31,939,175 | $ | 36 | $ | 207,924 | 4,417,585 | $ | (13,938) | $ | (238,185) | $ | (2,816) | $ | (46,979) | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | 161,997 | 1 | 1,141 | — | — | — | — | 1,142 | Exercise of stock options | 161,997 | 1 | 1,141 | — | — | — | — | 1,142 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock awards net settlement | 609,188 | 1 | (9,411 | ) | — | — | — | — | (9,410 | ) | Stock awards net settlement | 609,188 | 1 | (9,411) | — | — | — | — | (9,410) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from employee stock plans | 75,546 | — | 1,720 | — | — | — | — | 1,720 | Proceeds from employee stock plans | 75,546 | — | 1,720 | — | — | — | — | 1,720 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from Secondary Offering, net | 4,370,000 | 4 | 141,950 | — | — | — | — | 141,954 | Proceeds from Secondary Offering, net | 4,370,000 | 4 | 141,950 | — | — | — | — | 141,954 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncash share-based compensation | — | — | 21,553 | — | — | — | — | 21,553 | Noncash share-based compensation | — | — | 21,553 | — | — | — | — | 21,553 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of adoption of section 606 | — | — | — | — | — | 9,723 | — | 9,723 | Cumulative effect of adoption of section 606 | — | — | — | — | — | 9,723 | — | 9,723 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (558 | ) | (558 | ) | Other comprehensive loss | — | — | — | — | — | — | (558) | (558) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (64,246 | ) | — | (64,246 | ) | Net loss | — | — | — | — | — | (64,246) | — | (64,246) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 37,155,906 | $ | 42 | $ | 364,877 | 4,417,585 | $ | (13,938 | ) | $ | (292,708 | ) | $ | (3,374 | ) | $ | 54,899 | Balance at December 31, 2018 | 37,155,906 | $ | 42 | $ | 364,877 | 4,417,585 | $ | (13,938) | $ | (292,708) | $ | (3,374) | $ | 54,899 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock awards net settlement | 958,264 | 1 | (23,754 | ) | — | — | — | — | (23,753 | ) | Stock awards net settlement | 958,264 | 1 | (23,754) | — | — | — | — | (23,753) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from employee stock plans | 75,304 | — | 1,995 | — | — | — | — | 1,995 | Proceeds from employee stock plans | 75,304 | — | 1,995 | — | — | — | — | 1,995 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Settlement of convertible debt | 4,703,787 | 4 | 140,845 | — | — | — | — | 140,849 | Settlement of convertible debt | 4,703,787 | 4 | 140,845 | — | — | — | — | 140,849 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Note Hedges | (263,138 | ) | — | 15,911 | 263,138 | (15,909 | ) | — | — | 2 | Exercise of Note Hedges | (263,138) | — | 15,911 | 263,138 | (15,909) | — | — | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Termination of Note Hedges | — | — | 64,819 | — | — | — | — | 64,819 | Termination of Note Hedges | — | — | 64,819 | — | — | — | — | 64,819 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Termination of Warrants | — | — | (45,243 | ) | — | — | — | — | (45,243 | ) | Termination of Warrants | — | — | (45,243) | — | — | — | — | (45,243) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity component of convertible debt issuance, net | — | — | 32,883 | — | — | — | — | 32,883 | Equity component of convertible debt issuance, net | — | — | 32,883 | — | — | — | — | 32,883 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of Capped Call | — | — | (16,445 | ) | — | — | — | — | (16,445 | ) | Purchase of Capped Call | — | — | (16,445) | — | — | — | — | (16,445) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncash share-based compensation | — | — | 24,608 | — | — | — | — | 24,608 | Noncash share-based compensation | — | — | 24,608 | — | — | — | — | 24,608 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (537 | ) | (537 | ) | Other comprehensive loss | — | — | — | — | — | — | (537) | (537) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (69,081 | ) | — | (69,081 | ) | Net loss | — | — | — | — | — | (69,081) | — | (69,081) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 42,630,123 | $ | 47 | $ | 560,496 | 4,680,723 | $ | (29,847 | ) | $ | (361,789 | ) | $ | (3,911 | ) | $ | 164,996 | Balance at December 31, 2019 | 42,630,123 | $ | 47 | $ | 560,496 | 4,680,723 | $ | (29,847) | $ | (361,789) | $ | (3,911) | $ | 164,996 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock awards net settlement | Stock awards net settlement | 765,801 | 1 | (20,482) | — | — | — | — | (20,481) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from employee stock plans | Proceeds from employee stock plans | 65,457 | — | 2,824 | — | — | — | — | 2,824 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity component of convertible debt issuance, net | Equity component of convertible debt issuance, net | — | — | 47,215 | — | — | — | — | 47,215 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of Capped Call | Purchase of Capped Call | — | — | (25,335) | — | — | — | — | (25,335) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrant exercise | Warrant exercise | 163 | — | — | — | — | — | — | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncash share-based compensation | Noncash share-based compensation | — | — | 24,322 | — | — | — | — | 24,322 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | Other comprehensive loss | — | — | — | — | — | — | 480 | 480 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | Net loss | — | — | — | — | — | (76,984) | — | (76,984) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | Balance at December 31, 2020 | 43,461,544 | $ | 48 | $ | 589,040 | 4,680,723 | $ | (29,847) | $ | (438,773) | $ | (3,431) | $ | 117,037 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
PROS Holdings, Inc.
Notes to Consolidated Financial Statements
1. Organization and Nature of Operations
PROS Holdings, Inc., a Delaware corporation, through its operating subsidiaries (collectively, the "Company"), provides solutions that optimize the processes of selling and shopping in the digital economy. PROS solutions leverage artificial intelligence ("AI") solutions, self-learning and automation to ensure that power commerce in the digital economy by providingevery transactional experience is fast, frictionless and personalized buying experiences. PROS solutions enable dynamic buying experiences for every shopper, supporting both business-to-business ("B2B") and business-to-consumer ("B2C") companies across industry verticals. Companies can use the Company's selling, pricing, revenue optimization and eCommerce solutions to assess their market environments in real time to deliver customized prices and offers. The Company's solutions enable buyers to move fluidly across its customers’ direct sales, partner, online, mobile and partneremerging channels with personalized experiences regardless of which channel those buyers choose. The Company's decades of data science and AI expertise are infused into its solutions and are designed to reduce time and complexity through actionable intelligence. The Company provides standard configurations of its softwaresolutions based on the industries it serves and offers professional services to configure theseits solutions to meet the specific needs of each customer.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
These Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). Certain prior year amounts have been reclassified for consistency with the current year presentation. This insignificant reclassification had no effect on the reported results of operations. License revenue and license cost of revenue are now combined with subscription revenue and subscription cost of revenue, respectively.
Risks and uncertainties
Coronavirus ("COVID-19") continues to spread throughout the U.S. and the world and compliance with the various containment measures implemented by governmental authorities has impacted the Company's business, as well as the businesses of its customers, suppliers and other counterparties, and this impact could last for an indefinite period of time. There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 as a global pandemic, and as a result, the Company is unable to predict the full impact that COVID-19 will have on its results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures.
Changes in Accounting Policies
The Company has consistently applied the accounting policies described in this Note 2 to all periods presented in these Consolidated Financial Statements, except for the Company's adoption of certain accounting standards described in more detail under "Recently adopted accounting pronouncements" in this Note 2 below.
Dollar Amounts
The dollar amounts presented in the tabular data within these footnote disclosures are stated in thousands of dollars, except per share amounts, or as noted within the context of each footnote disclosure.
Use of Estimates
The preparation of these Consolidated Financial Statements in conformity with GAAP requires the Company to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses during the reporting period. The complexity and judgment required in the Company's estimation process, as well as issues related to the assumptions, risks and uncertainties inherent in determining the nature and timing of satisfaction of performance obligations and determining the standalone selling price of performance obligations, affect the amounts of revenue, expenses, unbilled receivables and deferred revenue. Estimates are also used for, but not limited to, receivables, allowance for doubtful
9
accounts, the determination of the period of benefit for deferred commissions, operating lease right-of-use assets and operating lease liabilities, useful lives of assets, depreciation and amortization, fair value of assets acquired and liabilities assumed for business combinations, income taxes and deferred tax asset valuation, valuation of stock options, other current liabilities and accrued liabilities. Numerous internal and external factors can affect estimates. Actual results could differ from those estimates and such differences could be material to the Company's consolidated financial position and results of operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase, or the ability to be settled in cash within a period of three months, to be cash equivalents, except for commercial paper which is classified as short-term investments, if any. The Company has a cash management program that provides for the investment of excess cash balances, primarily in short-term money market instruments.
Trade and Other Receivables
Trade and other receivables are primarily comprised of trade receivables, net of allowance for doubtful accounts, contract assets and unbilled receivables. The Company records trade accounts receivable for its unconditional rights to consideration arising from the Company's performance under contracts with customers. The Company's standard billing terms are that payment is due upon receipt of invoice, payable generally within thirty to sixty days. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. TheWhen developing its estimate of expected credit losses on trade and other receivables, the Company estimates its allowance for doubtful accounts for specific trade receivable balances based on historical collection trends,considers the ageavailable information relevant to assessing the collectability of outstanding trade receivables, existing economiccash flows, which includes a combination of both internal and external information relating to past events, current conditions, and any financial security associated withfuture forecasts as well as relevant qualitative and quantitative factors that relate to the receivables.
Contract assets represent conditional rights to consideration that have been recognized as revenue in advance of billing the customer. Unbilled receivables represent unconditional rights to consideration arising from contingent revenue that have been recognized as revenue in advance of billing the customer.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist primarily of prepaid third-party software subscription and license fees, deferred project costs and prepaid income taxes.
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation. Maintenance, repairs and minor replacements are charged to expense as incurred. Significant renewals and betterments are capitalized. Depreciation on property and equipment, with the exception of leasehold improvements, is recorded using the straight-line method over the estimated useful lives of the assets. Depreciation on leasehold improvements is recorded using the shorter of the lease term or useful life. When property is retired or disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gains or losses are reflected in the Consolidated Statements of Comprehensive Income (Loss) in the period of disposal.
Internal-Use Software
Costs incurred to develop internal-use software during the application development stage are capitalized, stated at cost, and depreciated using the straight-line method over the estimated useful lives of the assets. Application development stage costs generally include salaries and personnel costs and third-party contractor expenses associated with internal-use software development, configuration and coding. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose. Capitalized internal-use software is included in property and equipment, net in the Consolidated Balance Sheets.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, current operating lease liabilities and noncurrent operating lease liabilities in the Company's Consolidated Balance Sheet.
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ROU assets represent the Company’s right to use an underlying asset over the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company includes any anticipated lease incentives in the determination of lease liability.
The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when determining its incremental borrowing rates.
The Company’s lease terms will include options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recorded on the Company's unaudited condensed consolidated balance sheet. The Company’s lease agreements do not contain any residual value guarantees.
Deferred Costs
Sales commissions earned by the Company's sales representatives are considered incremental and recoverable costs of obtaining a customer contract. Sales commissions are deferred and amortized on a straight-line basis over the period of benefit, which the Company has determined to be five to eight years. The Company determined the period of benefit by taking into consideration its customer contracts, expected renewals of those customer contracts (as the Company currently does not pay an incremental sales commission)commission for renewals), the Company's technology and other factors. The Company also defers amounts earned by employees other than sales representatives who earn incentive payments under compensation plans that are also tied to the value of customer contracts acquired.
Deferred Implementation Costs
The Company capitalizes certain contract fulfillment costs, including employee-relatedpersonnel and other costs (such as hosting, employee salaries, benefits and payroll taxes), that are associated with arrangements where professional services are not distinct from other undelivered obligations in its customer contracts. The Company analyzes implementation costs and capitalizes those costs that are directly related to customer contracts that are expected to be recoverable and enhance the resources which will be used to satisfy the undelivered performance obligations in those contracts. Deferred implementation costs are amortized ratably over the remaining contract term once the revenue recognition criteria for the respective performance obligation has been met and revenue recognition commences. Deferred implementation costs are included in prepaid and other current assets and other assets, noncurrent in the Consolidated Balance Sheets. Amortization of deferred implementation costs is included in cost of subscription and cost of services revenues in the Consolidated Statements of Comprehensive Income (Loss).
Deferred Revenue
Deferred revenue primarily consists of customer invoicing in advance of revenues being recognized. The Company generally invoices its customers annually in advance for subscription services and maintenance and support services. Deferred revenue that is anticipated to be recognized during the next twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent deferred revenue.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes comparison of future cash flows expected to be generated by the asset or group of assets with the associated assets’ carrying value. If the carrying value of the asset or group of assets exceeds its expected future cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value. The Company did not identify any impairment indicators and recorded 0 impairment charges in the year ended December 31, 2020, 2019 2018 and 2017.2018.
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Intangible Assets and Goodwill
Intangible assets that have finite lives are amortized over their useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During this review, the Company reevaluates the significant assumptions used in determining the original cost and estimated lives of the intangible assets. Although the assumptions may vary from asset to asset, they generally include operating results, changes in the use of the asset, cash flows and other indicators of value. Management then determines whether the remaining useful life continues to be appropriate or whether there has been an impairment of the intangible assets based primarily upon whether expected future undiscounted cash flows are sufficient to support the assets’ recovery. If impairment exists, the Company would adjust the carrying value of the asset to fair value, generally determined by a discounted cash flow analysis.
Goodwill represents the excess of the purchase consideration over the net of the acquisition-date fair value of identifiable assets acquired, including identifiable intangible assets, and liabilities assumed in connection with business combinations. Goodwill is not amortized but is assessed for impairment as of November 30 of each fiscal year, or more frequently if events or changes in circumstances indicate that the fair value of the Company’s sole reporting unit has been reduced below its carrying value. When conducting the annual goodwill impairment assessment, a two-step process is used. The first step is to perform an optional qualitative evaluation as to whether it is more likely than not that the fair value of the Company’s sole reporting unit is less than its carrying value, using an assessment of relevant events and circumstances. In performing this assessment, the Company is required to make assumptions and judgments including but not limited to an evaluation of macroeconomic conditions as they relate to the business, industry and market trends, as well as the overall future financial performance of the reporting unit and future opportunities in the markets in which it operates. If it is determined that it is not more likely than not that the fair value of the reporting unit is less
than its carrying value, no additional tests are required to be performed in assessing goodwill for impairment. However, if the Company concludes otherwise or elects not to perform the qualitative assessment, the Company performs a second step, consisting of a quantitative assessment of goodwill impairment. This quantitative assessment requires the Company to compare the fair value of its reporting unit with its carrying value. If the carrying amount exceeds the fair value, an impairment charge will be recognized, however, loss cannot exceed the total amount of goodwill allocated to the reporting unit. Based on the results of the qualitative review of goodwill performed as of November 30, 2019,2020, the Company did not identify any indicators of impairment. As such, the quantitative assessment described above was not necessary.
Equity Investments
Investments in equity securities of privately held companies without readily determinable fair value, where the Company does not exercise significant influence over the investee, are recorded at cost, less impairment and adjusted for subsequent observable price changes obtained from orderly transactions for identical or similar investments issued by the same investee. Adjustments resulting from impairment, fair value, or observable price changes are accounted for in the Consolidated Statements of Comprehensive Income (Loss).
Financial Instruments
The carrying amount of the Company’s financial instruments, which include cash equivalents, receivables and accounts payable, and equity investments approximates their fair values at December 31, 20192020 and 2018.2019. For additional information on the Company’s fair value measurements, see Note 10 to the Consolidated Financial Statements.
Convertible Senior Notes
In accounting for the issuance of the Notes, the Company separates each of the Notes into liability and equity components. The carrying amounts of the liability components are calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity components representing the conversion option are determined by deducting the fair value of the liability components from the par value of the respective Notes. These differences represent debt discounts that are amortized to interest expense over the respective terms of the Notes using the effective interest rate method. The equity components are not remeasured as long as they continue to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the Company allocates the total amount of issuance costs incurred to the liability and equity components based on their relative values. Issuance costs attributable to the liability components are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the respective terms of the Notes. The issuance costs attributable to the equity components are netted against the respective equity components in additional paid-in capital.
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Research and Development
Research and development costs for software sold to customers are expensed as incurred. These costs include salaries and personnel costs, including employee benefits, third-party contractor expenses, software development tools, an allocation of facilities and depreciation expenses and other expenses in developing new solutions and upgrading and enhancing existing solutions.
Software Development Costs
Capitalization of software development costs for software to be sold, leased, or otherwise marketed begins upon the establishment of technological feasibility, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material.
Treasury Stock
The Company is authorized to make treasury stock purchases in the open market pursuant to the share repurchase program, which was approved by its Board of Directors on August 28, 2008. The Company accounts for the purchase of treasury stock under the cost method. For additional information on the Company’s stock repurchase program, see Note 12 to the Consolidated Financial Statements. There were no treasury stock repurchases under the program for the years ended December 31, 2020, 2019 2018 and 2017.2018.
Revenue Recognition
The Company derives its revenues primarily from subscriptionsubscriptions, services, professional services, perpetual licensing of its software products and associated software maintenance and support services.
The Company determines revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the customer contract(s);
•Determination of the transaction price;
•Allocation of the transaction price to each performance obligation in the customer contract(s); and
•Recognition of revenue when, or as, the Company satisfies a performance obligation.
Subscription services revenue
Subscription servicesrevenue primarily include customerconsists of fees that give customers access to one or more of the Company's cloud applications and associatedwith related customer support. Subscription servicesThe Company primarily recognizes subscription revenue is generally recognized ratably over the contractual subscription term of the arrangement beginning with commencement of service. Subscription revenue related to certain offerings, where fees are based on the date that the Company's subscription service is made available to the customer.a number of transactions, are recognized on a usage basis. The Company's subscription contracts do not provide customers with the right to take possession of the software supporting the service and, as a result, are accounted for as service contracts. The Company's subscription contracts are generally two to five years in length, billed annually in advance, and non-cancelable.
Maintenance and support revenue
Maintenance and support revenue includes post-implementation customer support for on-premises licenses and the right to unspecified software updates and enhancements. The Company recognizes revenue from maintenance and support arrangements ratably over the period in which the services are provided. The Company's maintenance and support contracts are generally one to three yearsyear in length, billed annually in advance, and non-cancelable.
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Services revenue
SProfessional serviceservices revenue primarily consists of fees for deployment and configuration services, as well as training services. Professionalconsulting and training. The Company typically sells its services either on a fixed-fee or time-and-material basis. Services revenue is generally recognized as the services are renderedperformed for time and material contracts, or on a proportional performance basis for fixed feefixed-price contracts. The majority of the Company's professional servicesServices contracts are on a fixed feefixed-fee basis. Training revenue is recognized as the services are rendered.
Significant judgment isjudgments are required in determining whether professional services that are contained in athe Company's customer subscription contracts are considered distinct, including whether the services contract are capable of being distinct and whether they are separately identifiable in the customer contract. Professional services determinedidentifiable. Services deemed to be distinct are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If the professionaldetermined services are not determined to beconsidered distinct, the professional services and the subscription services are accounted for asdetermined to be a single performance obligation and revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer.
Customer contracts with multiple performance obligations
A portion of the Company's customer contracts contain multiple performance obligations. Significant judgment is required in determining whether multiple performance obligations contained in a single customer contract are capable of being distinct and are separately identifiable. An obligation determined to be distinct is accounted for as a separate performance obligation and
revenue for that separate performance obligation is recognized when, or as, the Company satisfies the performance obligation. If obligations are not determined to be distinct, those obligations are accounted for as a single, combined performance obligation. The transaction price is allocated to each performance obligation on a relative standalone selling price basis.
Disaggregation of revenue
The Company categorizes revenue from external customers by geographic area based on the location of the customer's headquarters. For additional information regarding the Company's revenue by geography, see Note 19 to the Consolidated Financial Statements.
Foreign Currency
The Company has contracts denominated in foreign currencies and therefore a portion of the Company’s revenue is subject to foreign currency risks. Gains and losses from foreign currency transactions, such as those resulting from the settlement of receivables, are classified in other income (expense), net included in the accompanying Consolidated Statements of Comprehensive Income (Loss).
The functional currency of PROS France SAS ("PROS France") is the Euro. The financial statements of this subsidiary are translated into U.S. dollars using period-end rates of exchange for assets and liabilities, historical rates of exchange for equity, and average rates of exchange for the periodperiod for revenue and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of stockholders’ equity.
Noncash Share-Based Compensation
The Company has two noncash share-based compensation plans, the 2007 Equity Incentive Plan ("2007 Stock Plan") and the 2017 Equity Incentive Plan ("2017 Stock Plan"), which authorize the discretionary granting of various types of stock awards to key employees, officers, directors and consultants. The 2007 Stock Plan expired in March 2017. The 2017 Stock Plan serves as the successor to the 2007 Stock Plan and was adopted in May 2017. The Company may provide noncash share-based compensation through the grant of: (i) restricted stock awards; (ii) restricted stock unit awards - time, performance and market-based ("RSUs"); (iii) stock options; (iv) stock appreciation rights ("SARs"); (v) phantom stock; and (vi) performance awards, such as market stock units ("MSUs").
To date, the Company has granted stock options, SARs, RSUs, time, performance and market-based, and MSUs. The Company issues common stock from its pool of authorized stock upon exercise of stock options, settlement of SARs and MSUs or upon vesting of RSUs.
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The following table presents the number of awards outstanding for each award type as of December 31, 20192020 and 20182019 (in thousands):
| Year Ended December 31, | |||||
| Award type | 2019 | 2018 | |||
| Restricted stock units (time-based) | 1,893 | 1,969 | |||
| Restricted stock units (performance-based) | 114 | — | |||
| Restricted stock units (market-based) | — | 215 | |||
| Stock appreciation rights | 65 | 287 | |||
| Market stock units | 267 | 419 | |||
| Year Ended December 31, | |||||||||||
| Award type | 2020 | 2019 | |||||||||
| Restricted stock units (time-based) | 1,802 | 1,893 | |||||||||
| Restricted stock units (performance-based) | 162 | 114 | |||||||||
| Stock appreciation rights | 28 | 65 | |||||||||
| Market stock units | 111 | 267 | |||||||||
Stock options. The Company did not grant stock options during 20192020 and 2018.2019. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model.
Restricted stock units. The fair value of the RSUs (time-based and performance-based) is based on the closing price of the Company’s stock on the date of grant and is amortized over the vesting period. RSUs include (i) time-based awards and (ii) performance-based awards in which the number of shares that vest are based upon achievement of certain internal performance metrics set by the Company, and (iii) market-based awards in which the number of shares that vest are based upon attainment of target average per share closing price over a requisite trading period. Market-based RSUs vest if the average trailing closing price of the Company's common stock meets certain minimum performance hurdles for at least 105 calendar days prior to September 9, 2020, with 25% vesting at $27, an additional 25% vesting at $33, and the remaining 50% vesting at $41. The Company estimates the fair value and the derived service period of the market-based RSUs on the date of grant using a Monte Carlo simulation model.Company.
Stock appreciation rights. SARs will be settled in stock at the time of exercise and vest over four years from the date of grant. The Company used the Black-Scholes option pricing model to estimate the fair value of its SARs. The determination of the fair value of SARs utilizing the Black-Scholes model is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected life, delivery of risk-free interest rate and expected dividends. The Company estimates the expected volatility of common stock at the date of grant based on a combination of its historical volatility and the average volatility of comparable companies. The expected life of the SARs noncash share-based payment awards is a historical weighted average of the expected lives of similar securities of comparable public companies. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of the Company’s awards. The dividend yield assumption is based on the Company's expectation of paying no dividends.
Market stock units. MSUs are performance-based awards that vest based upon the Company’s relative shareholder return. The actual number of MSUs that will be eligible to vest is based on the total shareholder return of the Company relative to the total shareholder return of the Russell 2000 Index ("Index") over a 3-year period ending February 28, 2019, February 28, 2020, October 9, 2020 and December 31, 2020 ("Performance Period"), respectively. The MSUs vested on March 1, 2019,2020 and October 9, 2020, and will vest on March 1, 2020, October 9, 2020 and January 10, 2021, respectively. The maximum number of shares issuable upon vesting is 200% of the MSUs initially granted based on the average price of the Company's common stock relative to the Index during the Performance Period. The Company estimates the fair value of MSUs on the date of grant using a Monte Carlo simulation model. The determination of the fair value of the MSUs is affected by the Company’s stock price and a number of assumptions including the expected volatility of the Company’s stock and the Index, its risk-free interest rate and expected dividends. The Company’s expected volatility at the date of grant was based on the historical volatilities of the Company and the Index over the Performance Period.
As the Company issues stock options and SARs, it evaluates the assumptions used to value its stock option awards and SARs. If factors change and the Company employs different assumptions, noncash share-based compensation expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned noncash share-based compensation expense. Future noncash share-based compensation expense and unearned noncash share-based compensation will increase to the extent that the Company grants additional equity awards to employees.
At December 31, 2019,2020, there were an estimated $43.1$55.9 million of total unrecognized compensation costs related to noncash share-based compensation arrangements. These costs will be recognized over a weighted average period of 2.5 years. For further discussion of the Company’s noncash share-based compensation plans, see Note 14 to the Consolidated Financial Statements.
Income Taxes
The Company uses the asset and liability method to account for income taxes, including recognition of deferred tax assets and liabilities for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax basis. The Company reviews its deferred tax assets for recovery. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in the valuation allowance from period to period are included in the Company’s tax provision in the period of change.
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The Company accounts for uncertain income tax positions recognized in an enterprise’s financial statements in accordance with the income tax topic of the ASC issued by the FASB. This interpretation requires companies to use a prescribed model for assessing the financial recognition and measurement of all tax positions taken or expected to be taken in its tax returns. This guidance provides clarification on recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. The Company recognized accrued interest and penalties related to income taxes as a component of income tax expense. For additional information regarding the Company’s income taxes, see Note 15 to the Consolidated Financial Statements.
Segment Reporting
The Company reports as one operating segment with the Chief Executive Officer ("CEO") acting as the Company’s chief operating decision maker. The Company’s CEO reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has a single reporting unit, and there are no segment managers who are held accountable for operations, operating results or components below the consolidated unit level.
Earnings Per Share
The Company computes basic earnings (loss) per share by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by giving effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible notes using the if-converted method. Dilutive potential common shares consist of shares issuable upon the exercise of stock options, shares of unvested restricted stock units and market stock units, and settlement of stock appreciation rights. When the Company incurs a net loss, the effect of the Company's outstanding stock options, stock appreciation rights, restricted stock units, market stock units and convertible notes are not included in the calculation of diluted earnings (loss) per share as the effect would be anti-dilutive. Accordingly, basic and diluted net loss per share are identical.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("Topic 326"), in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. Topic 326 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in current GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. The Company adopted Topic 326 as of January 1, 2020using the modified retrospective method and there was no material impact on the Company's unaudited condensed consolidated financial statements as of the adoption date. As of December 31, 2020, the Company has recorded allowance for doubtful accounts related to trade receivables of $4.1 million primarily due to increased credit risk from uncertain economic conditions caused by COVID-19.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("Topic 842"), which requires the lessee to recognize most leases on the balance sheet thereby resulting in the recognition of right-of-use ("ROU") assets and lease liabilities for those leases currently classified as operating leases. Lessor accounting remains largely unchanged from current guidance, however, Topic 842 provides improvements that are intended to align lessor accounting with the lessee model and with updated revenue recognition guidance. This standard took effect in the first quarter of 2019, including interim periods within that reporting period. The Company adopted Topic 842 as of January 1, 2019 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balances of operating ROU assets and lease liabilities, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under the prior lease accounting rules in ASC 840, "Leases".
In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract" ("Subtopic 350-40"). The amendment aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred to develop or obtain an internal-use software. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019; early adoption is permitted. The Company early adopted Subtopic 350-40 prospectively effective January 1, 2019 and there was no impact on the Company's Consolidated Financial Statements as of the adoption date. During the yearyears ended December 31, 2020 and 2019, the Company capitalized implementation cost in result of
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adoption of the standard which affected the prepaid and other current assets and other assets, noncurrent line items in the Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("Topic 350"), which eliminates step two from the goodwill impairment test. Under the amendments in this standard, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The standard is effective for interim and annual reporting periods beginning after December 15, 2019; earlier adoption is permitted for goodwill impairment tests performed after January 1, 2017. The Company early adopted Topic 350 effective October 1, 2019 and there was no impact on its Consolidated Financial Statements in result of the standard adoption.
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, " Revenue from Contracts with Customers (Topic 606) " ("Topic 606"). Topic 606 replaces the prior revenue recognition requirements in ASC 605, "Revenue Recognition" ("Topic 605" or "Prior Guidance") with a comprehensive revenue measurement and recognition standard, and expanded disclosure requirements. The new standard also provides guidance on the recognition of costs related to obtaining customer contracts. Topic 606 took effect in the first quarter of 2018, including interim periods within that reporting period. The Company adopted Topic 606 and applied Topic 606 to those contracts which were not complete as of January 1, 2018 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of accumulated deficit, while prior period amounts were not adjusted and continue to be reported in accordance with the Company's historic accounting under the Prior Guidance. See Note 2 - Summary of Significant Accounting Policies to the Consolidated Financial Statements included in form 10-K for the year ended December 31, 2018, regarding the impact of Topic 606 adoption on the Consolidated Financial Statements.
Recent Accounting Pronouncements
In June 2016,August 2020, the FASB issued ASU 2016-13,2020-06, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial InstrumentsDebt - Debt with Conversion and Other Options ("Topic 326"Subtopic 470-20") and Derivatives and Hedging - Contracts in an Entity's Own Equity ("Subtopic 815-40"), which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in orderan entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. This new standard is effective for the Company's interim and annual periods beginning January 1, 2022, and earlier adoption is permitted on January 1, 2021. The Company may elect to improve financial reportingapply the amendments on a retrospective or modified retrospective basis. The Company will early adopt the new standard effective January 1, 2021 on the modified retrospective basis. The adoption is expected to increase convertible debt, net, noncurrent by approximately $70.6 million excluding the impact of expected credit losses on financial instruments and other commitments to extend credit. Topic 326 requires that an entity measure and recognize expected credit losses for financial assets held at amortizeddebt issuance cost and replaces the incurred loss impairment methodology in current GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. While theequity conversion component. The Company is currently continuing to assess the potential impactsimpact of Topic 326, it does not expect the newadoption of the standard to have a material effect on its Consolidated Financial Statements.financial statements.
With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2019,2020, that are of significance or potential significance to the Company.
3. Business Combination
Travelaer
On August 14, 2019, the Company acquired Travelaer SAS ("Travelaer"), a privately held company based near Nice, France, for a total cash consideration, net of cash acquired, of approximately $10.5 million. Travelaer is a digital innovator for the travel industry with a focus on improving the customer experience across all phases of travel, and brings an internet booking engine and NDCNew Distribution Capability platform to the Company's portfolio. The Company has included the financial results of Travelaer in the Consolidated Financial Statements from the date of the acquisition, which have not been material to date. The transaction cost associated with the acquisition was $0.5 million for the year ended December 31, 2019.
The Company accounted for the transaction as a business combination and all of the assets acquired and the liabilities assumed in the transaction have been recognized at their acquisition date fair values. The Company recorded approximately $2 million for developed technology and customer relationships with estimated useful lives of seven years and five years, respectively. The Company recorded approximately $11 million of goodwill which is primarily related to the assembled workforce and expanded market opportunities from integrating Travelaer's technology with the Company's solutions. The goodwill balance is not deductible for U.S. income tax purposes. The Company expects to finalize the valuation as soon as practicable, but no later than one year from the acquisition date.
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| Cash | $ | 1,822 | |
| Other current assets | 1,235 | ||
| Noncurrent assets | 86 | ||
| Intangibles | 18,600 | ||
| Goodwill | 17,052 | ||
| Accounts payable and accrued liabilities | (1,668 | ) | |
| Deferred revenue | (600 | ) | |
| Deferred tax liability | (526 | ) | |
| Noncurrent liabilities | (49 | ) | |
| Net assets acquired | $ | 35,952 | |
| Useful Life | |||||
| Amount | (years) | ||||
| Developed technology | $ | 11,600 | 7 | ||
| Customer relationships | 7,000 | 5 | |||
| Total | $ | 18,600 | |||
| Year Ended December 31, | |||
| (in thousands, except earnings per share) | 2017 | ||
| Total revenue | $ | 173,866 | |
| Net loss | (81,476 | ) | |
| Earnings per share - basic and diluted | $ | (2.58 | ) |
4. Trade and Other Receivables, Net
Accounts receivable at December 31, 20192020 and 2018,2019, consists of the following (in thousands):
| December 31, | |||||||
| 2019 | 2018 | ||||||
| Accounts receivable | $ | 59,606 | $ | 38,876 | |||
| Unbilled receivables and contract assets | 5,682 | 3,924 | |||||
| Total receivables | 65,288 | 42,800 | |||||
| Less: Allowance for doubtful accounts | (214 | ) | (978 | ) | |||
| Trade and other receivables, net | $ | 65,074 | $ | 41,822 | |||
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Accounts receivable | $ | 50,257 | $ | 59,606 | |||||||
| Unbilled receivables and contract assets | 3,443 | 5,682 | |||||||||
| Total receivables | 53,700 | 65,288 | |||||||||
| Less: Allowance for doubtful accounts | (4,122) | (214) | |||||||||
| Trade and other receivables, net | $ | 49,578 | $ | 65,074 | |||||||
The bad debt expense reflected in general and administrative expenses in the accompanying Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 2018 and 2017,2018, totaled approximately $4.8 million, $(0.6) million $0.2and $0.2 million, respectively. However, as a result of the ongoing and 0, respectively.uncertain economic conditions caused by COVID-19, the amount of bad debt expense recognized by the Company could vary in the near term depending on the ongoing impact of COVID-19 on the Company’s customers and inherently the related receivables.
5. Deferred Costs
Deferred costs, which primarily consist of deferred sales commissions, were $21.2$18.5 million and $17.5$21.2 million as of December 31, 20192020 and December 31, 2018,2019, respectively. Amortization expense for the deferred costs was $5.9 million,$4.8 million and $3.0 million for the year ended December 31, 2020, 2019 and 2018, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.
6. Deferred Implementation Costs
Deferred implementation costs, which related to certain customer contract fulfillment costs, were $4.4$2.9 million and $3.9$4.4 million as of December 31, 20192020 and December 31, 2018,2019, respectively. Amortization expense for the deferred implementation costs was $1.4 $1.8 million, $1.4 million and $0.6 million for the year ended December 31, 2020, 2019 and 2018, respectively. Deferred implementation costs are included in prepaid and other current assets and other assets, noncurrent in the Consolidated Balance Sheets. Amortization of deferred implementation costs is included in cost of subscription and cost of services revenues in the Consolidated Statements of Comprehensive Income (Loss). There was no impairment loss in relation to the costs capitalized for the periods presented.
7. Property and Equipment, Net
Property and equipment, net as of December 31, 20192020 and 20182019 consists of the following:
| December 31, | |||||||||
| Estimated useful life | 2019 | 2018 | |||||||
| Furniture and fixtures | 5-10 years | $ | 3,227 | $ | 3,208 | ||||
| Computers and equipment | 3-5 years | 15,388 | 19,644 | ||||||
| Software | 3-6 years | 7,302 | 5,432 | ||||||
| Capitalized internal-use software development costs | 3 years | 10,194 | 8,775 | ||||||
| Leasehold improvements | Shorter of lease term or useful life | 5,591 | 5,587 | ||||||
| Construction in progress | 794 | 20 | |||||||
| Property and equipment, gross | 42,496 | 42,666 | |||||||
| Less: Accumulated depreciation and amortization | (27,702 | ) | (27,990 | ) | |||||
| Property and equipment, net | $ | 14,794 | $ | 14,676 | |||||
| December 31, | |||||||||||||||||
| Estimated useful life | 2020 | 2019 | |||||||||||||||
| Furniture and fixtures | 5-10 years | $ | 6,248 | $ | 3,227 | ||||||||||||
| Computers and equipment | 3-5 years | 17,333 | 15,388 | ||||||||||||||
| Software | 3-6 years | 7,646 | 7,302 | ||||||||||||||
| Capitalized internal-use software development costs | 3 years | 12,217 | 10,194 | ||||||||||||||
| Leasehold improvements | Shorter of lease term or useful life | 20,709 | 5,591 | ||||||||||||||
| Construction in progress | 147 | 794 | |||||||||||||||
| Property and equipment, gross | 64,300 | 42,496 | |||||||||||||||
| Less: Accumulated depreciation and amortization | (27,796) | (27,702) | |||||||||||||||
| Property and equipment, net | $ | 36,504 | $ | 14,794 | |||||||||||||
Depreciation and amortization was approximately $8.0 million, $7.1 million $5.5and $5.5 million and $5.4 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. During the years ended December 31, 2020, 2019 2018 and 2017,2018, the Company disposed of approximately $8.3 million, $7.4 million $0.5 million and $1.8$0.5 million, respectively, of fully depreciated assets. During the year ended December 31, 2019,2020, the Company recognized no loss on disposal of assets and during the years ended 20182019 and 2017,2018, the Company recognized immaterial amounts of loss on disposal of certain non-fully depreciated assets, respectively. As of December 31, 20192020 and 2018,2019, the Company had approximately $10.7 million and $12.2 million, and $14.0 million, respectively, of fully depreciated assets in use.
18
During the years ended December 31, 20192020 and 2018,2019, the Company capitalized internal-use software development costs of approximately $1.4$1.7 million and $4.7$1.4 million, respectively, related to its subscription solutions. As of December 31, 2020 and 2019, $12.2 million and 2018, $9.6 million and $2.8 million, respectively, of capitalized internal-use software development costs were subject to amortization and $7.3 million and $4.1 million and $1.1 million, respectively, of capitalized internal-use software development costs were included in accumulated depreciation and amortization for the years ended December 31, 20192020 and 2018.2019.
NaN impairment was recorded for the years ended December 31, 2020, 2019 2018 and 2017.2018.
8. Leases
The Company has operating leases for data centers, computer infrastructure, corporate offices and certain equipment. These leases have remaining lease terms ranging from 1 year to 1413 years. Some of these leases include options to extend for up to 15 years, and some include options to terminate within 1 year. The Company includes options in the lease terms when it is reasonably certain that the Company will exercise that option.
As of December 31, 2019,2020, the Company did not have any finance leases.
The components of operating lease expense were as follows (in thousands):
| Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||
| Operating lease cost | $ | 11,632 | $ | 10,109 | |||||||
| Variable lease cost | 1,717 | 1,810 | |||||||||
| Sublease income | (375) | (332) | |||||||||
| Total lease cost | $ | 12,974 | $ | 11,587 | |||||||
| Year Ended December 31, 2019 | |||
| Operating lease cost | $ | 10,109 | |
| Variable lease cost | 1,810 | ||
| Sublease income | (332 | ) | |
| Total lease cost | $ | 11,587 | |
Operating lease expense was $4.3 million for the year ended December 31, 2018 under Topic 840, the predecessor of Topic 842.
Supplemental information related to leases was as follows (in thousands):
| Year Ended December 31, 2020 | Year Ended December 31, 2019 | ||||||||||
| Cash paid for amounts included in the measurement of lease liability: | |||||||||||
| Cash paid for operating lease liabilities | $ | 7,562 | $ | 5,883 | |||||||
| Right-of-use asset obtained in exchange for operating lease liability (1) | $ | 12,599 | $ | 34,418 | |||||||
| Year Ended December 31, 2019 | |||
| Cash paid for amounts included in the measurement of lease liability: | |||
| Operating cash flows from operating leases | $ | 5,883 | |
| December 31, 2020 | December 31, 2019 | |||||||||||||
| Weighted average remaining lease term: | ||||||||||||||
| Operating leases | 8.6 years | 7.1 years | ||||||||||||
| Weighted average discount rate: | ||||||||||||||
| Operating leases | 7.12 | % | 7.26 | % | ||||||||||
As of December 31, 2019,2020, maturities of lease liabilities were as follows (in thousands):
| Year Ending December 31, | Amount | |||
| 2020 | $ | 6,965 | ||
| 2021 | 8,745 | |||
| 2022 | 8,202 | |||
| 2023 | 4,630 | |||
| 2024 | 4,680 | |||
| 2025 and thereafter | 34,059 | |||
| Total operating lease payments | 67,281 | |||
| Less: Imputed interest | (23,510 | ) | ||
| Less: Anticipated lease incentive | (14,207 | ) | ||
| Total operating lease liabilities | $ | 29,564 | ||
| Year Ending December 31, | Amount | |||||||
| 2021 | $ | 9,580 | ||||||
| 2022 | 10,374 | |||||||
| 2023 | 11,378 | |||||||
| 2024 | 5,418 | |||||||
| 2025 | 4,265 | |||||||
| 2026 and thereafter | 31,867 | |||||||
| Total operating lease payments | 72,882 | |||||||
| Less: Imputed interest | (21,461) | |||||||
| Less: Anticipated lease incentive | (1,385) | |||||||
| Total operating lease liabilities | $ | 50,036 | ||||||
| Year Ending December 31, | Amount | |||
| 2019 | $ | 4,164 | ||
| 2020 | 1,649 | |||
| 2021 | 5,115 | |||
| 2022 | 6,181 | |||
| 2023 | 5,679 | |||
| 2024 and thereafter | 57,365 | |||
| Total minimum lease payments | $ | 80,153 | ||
9. Goodwill and Intangible Assets
The change in the carrying amount of goodwill for the years ended December 31, 20192020 and 2018,2019, was as follows (in thousands):
| Balance as of December 31, 2018 | $ | 38,231 | |||
| Goodwill acquired | 11,077 | ||||
| Foreign currency translation adjustments | (204) | ||||
| Balance as of December 31, 2019 | 49,104 | ||||
| Foreign currency translation adjustments | 940 | ||||
| Balance as of December 31, 2020 | $ | 50,044 | |||
| Balance as of December 31, 2017 | $ | 38,458 | |
| Purchase accounting adjustments | 252 | ||
| Foreign currency translation adjustments | (479 | ) | |
| Balance as of December 31, 2018 | 38,231 | ||
| Goodwill acquired | 11,077 | ||
| Foreign currency translation adjustments | (204 | ) | |
| Balance as of December 31, 2019 | $ | 49,104 | |
The goodwill balance related to PROS France and Travelaer is denominated in Euro and the goodwill balance related to PROS Travel Commerce, Inc. (formerly Vayant Travel Technologies, Inc.) ("Vayant") is denominated in the U.S. dollar.
Intangible assets consisted of the following as of December 31, (in thousands):
| December 31, 2020 | |||||||||||||||||||||||
| Weighted average useful life (years) | Gross Carrying Amount | Accumulated Amortization* | Net Carrying Amount | ||||||||||||||||||||
| Developed technology | 7 | $ | 27,700 | $ | 22,077 | $ | 5,623 | ||||||||||||||||
| Maintenance relationships | 8 | 3,608 | 3,259 | 349 | |||||||||||||||||||
| Customer relationships | 6 | 12,513 | 10,144 | 2,369 | |||||||||||||||||||
| Acquired technology | 2 | 1,925 | 1,925 | 0 | |||||||||||||||||||
| Total | $ | 45,746 | $ | 37,405 | $ | 8,341 | |||||||||||||||||
| December 31, 2019 | |||||||||||||
| Weighted average useful life (years) | Gross Carrying Amount | Accumulated Amortization* | Net Carrying Amount | ||||||||||
| Developed technology | 7 | $ | 26,839 | $ | 17,653 | $ | 9,186 | ||||||
| Maintenance relationships | 8 | 3,451 | 2,790 | 661 | |||||||||
| Customer relationships | 6 | 12,439 | 8,478 | 3,961 | |||||||||
| Acquired technology | 2 | 1,925 | 1,128 | 797 | |||||||||
| Total | $ | 44,654 | $ | 30,049 | $ | 14,605 | |||||||
| December 31, 2019 | |||||||||||||||||||||||
| Weighted average useful life (years) | Gross Carrying Amount | Accumulated Amortization* | Net Carrying Amount | ||||||||||||||||||||
| Developed technology | 7 | $ | 26,839 | $ | 17,653 | $ | 9,186 | ||||||||||||||||
| Maintenance relationships | 8 | 3,451 | 2,790 | 661 | |||||||||||||||||||
| Customer relationships | 6 | 12,439 | 8,478 | 3,961 | |||||||||||||||||||
| Acquired technology | 2 | 1,925 | 1,128 | 797 | |||||||||||||||||||
| Total | $ | 44,654 | $ | 30,049 | $ | 14,605 | |||||||||||||||||
*Cumulative foreign currency translation adjustments, reflecting movement in the currencies of the underlying entities, decreased total intangible assets by approximately $0.1 million as of December 31, 2019.
20
| December 31, 2018 | |||||||||||||
| Weighted average useful life (years) | Gross Carrying Amount | Accumulated Amortization* | Net Carrying Amount | ||||||||||
| Developed technology | 7 | $ | 25,584 | $ | 13,890 | $ | 11,694 | ||||||
| Maintenance relationships | 8 | 3,485 | 2,488 | 997 | |||||||||
| Customer relationships | 6 | 11,802 | 6,884 | 4,918 | |||||||||
| Acquired technology | 2 | 1,925 | 180 | 1,745 | |||||||||
| Total | $ | 42,796 | $ | 23,442 | $ | 19,354 | |||||||
Intangible asset amortization expense for the years ended December 31, 2020, 2019 and 2018 and 2017 was$6.3 million, $6.8 million $7.6 million and $5.2$7.6 million, respectively. As of December 31, 2019,2020, the expected future amortization expense for the acquired intangible assets for each of the five succeeding years and thereafter was as follows (in thousands):
| Year Ending December 31, | Amount | |||
| 2020 | $ | 6,272 | ||
| 2021 | 3,372 | |||
| 2022 | 2,179 | |||
| 2023 | 1,545 | |||
| 2024 | 970 | |||
| 2025 and thereafter | 267 | |||
| Total amortization expense | $ | 14,605 | ||
| Year Ending December 31, | Amount | |||||||
| 2021 | $ | 3,391 | ||||||
| 2022 | 2,180 | |||||||
| 2023 | 1,547 | |||||||
| 2024 | 971 | |||||||
| 2025 | 156 | |||||||
| 2026 and thereafter | 96 | |||||||
| Total amortization expense | $ | 8,341 | ||||||
10. Fair Value Measurements
The Company adopted fair value measurements guidance for financial and nonfinancial assets and liabilities. The guidance defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements.
The guidance defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. The guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for similar assets or liabilities in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
A portion of the Company’s existing cash and cash equivalents are invested in short-term interest bearing obligations with original maturities less than 90 days, principally various types of money market funds. The Company does not enter into investments for trading or speculative purposes.
At December 31, 20192020 and 2018,2019, the Company had approximately $273.1$301.3 million and $268.6$273.1 million invested in treasury money market funds. The fair value of the treasury money market funds is determined based on quoted market prices, which represents level 1 in the fair value hierarchy as defined by Accounting Standard Codification ("ASC") 820, "Fair Value Measurement and Disclosure."
The fair value of the Company's Notes is classified in the level 2 hierarchy. See Note 16 for further detail regarding the Notes.
As of December 31, 20192020 and 2018,2019, the Company had $2.3$2.6 million and $2.0$2.3 million, respectively, of equity securities in privately held companies. These investments are accounted for at cost, less impairment and adjusted for subsequent observable price changes obtained from orderly transactions for identical or similar investments issued by the same investee. The Company estimates the fair value of its equity investments by considering available information such as pricing in recent rounds of financing and any other readily available market data, which represents level 3 in the fair value hierarchy. An impairment charge to current earnings is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. As of December 31, 2020, 2019 and 2018 the Company determined there were no other-than-temporary impairments on its equity investments.
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11. Deferred Revenue and Performance Obligations
Deferred Revenue
For the year ended December 31, 20192020 and 2018,2019, the Company recognized approximately $96.4$120.9 million and $74.6$96.4 million, respectively, in each case of revenue that was included in the deferred revenue balances at the beginning of the respective periods and primarily related to subscription services, maintenance and support, and other services.
Performance Obligations
As of December 31, 2019,2020, the Company expects to recognize approximately $403.7$389.7 million of revenue from remaining performance obligations. The Company expects to recognize revenue on approximately $188.3 $178.9 million of these performance obligations over the next 12 months, with the balance recognized thereafter. However, as a result of the ongoing and uncertain economic conditions caused by COVID-19, the amount of revenue recognized from the Company's contractual remaining performance obligations could vary and be less than what the Company expects as revenue recognized could be delayed or not occur depending on the ongoing impact of COVID-19.
12. Stockholders’ equity
Equity Offering
In August 2018, the Company completed a follow-on public offering of 3,800,000 shares of the Company's common stock at an offering price of $34 per share (the "Secondary Offering"). Additionally, as part of the Secondary Offering the underwriters exercised, in full, their over-allotment option to purchase an additional 570,000 shares of the Company's common stock at the offering price of $34 per share. The aggregate gross proceeds from the Secondary Offering, including the exercise of the over-allotment, were $148.6 million, and net proceeds received after underwriting fees and offering expenses were approximately $142.0 million.
Stock Repurchase
On August 25, 2008, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to purchase up to $15.0 million of the Company’s outstanding shares of common stock. Under the board-approved repurchase program, share purchases may be made from time to time in the open market or through privately negotiated transactions depending on market conditions, share price, trading volume and other factors, and such purchases, if any, will be made in accordance with applicable insider trading and other securities laws and regulations. These repurchases may be commenced or suspended at any time or from time to time without prior notice.
The Company did not repurchase any shares under this plan for the years ended December 31, 20192020 and 2018.2019. The remaining amount available to purchase common stock under this plan was $10.0 million as of December 31, 2019.2020.
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
| For the Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Numerator: | |||||||||||||||||
| Net loss | $ | (76,984) | $ | (69,081) | $ | (64,246) | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted average shares (basic) | 43,301 | 40,232 | 34,465 | ||||||||||||||
| Dilutive effect of stock options, SARs, RSUs, MSUs and convertible notes | 0 | 0 | 0 | ||||||||||||||
| Weighted average shares (diluted) | 43,301 | 40,232 | 34,465 | ||||||||||||||
| Basic earnings per share | $ | (1.78) | $ | (1.72) | $ | (1.86) | |||||||||||
| Diluted earnings per share | $ | (1.78) | $ | (1.72) | $ | (1.86) | |||||||||||
| For the Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Numerator: | |||||||||||
| Net loss | $ | (69,081 | ) | $ | (64,246 | ) | $ | (77,926 | ) | ||
| Denominator: | |||||||||||
| Weighted average shares (basic) | 40,232 | 34,465 | 31,627 | ||||||||
| Dilutive effect of stock options, restricted stock units and stock appreciation rights | — | — | — | ||||||||
| Weighted average shares (diluted) | 40,232 | 34,465 | 31,627 | ||||||||
| Basic earnings per share | $ | (1.72 | ) | $ | (1.86 | ) | $ | (2.46 | ) | ||
| Diluted earnings per share | $ | (1.72 | ) | $ | (1.86 | ) | $ | (2.46 | ) | ||
22
Dilutive potential common shares consist of shares issuable upon the exercise of stock options, settlement of SARs, and the vesting of RSUs and MSUs. Potential common shares determined to be antidilutive and excluded from diluted weighted average shares outstanding were approximately 2.11.4 million, 2.1 million and 2.02.1 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. Potential common shares related to the Notes determined to be antidilutive and excluded from diluted weighted average shares outstanding werewere 5.8 million and 2.2 million for the year ended December 31, 2020 and 2019.
14. Noncash Share-Based Compensation
Employee Noncash Share-based Compensation Plans
The Company has two noncash share-based compensation plans, the 2007 Stock Plan and the 2017 Stock Plan (collectively the "Stock Plans"). These plans authorize the discretionary granting of various types of stock awards to key employees, officers, directors and consultants. The discretionary issuance of stock awards generally contains vesting provisions ranging from one to four years.
2007 Stock Plan. The Company’s 2007 Stock Plan expired in March 2017 for purposes of granting future equity awards. As of December 31, 2019,2020, the Company had outstanding equity awards to acquire 726,451175,733 shares of its common stock held by the Company’s employees, directors and consultants under the 2007 Stock Plan (assuming MSU performance at 100% of the MSUs initially granted), and inclusive of 0 stock options, 551,351147,733 RSUs, 65,00028,000 SARs and 110,100 0 MSUs.
2017 Stock Plan. The Company’s 2017 Stock Plan provides for the issuance of awards to employees, officers, directors and certain other individuals providing services to the Company are eligible to receive awards. The 2017 Stock Plan reserved an aggregate amount of 4,550,000 shares for issuance. The Company may provide these incentives through the grant of: (i) restricted stock awards; (ii) RSUs (time, performance and market-based); (iii) stock options; (iv) SARs; (v) phantom stock; and (vi) performance awards, such as MSUs.
As of December 31, 2019,2020, the Company had outstanding equity awards to acquire 1,612,0261,927,109 shares of its common stock held by the Company’s employees, directors and consultants under the 2017 Stock Plan (assuming MSU performance at 100% of the MSUs initially granted), and inclusive of 1,455,4581,816,383 RSUs and 156,568110,726 MSUs. As of December 31, 2019, 2,466,2732020, 1,745,900 shares remain available for grant under the 2017 Stock Plan. As of December 31, 2019,2020, there were no options, SARs, restricted stock awards or phantom stock issued under the 2017 Stock Plan.
Noncash share-based compensation expense for all noncash share-based payment awards granted is determined based on the grant date fair value of the award. The Company recognizes compensation expense, net of estimated forfeitures, which represents noncash share-based awards expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term. Noncash share-based awards typically vest over four years. Stock options are generally granted for a ten-year term. The Company estimates forfeiture rates based on its historical experience for grant years where the majority of the vesting terms have been satisfied. Changes in estimated forfeiture rates are recognized through a cumulative catch-up
adjustment in the period of change and thus impact the amount of noncash share-based compensation expense to be recognized in future periods.
Noncash share-based compensation expense is allocated to expense categories on the Consolidated Statements of Comprehensive Income (Loss). The following table summarizes noncash share-based compensation expense, net of amounts capitalized, for the years ended December 31, 2020, 2019 2018 and 20172018 (in thousands).
| For the Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Share-based compensation: | |||||||||||||||||
| Cost of revenue | $ | 2,132 | $ | 2,025 | $ | 1,721 | |||||||||||
| Operating expenses: | |||||||||||||||||
| Selling and marketing | 6,536 | 5,995 | 4,396 | ||||||||||||||
| General and administrative | 9,670 | 11,451 | 10,717 | ||||||||||||||
| Research and development | 6,061 | 5,209 | 4,619 | ||||||||||||||
| Total included in operating expenses | 22,267 | 22,655 | 19,732 | ||||||||||||||
| Total share-based compensation expense | $ | 24,399 | $ | 24,680 | $ | 21,453 | |||||||||||
| For the Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Share-based compensation: | |||||||||||
| Cost of revenue | $ | 2,025 | $ | 1,721 | $ | 1,971 | |||||
| Operating expenses: | |||||||||||
| Selling and marketing | 5,995 | 4,396 | 4,348 | ||||||||
| General and administrative | 11,451 | 10,717 | 11,163 | ||||||||
| Research and development | 5,209 | 4,619 | 5,314 | ||||||||
| Total included in operating expenses | 22,655 | 19,732 | 20,825 | ||||||||
| Total share-based compensation expense | $ | 24,680 | $ | 21,453 | $ | 22,796 | |||||
23
At December 31, 2019,2020, there was an estimated $43.1$55.9 million of total unrecognized compensation costs related to noncash share-based compensation arrangements. These costs will be recognized over a weighted average period of 2.5 years.
Stock Options
For the years ended December 31, 20192020 and 2018,2019, respectively, the Company did not grant any stock options and had no stock options outstanding. The total intrinsic value of stock options exercised for the years ended December 31, 2020, 2019 2018 and 20172018 was 0, $2.5 million0 and $7.2$2.5 million, respectively.
RSUs (time-based)
The Company has granted time-based RSUs under the Stock Plans. Time-based RSUs granted to employees, directors and consultants vest in equal annual installments over a one to four-year period from the grant date.
The following table summarizes the Company's unvested time-based RSUs as of December 31, 2019,2020, and changes during the year then ended (number of shares and intrinsic value in thousands):
| Number of shares | Weighted average grant date fair value | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | ||||||||||||||||||||||||||||||||
Number of shares | Weighted average grant date fair value | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | ||||||||||||||||||||||||||||||||
| Unvested at December 31, 2018 | 1,969 | $ | 21.77 | ||||||||||||||||||||||||||||||||
| Unvested at December 31, 2019 | Unvested at December 31, 2019 | 1,893 | $ | 27.83 | |||||||||||||||||||||||||||||||
| Granted | 816 | 35.38 | Granted | 976 | 52.62 | ||||||||||||||||||||||||||||||
| Vested | (790 | ) | 21.01 | Vested | (814) | 23.88 | |||||||||||||||||||||||||||||
| Forfeited | (102 | ) | 23.98 | Forfeited | (253) | 39.25 | |||||||||||||||||||||||||||||
| Unvested at December 31, 2019 | 1,893 | $ | 27.83 | 2.02 | $ | 113,422 | |||||||||||||||||||||||||||||
| Expected to vest at December 31, 2019 | 1,775 | $ | 27.57 | 1.98 | $ | 106,340 | |||||||||||||||||||||||||||||
| Unvested at December 31, 2020 | Unvested at December 31, 2020 | 1,802 | $ | 41.44 | 2.03 | $ | 91,476 | ||||||||||||||||||||||||||||
| Expected to vest at December 31, 2020 | Expected to vest at December 31, 2020 | 1,653 | $ | 40.80 | 2.00 | $ | 83,909 | ||||||||||||||||||||||||||||
(1) The aggregate intrinsic value was calculated based on the fair value of the Company’s common stock on December 31, 20192020 of $59.92.$50.77.
The weighted average grant-date fair value of the time-based RSUs granted during the years ended December 31, 2020, 2019 and 2018 was $52.62, $35.38 and 2017 was $35.38, $27.61, and $21.63, respectively.
RSUs (performance-based)
During 2020 and 2019, the Company granted performance-based RSUs ("PRSUs") under the 2017 Stock Plan the Company granted 113,919 performance-based RSUs ("PRSUs") to certain executive employees. These PRSUs vest on January 13, 2023 and January 15, 2022 respectively, and the actual number of PRSUs that will be eligible to vest is based upon achievement of certain internal performance metrics, as defined by each award's plan documents or individual award agreements. The maximum number of shares issuable upon vesting is 200% of the PRSUs initially granted.
The following table summarizes the Company's unvested PRSUs as of December 31, 2019,2020, and changes during the year then ended (number of shares and intrinsic value in thousands):
| Number of shares | Weighted average grant date fair value | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | ||||||||||||||||||||||||||||||||
Number of shares | Weighted average grant date fair value | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | ||||||||||||||||||||||||||||||||
| Unvested at December 31, 2018 | — | $ | — | ||||||||||||||||||||||||||||||||
| Unvested at December 31, 2019 | Unvested at December 31, 2019 | 114 | $ | 33.05 | |||||||||||||||||||||||||||||||
| Granted | 114 | 33.05 | Granted | 76 | 54.23 | ||||||||||||||||||||||||||||||
| Vested | — | — | Vested | 0 | 0 | ||||||||||||||||||||||||||||||
| Forfeited | — | — | Forfeited | (28) | 39.46 | ||||||||||||||||||||||||||||||
| Unvested at December 31, 2019 | 114 | $ | 33.05 | 2.04 | $ | 6,826 | |||||||||||||||||||||||||||||
| Expected to vest at December 31, 2019 | 228 | $ | 33.05 | 2.04 | $ | 13,652 | |||||||||||||||||||||||||||||
| Unvested at December 31, 2020 | Unvested at December 31, 2020 | 162 | $ | 41.89 | 1.46 | $ | 8,243 | ||||||||||||||||||||||||||||
| Expected to vest at December 31, 2020 | Expected to vest at December 31, 2020 | 74 | $ | 33.05 | 1.04 | $ | 3,744 | ||||||||||||||||||||||||||||
(1) The aggregate intrinsic value was calculated based on the fair value of the Company’s common stock on December 31, 20192020 of $59.92.$50.77.
24
| Number of shares | Weighted average grant date fair value | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | |||||||||
| Unvested at December 31, 2018 | 215 | $ | 9.98 | |||||||||
| Granted | — | — | ||||||||||
| Vested | (215 | ) | 9.98 | |||||||||
| Forfeited | — | — | ||||||||||
| Unvested at December 31, 2019 | — | $ | — | 0 | $ | — | ||||||
| Expected to vest at December 31, 2019 | — | $ | — | 0 | $ | — | ||||||
SARs
The Company has granted SARs under the 2007 Stock Plan. TheThese SARs will be settled in stock at the time of exercise and vest four years from the date of grant subject to the recipient’s continued employment with the Company. The number of shares issued upon the exercise of the SARs is calculated as the difference between the share price of the Company’s stock on the date of exercise and the date of grant multiplied by the number of SARs divided by the share price on the exercise date.
The Company did not grant SARs in 2020, 2019 and 2018. The following table summarizes the Company's SARs activity for the year ended December 31, 20192020 (number of shares and intrinsic value in thousands):
| Stock appreciation rights | Weighted average exercise price | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | ||||||||||||||||||||||||||||||||
Stock appreciation rights | Weighted average exercise price | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | ||||||||||||||||||||||||||||||||
| Outstanding, December 31, 2018 | 287 | $ | 10.92 | ||||||||||||||||||||||||||||||||
| Outstanding, December 31, 2019 | Outstanding, December 31, 2019 | 65 | $ | 10.38 | |||||||||||||||||||||||||||||||
| Granted | — | — | Granted | 0 | 0 | ||||||||||||||||||||||||||||||
| Exercised | (222 | ) | 11.08 | Exercised | (37) | 9.59 | |||||||||||||||||||||||||||||
| Forfeited | — | — | Forfeited | 0 | 0 | ||||||||||||||||||||||||||||||
| Expired | — | — | Expired | 0 | 0 | ||||||||||||||||||||||||||||||
| Outstanding, December 31, 2019 | 65 | $ | 10.38 | 0.74 | $ | 3,220 | |||||||||||||||||||||||||||||
| Exercisable at December 31, 2019 | 65 | $ | 10.38 | 0.74 | $ | 3,220 | |||||||||||||||||||||||||||||
| Vested and expected to vest at December 31, 2019 | 65 | $ | 10.38 | 0.74 | $ | 3,220 | |||||||||||||||||||||||||||||
| Outstanding, December 31, 2020 | Outstanding, December 31, 2020 | 28 | $ | 11.42 | 0.16 | $ | 1,102 | ||||||||||||||||||||||||||||
| Exercisable at December 31, 2020 | Exercisable at December 31, 2020 | 28 | $ | 11.42 | 0.16 | $ | 1,102 | ||||||||||||||||||||||||||||
| Vested and expected to vest at December 31, 2020 | Vested and expected to vest at December 31, 2020 | 28 | $ | 11.42 | 0.16 | $ | 1,102 | ||||||||||||||||||||||||||||
(1) The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on December 31, 20192020 of $59.92$50.77 and the exercise price of the underlying SARs.
MSUs
In 2018 and 2017, the Company granted MSUs to certain executive employees under the Stock Plans. The MSUs are performance-based awards that vest based upon the Company’s relative shareholder return. The actual number of MSUs that will be eligible to vest is based on the total shareholder return of the Company relative to the total shareholder return of the Index over the 3-year Performance Period. The MSUs vested on March 1, 20192020 and October 9, 2020 and will vest on March 1, 2020, October 9, 2020 and January 10, 2021, respectively. The MSUs maximum number of shares issuable upon vesting is 200% of the MSUs initially granted. The companyCompany did not grant any MSUs in 2020 and 2019.
The following table summarizes the Company's MSUs activity for the year ended December 31, 20192020 (number of shares and intrinsic value in thousands):
| Number of unvested awards | Weighted average grant date fair value | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | ||||||||||||||||||||||||||||||||
Number of unvested awards | Weighted average grant date fair value | Weighted average remaining contractual term (year) | Aggregate intrinsic value (1) | ||||||||||||||||||||||||||||||||
| Unvested at December 31, 2018 | 419 | $ | 25.90 | ||||||||||||||||||||||||||||||||
| Unvested at December 31, 2019 | Unvested at December 31, 2019 | 267 | $ | 32.54 | |||||||||||||||||||||||||||||||
| Granted | — | — | Granted | 0 | 0 | ||||||||||||||||||||||||||||||
| Vested | (152 | ) | 14.29 | Vested | (150) | 28.03 | |||||||||||||||||||||||||||||
| Forfeited | — | — | Forfeited | (6) | 38.18 | ||||||||||||||||||||||||||||||
| Expired | — | — | Expired | 0 | 0 | ||||||||||||||||||||||||||||||
| Unvested at December 31, 2019 | 267 | $ | 32.54 | 0.64 | $ | 15,979 | |||||||||||||||||||||||||||||
| Unvested at December 31, 2020 | Unvested at December 31, 2020 | 111 | $ | 38.18 | 0.03 | $ | 5,622 | ||||||||||||||||||||||||||||
(1) The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on December 31, 20192020 of $59.92$50.77 and the grant date fair value of the underlying MSUs.
The Company estimates the fair value of MSUs on the date of grant using a Monte Carlo simulation model. The determination of the fair value of the MSUs is affected by the Company's stock price and a number of assumptions including the expected volatilities of the Company's stock and the Index, its risk-free interest rate and expected dividends. The Company's expected volatility at the date of grant was based on the historical volatilities of the Company and the Index over the Performance
Period. The Company did not estimate a forfeiture rate for the MSUs due to the limited size, the vesting period and nature of the grantee population and the lack of history of granting this type of award.
Significant assumptions used in the Monte Carlo simulation model for MSUs granted during the yearsyear ended December 31, 2018 and 2017 are as follows:
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| For the Year Ended December 31, | |||
| 2018 | 2017 | ||
| Volatility | 43.67% | 45.38% | |
| Risk-free interest rate | 2.12% | 1.56% | |
| Expected option life in years | 2.97 | 3.07 | |
| Dividend yield | — | — | |
| For the Year Ended December 31, | |||||||||||||||||
| 2018 | |||||||||||||||||
| Volatility | 43.67% | ||||||||||||||||
| Risk-free interest rate | 2.12% | ||||||||||||||||
| Expected option life in years | 2.97 | ||||||||||||||||
| Dividend yield | 0 | ||||||||||||||||
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") provides for eligible employees to purchase shares on an after-tax basis in an amount between 1% and 10% of their annual pay: (i) on June 30 of each year at a 15% discount of the fair market value of the Company's common stock on January 1 or June 30, whichever is lower, and (ii) on December 31 of each year at a 15% discount of the fair market value of the Company's common stock on July 1 or December 31, whichever is lower. An employee may not purchase more than $5,000 in either of the six-month measurement periods described above or more than $10,000 annually. During the year ended December 31, 2019,2020, the Company issued 75,30465,457 shares under the ESPP. As of December 31, 2019, 140,2512020, 74,794 shares remain authorized and available for issuance under the ESPP. As of December 31, 2019,2020, the Company held approximately $1.4$1.6 million on behalf of employees for future purchases under the ESPP and this amount was recorded in accrued liabilities in the Company's Consolidated Balance Sheet.
15. Income Taxes
The income tax provision consisted of the following for the years ended December 31, 2020, 2019 2018 and 20172018 (in thousands):
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Current: | |||||||||||
| Federal | $ | — | $ | (252 | ) | $ | — | ||||
| State and Foreign | 624 | 663 | 669 | ||||||||
| 624 | 411 | 669 | |||||||||
| Deferred: | |||||||||||
| Federal | — | (211 | ) | (488 | ) | ||||||
| State | — | — | (32 | ) | |||||||
| Income tax provision | $ | 624 | $ | 200 | $ | 149 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 0 | $ | 0 | $ | (252) | |||||||||||
| State and Foreign | 676 | 624 | 663 | ||||||||||||||
| 676 | 624 | 411 | |||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 0 | 0 | (211) | ||||||||||||||
| State | 0 | 0 | 0 | ||||||||||||||
| Income tax provision | $ | 676 | $ | 624 | $ | 200 | |||||||||||
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The differences between the effective tax rates reflected in the total provision for income taxes and the U.S. federal statutory rate of 34%21% for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively, were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Provision at the U.S. federal statutory rate | $ | (16,035) | $ | (14,491) | $ | (13,464) | |||||||||||
| Increase (decrease) resulting from: | |||||||||||||||||
| State income taxes, net of federal taxes | 0 | 17 | 46 | ||||||||||||||
| Nondeductible expenses | 482 | 468 | 414 | ||||||||||||||
| Statutory to GAAP income adjustment | 109 | (640) | (221) | ||||||||||||||
| Noncash share-based compensation | (3,268) | (570) | (394) | ||||||||||||||
| Other | 460 | (368) | (153) | ||||||||||||||
| Incremental benefits for tax credits | (2,391) | (990) | (1,656) | ||||||||||||||
| Change in tax rate/income subject to lower tax rates | (2,385) | 788 | (1,824) | ||||||||||||||
| Change related to prior tax years | (553) | 4,006 | (4,800) | ||||||||||||||
| Change related to US tax reform | 0 | 0 | 1,835 | ||||||||||||||
| Change in valuation allowance | 24,257 | 12,404 | 20,417 | ||||||||||||||
| Income tax provision | $ | 676 | $ | 624 | $ | 200 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Provision at the U.S. federal statutory rate | $ | (14,491 | ) | $ | (13,464 | ) | $ | (26,443 | ) | ||
| Increase (decrease) resulting from: | |||||||||||
| State income taxes, net of federal taxes | 17 | 46 | 18 | ||||||||
| Nondeductible expenses | 468 | 414 | 373 | ||||||||
| Acquisition-related expense | — | — | 245 | ||||||||
| Statutory to GAAP income adjustment | (640 | ) | (221 | ) | (77 | ) | |||||
| Noncash share-based compensation | (570 | ) | (394 | ) | (3,405 | ) | |||||
| Other | (368 | ) | (153 | ) | — | ||||||
| Incremental benefits for tax credits | (990 | ) | (1,656 | ) | (1,711 | ) | |||||
| Change in tax rate/income subject to lower tax rates | 788 | (1,824 | ) | 2,625 | |||||||
| Change related to prior tax years | 4,006 | (4,800 | ) | (2,331 | ) | ||||||
| Change related to US tax reform | — | 1,835 | 31,359 | ||||||||
| Change in valuation allowance | 12,404 | 20,417 | (504 | ) | |||||||
| Income tax provision | $ | 624 | $ | 200 | $ | 149 | |||||
The Company’s effective tax rate was (0.9)%, (0.3)(0.9)% and (0.2)(0.3)% for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. During the year ended December 31, 2019,2020, the Company's effective tax rate was impacted primarily by changes in valuation allowance, foreign income taxes and other nondeductible expenses.
The Tax Cuts and Jobs Act reduced the U.S. corporate income tax rate to 21% effective January 1, 2018.
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The tax effects of temporary differences and other tax attributes that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 20192020 and 20182019 are as follows (in thousands):
| Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Noncurrent deferred taxes: | |||||||||||
| Property and equipment | $ | (104) | $ | (158) | |||||||
| Noncash share-based compensation | 2,878 | 2,534 | |||||||||
| Disallowed interest expense | 8,174 | 5,871 | |||||||||
| Capitalized software | (2,097) | (1,905) | |||||||||
| Amortization | (1,831) | (2,971) | |||||||||
| Operating lease right-of-use assets | (5,645) | (4,431) | |||||||||
| Operating lease liabilities | 9,833 | 5,068 | |||||||||
| R&E tax credit carryforwards | 12,620 | 11,594 | |||||||||
| Deferred revenue | 2,441 | 2,264 | |||||||||
| Federal Net Operating Losses ("NOLs") | 81,745 | 69,673 | |||||||||
| State NOLs | 2,697 | 2,254 | |||||||||
| State Credits | 3,987 | 2,005 | |||||||||
| Foreign NOLs | 14,090 | 11,808 | |||||||||
| Foreign tax credit carryforward | 2,168 | 2,168 | |||||||||
| Other | (93) | 821 | |||||||||
| Total noncurrent deferred tax assets | 130,863 | 106,595 | |||||||||
| Less: Valuation allowance | (130,733) | (106,476) | |||||||||
| Total net deferred tax asset | $ | 130 | $ | 119 | |||||||
| Year Ended December 31, | |||||||
| 2019 | 2018 | ||||||
| Noncurrent deferred taxes: | |||||||
| Property and equipment | $ | (158 | ) | $ | (528 | ) | |
| Noncash share-based compensation | 2,534 | 6,922 | |||||
| Disallowed interest expense | 5,871 | 4,574 | |||||
| Capitalized software | (1,905 | ) | (1,533 | ) | |||
| Amortization | (2,971 | ) | (4,110 | ) | |||
| R&E tax credit carryforwards | 11,594 | 10,603 | |||||
| Deferred revenue | 2,264 | 2,680 | |||||
| Federal Net Operating Losses ("NOLs") | 69,673 | 58,601 | |||||
| State NOLs | 2,254 | 2,319 | |||||
| State Credits | 2,005 | 2,005 | |||||
| Foreign NOLs | 11,808 | 8,945 | |||||
| Foreign tax credit carryforward | 2,168 | 2,462 | |||||
| Other | 1,458 | 1,291 | |||||
| Total noncurrent deferred tax assets | 106,595 | 94,231 | |||||
| Less: Valuation allowance | (106,476 | ) | (94,231 | ) | |||
| Total noncurrent deferred tax asset | 119 | — | |||||
| Total net deferred tax asset | $ | 119 | $ | — | |||
The net deferred tax liabilityasset is classified as other liabilities,assets, noncurrent in the accompanying Consolidated Balance Sheets.
As of December 31, 2014, the Company determined it was more likely than not that it would be unable to fully utilize the majority of its U.S. and state deferred tax assets. As a result, the Company had recorded a valuation allowance against those assets to the extent that they cannot be realized through net operating loss carrybacks to prior years. This valuation allowance is evaluated periodically and will be reversed partially or in whole if business results and the economic environment have sufficiently improved to support realization of some or all of the Company's deferred tax assets. In performing the analysis throughout 2019,2020, the Company determined that there was no sufficient positive evidence to outweigh the current and historic negative evidence to determine that it was more likely than not that the deferred assets would not be realized. Therefore, the Company continues to have a valuation allowance against net deferred tax assets as of December 31, 20192020 and 2018.2019.
The Company has federal and state net operating loss carryforwards related to current and prior year operations and acquisitions. Internal Revenue Code Section 382 ("Section 382") places certain limitations on the annual amount of U.S. net operating loss carryforwards that can be utilized when a change of ownership occurs. The Company believes the past acquisitions were changes in ownership pursuant to Section 382, subjecting federal acquired net operating losses to limitations. According to French tax law, the net operating loss carryforwards are not subject to ownership change limitations.
The U.S. federal net operating losses and R&E tax credit carryforward amount available to be used in future periods, taking into account the Section 382 annual limitation and current year losses, is approximately $389.5 million and $16.6 million, respectively. The Company’s net operating losses will begin to expire in 2024, R&E credits will begin to expire in 2031, and foreign tax credits will begin to expire in 2022. The U.S. net operating losses generated after January 1, 2018 have no expiration. Also included in foreign net operating losses are $50.3 million of French carryforwards which have no expiration.
Undistributed earnings of the Company’s foreign subsidiaries are considered permanently reinvested and, accordingly, no provision for U.S. federal or state income taxes or non-U.S. withholding taxes has been provided thereon. The cumulative amount of positive undistributed earnings of the Company’s non-U.S. subsidiaries, if any, was minimal for the years ended December 31, 20192020 and 2018. The determination of the related deferred tax liability, which requires complex analysis of international tax situations related to repatriation, is not practical at this time.2019. The Company is presently investing in international operations located in Europe, North America, the United Arab Emirates, and Australia. The Company is funding the working capital needs of its foreign
28
For the years ended December 31, 2019, 20182020 and 2017,2019, the Company had approximately 0 $0.2 million unrecognized tax benefits, and $0.2 million respectively, of net unrecognized tax benefits in 2018 which, if recognized, would impact the Company's effective tax rate. The Company recorded immaterial amounts for interest and penalties to tax expense as of December 31, 2020, 2019 2018 and 2017,2018, respectively. During 2019, the Company determined that the statute of limitations concluded for positions and removed these positions from the uncertain tax positions. The Company believes the remaining position will be removed from the schedule during the next twelve months as the statute expires on that position. The Company continually monitors tax positions and will evaluate if any new positions need to be added during the next twelve months.
The Company is not subject to or aware of any forth-comingcurrently under an income tax examinations at this time. The Company has completed a transfer pricing review byaudit in Germany for the Bulgariancalendar tax authorities during 2019.years 2014-2016.No material taxes are expected to arise from the audit. The Company files tax returns in the U.S. and various foreign jurisdictions. The Company ismay be subject to U.S. federal income tax examination for the calendar tax years 2019, 2018, 2017, 2016, 2015 2014 and 20132014 and state and foreign income tax examination for various years depending on the statutes of limitation of those jurisdictions.
The following table sets forth the changes to the Company's unrecognized tax benefit for the year ended December 31, 2020, 2019 2018 and 20172018 (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||
| Beginning balance | $ | 183 | $ | 183 | $ | 192 | Beginning balance | $ | 14 | $ | 183 | $ | 183 | |||||||||||||||||||
| Changes based on tax positions related to prior year | — | — | — | Changes based on tax positions related to prior year | 0 | 0 | 0 | |||||||||||||||||||||||||
| Changes due to settlement | (169 | ) | — | (9 | ) | Changes due to settlement | 0 | (169) | 0 | |||||||||||||||||||||||
| Ending balance | $ | 14 | $ | 183 | $ | 183 | Ending balance | $ | 14 | $ | 14 | $ | 183 | |||||||||||||||||||
The table above has been updated to reflect gross tax liability, exclusive of interest and penalties and other offsetting amounts.
16. Convertible Senior Notes
The Company issued $143.8 million principal amount of the 2019 Notes in December 2014, $106.3 million principal amount of the 2047 Notes in June 2017, and $143.8 million principal amount of the 2024 Notes in May 2019.2019 and $150.0 million principal amount of the 2027 Notes in September 2020. As disclosed below, as of December 31, 2020 and 2019, there was no principal amount of either the 2019 Notes or the 2047 Notes outstanding. The interest rate for the 2024 Notes is fixed at 1% per annum and the effective interest rate related to the amortization of the liability component is 6.6%. Interest, interest is payable semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2019. The interest rate for the 2027 Notes is fixed at 2.25% per year and the effective interest rate related to the amortization of the liability component is 8.5%, interest is payable semiannually in arrears in cash on March 15 and September 15 of each year, beginning on March 15, 2021. The 2024 Notes mature on May 15, 2024 and the 2027 Notes mature on September 15, 2027, unless redeemed or converted in accordance with their terms prior to such date.
Each $1,000 of principal of the 2019 Notes were initially convertible into 29.5972 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $33.79 per share. Each $1,000 of principal of the 2024 Notes will initially be convertible into 15.1394 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $66.05 per share. Each $1,000 of principal of the 2027 Notes will initially be convertible into 23.9137 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $41.82 per share. Each $1,000 of principal amount at maturity of the 2047 Notes had an issue price of $880 and were initially convertible into 20.5624 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $48.63 per share. The initial conversion price for each of the Notes is subject to adjustment upon the occurrence of certain specified events.
The Notes are each general unsecured obligations and rank senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with all of the Company's existing and future liabilities that are not so subordinated, are effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all
29
indebtedness and other liabilities of the Company's subsidiaries (including trade payables but excluding intercompany obligations owed to the Company or its subsidiaries).
On or after February 15, 2024 and June 15, 2027, respectively, to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2024 and 2027 Notes, respectively, regardless of the contingent conversion conditions described herein. Upon conversion, the Company will pay or deliver cash, shares of its common stock or a combination of cash
and shares of its common stock, at its election, as described in the indenture governing the 2024 and 2027 Notes.
Holders may convert their 2024 and 2027 Notes at their option at any time prior to the close of business on the business day immediately preceding February 15, 2024 and June 15, 2027, respectively, only under the following circumstances:
•during the five consecutive business day period immediately following any five consecutive trading day period (the "Measurement Period") in which the trading price per 2024 and 2027 Note, respectively, for each day of that Measurement Period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such day;
•during any calendar quarter commencing after the calendar quarter ending on June 30, 2019 and December 31, 2020, respectively, if the last reported sale price of the common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; or
•upon the occurrence of specified corporate events.
If a fundamental change (as defined in the relevant indenture governing the applicable series of Notes) occurs prior to the maturity date, holders of each of the Notes may require the Company to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount at maturity of the Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date.
In accordance with accounting guidance on embedded conversion features, the Company valued and bifurcated the conversion options associated with each of the Notes from the respective host debt instrument, which is referred to as debt discount, and recorded the conversion option of each of the Notes in stockholders’ equity. The equity component for each Note is not remeasured as long as such Note continues to meet the conditions for equity classification.
In accounting for the transaction costs for each of the Notes issuances, the Company allocated the costs incurred to the liability and equity components in proportion to the allocation of the proceeds from issuance to the liability and equity components. Issuance costs attributable to the liability component, totaling $4.3 million for the 2019 Notes, $3.4 million for the 2024 Notes and $2.7$2.8 million for the 20472027 Notes, are being amortized to expense over the expected life of each Note using the effective interest method. Issuance costs attributable to the equity component related to the conversion option, totaling $1.2 million for the 2019 Notes, $1.1 million for the 2024 Notes and $0.3$1.3 million for the 20472027 Notes, were netted with the equity component in stockholders' equity.
In May 2019, in accordance with the Exchange Transactions, the Company used a portion of the net proceeds of the offering of the 2024 Notes to exchange and retire approximately $122.1 million in aggregate principal of the 2019 Notes for an aggregate cash consideration of $76.0 million and approximately 2.2 million shares of the Company's common stock. The Company recorded a $2.3 million loss on debt extinguishment related to the Exchange Transactions. The loss on extinguishment is included in the other (expense) income, net in the Consolidated Statements of Comprehensive Income (Loss). In the fourth quarter of 2019, at maturity, the Company settled the remaining principal of the 2019 Notes in cash and distributed approximately 0.3 million shares of its common stock to the notes holders, which represented the conversion value in excess of the principal amount.
In August 2019, the Company issued a notice of redemption to the holders of its outstanding 2047 Notes and during the third and fourth quarter of 2019, the Company converted the entire aggregate principal of $106.3 million of the 2047 Notes and delivered approximately 2.3 million shares of its common stock upon conversion. The Company recorded a $3.4 million loss on debt extinguishment related to the Redemption. The loss on extinguishment is included in the other (expense) income, net in the Consolidated Statements of Comprehensive Income (Loss).
As of December 31, 2019,2020, the 2024 and 2027 Notes are not yet convertible, and their remaining life is approximately 52 months.40 months and 80 months, respectively.
30
As of December 31, 20192020 and December 31, 2018,2019, the fair value of the principal amount of the Notes was $163.2$363.8 million and $251.5$163.2 million, respectively. The estimated fair value was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price and interest rates, which represents level 2 in the fair value hierarchy.
The Notes consist of the following (in thousands):
| December 31, 2020 | December 31, 2019 | |||||||||||||
| Liability component: | ||||||||||||||
| Principal | $ | 293,750 | $ | 143,750 | ||||||||||
| Less: debt discount, net of amortization | (75,722) | (33,046) | ||||||||||||
| Net carrying amount | $ | 218,028 | $ | 110,704 | ||||||||||
Equity component (1) | $ | 80,098 | $ | 32,883 | ||||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Liability component: | ||||||||
| Principal | $ | 143,750 | $ | 250,000 | ||||
| Less: debt discount, net of amortization | (33,046 | ) | (24,810 | ) | ||||
| Net carrying amount | $ | 110,704 | $ | 225,190 | ||||
Equity component (1) | $ | 32,883 | $ | 37,560 | ||||
(1) Recorded within additional paid-in capital in the Consolidated Balance Sheet. As of December 31, 2020, it included $32.9 million and $47.2 million related to the 2024 and 2027 Notes, respectively, net of $1.1 million and $1.3 million issuance cost in equity, respectively. As of December 31, 2019, it included $32.9 million related to the 2024 Notes, net of $1.1 million issuance cost in equity, respectively. As of December 31, 2018, it included $28.7 million and $8.8 million related to the 2019 Notes and the 2047 Notes, respectively, net of $1.2 million and $0.3 million issuance cost in equity, respectively.equity.
The following table sets forth total interest expense recognized related to the Notes (in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Coupon | $ | 2,422 | $ | 3,691 | $ | 5,000 | ||||||||||||||
| Amortization of debt issuance costs | 733 | 1,157 | 1,419 | |||||||||||||||||
| Amortization of debt discount | 7,970 | 9,917 | 10,567 | |||||||||||||||||
| Total | $ | 11,125 | $ | 14,765 | $ | 16,986 | ||||||||||||||
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Coupon | $ | 3,691 | $ | 5,000 | ||||
| Amortization of debt issuance costs | 1,157 | 1,419 | ||||||
| Amortization of debt discount | 9,917 | 10,567 | ||||||
| Total | $ | 14,765 | $ | 16,986 | ||||