UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
___________________________________________________________________________
FORM 10-Q
___________________________________________________________________________
_________________________________________________________________________ |
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ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172023
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-33554
___________________________________________________________________________
PROS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________________________________
__________________________________________________________________________ |
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Delaware | | 76-0168604 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
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3100 Main Street,3200 Kirby Drive, Suite 900
Houston TX 600 | | 77002 | | 77098 |
Houston | TX | | | |
(Address of Principal Executive Offices) | | | | (Zip Code) |
| | (713) | 335-5151 | |
(Registrant's telephone number, including area code) |
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(Former address, if changed since last report) |
(Former Name, Former Address and Former Fiscal Year, if changed Since Last Report)Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
Common stock $0.001 par value per share | | PRO | | New York Stock Exchange |
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | Accelerated Filer | o | Accelerated Filer | x☐ |
Non-Accelerated Filer | o (do not check if a smaller reporting company)☐
| Smaller Reporting Company | o☐ |
Emerging Growth Company | o☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
The number of shares outstanding of the registrant's Common Stock, $0.001 par value, was 31,906,98746,202,671 as of October 23, 2017.
PROS Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended SeptemberJune 30, 20172023
Table of Contents
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Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 6. | | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements"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, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-lookingamended ("Exchange Act"). All statements relate to future events or our future financial performance. Thesein this report other than historical facts are forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecastsassumptions, trends, and projections, andprojections. Statements which include the beliefs and assumptionswords "believes," "seeks," "expects," "may," "should," "intends," "likely," "targets," "plans," "anticipates," "estimates," or the negative version of our management including, without limitation, our expectations regarding the following: our ability to execute on our revenue strategy shift to cloud-first, the license and subscription revenues generated by our software products and services; the impact of our revenue recognition policies; our belief that our current assets, including cash, cash equivalents, short-term investments, and expected cash flows from operating activities, will be sufficient to fund our operations; our belief that we will successfully integrate our acquisitions; our anticipated additions to property, plant and equipment; our belief that our facilities are suitable and adequate to meet our current operating needs; and our belief that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in foreign currency exchange rates or interest rates. Words such as, but not limited to, “we expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “may,” “might,” “could,” “would,” “intend,” and variations of these types ofthose words and similar expressions are intended to identify these forward-looking statements. Numerous important factors, risks and uncertainties affect our operating results, including, without limitation, those described in our Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q, 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 our Annual Report on Form 10-K entitled "Risk Factors" and the section of this Quarterly Report on Form 10-Q entitled "Risk Factors." You should also carefully review the cautionary statements described in the other documents we file with the Securities and Exchange Commission, specifically the Annual Report on Form 10-K, 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. Financial InformationFINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROS Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
| | | September 30, 2017 | | December 31, 2016 | | June 30, 2023 | | December 31, 2022 |
Assets: | | | | Assets: | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 157,359 |
| | $ | 118,039 |
| Cash and cash equivalents | $ | 184,567 | | | $ | 203,627 | |
Short-term investments | — |
| | 15,996 |
| |
Accounts and unbilled receivables, net of allowance of $760 | 34,641 |
| | 33,285 |
| |
| Trade and other receivables, net of allowance of $679 and $609, respectively | | Trade and other receivables, net of allowance of $679 and $609, respectively | 54,163 | | | 48,178 | |
Deferred costs, current | | Deferred costs, current | 6,221 | | | 6,032 | |
Prepaid and other current assets | 12,123 |
| | 6,337 |
| Prepaid and other current assets | 11,413 | | | 9,441 | |
| Total current assets | 204,123 |
| | 173,657 |
| Total current assets | 256,364 | | | 267,278 | |
| Property and equipment, net | 14,471 |
| | 15,238 |
| Property and equipment, net | 24,659 | | | 25,012 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 14,050 | | | 17,474 | |
Deferred costs, noncurrent | | Deferred costs, noncurrent | 8,234 | | | 8,764 | |
Intangibles, net | 28,972 |
| | 12,650 |
| Intangibles, net | 14,425 | | | 17,851 | |
Goodwill | 38,309 |
| | 20,096 |
| Goodwill | 107,724 | | | 107,561 | |
Other long-term assets | 6,754 |
| | 6,013 |
| |
| Other assets, noncurrent | | Other assets, noncurrent | 8,508 | | | 9,012 | |
Total assets | $ | 292,629 |
| | $ | 227,654 |
| Total assets | $ | 433,964 | | | $ | 452,952 | |
Liabilities and Stockholders' Equity: | | | | |
Liabilities and Stockholders' (Deficit) Equity: | | Liabilities and Stockholders' (Deficit) Equity: | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable and other liabilities | $ | 4,203 |
| | $ | 2,744 |
| Accounts payable and other liabilities | $ | 6,874 | | | $ | 7,964 | |
Accrued liabilities | 7,693 |
| | 7,279 |
| Accrued liabilities | 13,784 | | | 12,854 | |
Accrued payroll and other employee benefits | 13,312 |
| | 18,349 |
| Accrued payroll and other employee benefits | 20,109 | | | 23,797 | |
Deferred revenue | 73,092 |
| | 68,349 |
| |
Operating lease liabilities, current | | Operating lease liabilities, current | 4,863 | | | 7,662 | |
Deferred revenue, current | | Deferred revenue, current | 116,365 | | | 108,659 | |
Current portion of convertible debt, net | | Current portion of convertible debt, net | 143,003 | | | — | |
Total current liabilities | 98,300 |
| | 96,721 |
| Total current liabilities | 304,998 | | | 160,936 | |
Long-term deferred revenue | 18,672 |
| | 11,389 |
| |
Deferred revenue, noncurrent | | Deferred revenue, noncurrent | 5,218 | | | 8,298 | |
Convertible debt, net | 210,312 |
| | 122,299 |
| Convertible debt, net | 147,522 | | | 289,779 | |
Other long-term liabilities | 756 |
| | 639 |
| |
Operating lease liabilities, noncurrent | | Operating lease liabilities, noncurrent | 26,456 | | | 28,184 | |
Other liabilities, noncurrent | | Other liabilities, noncurrent | 1,224 | | | 1,228 | |
Total liabilities | 328,040 |
| | 231,048 |
| Total liabilities | 485,418 | | | 488,425 | |
Commitments and contingencies (Note 7) |
| | | |
Stockholders' equity: | | | | |
Commitments and contingencies (see Note 9) | | Commitments and contingencies (see Note 9) | | | |
Stockholders' (deficit) equity: | | Stockholders' (deficit) equity: | |
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued | — |
| | — |
| Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued | — | | | — | |
Common stock, $0.001 par value, 75,000,000 shares authorized; 36,319,135 and 35,001,236 shares issued, respectively; 31,901,550 and 30,583,651 shares outstanding, respectively | 36 |
| | 35 |
| |
Common stock, $0.001 par value, 75,000,000 shares authorized; 50,821,459 and 50,318,726 shares issued, respectively; 46,140,736 and 45,638,003 shares outstanding, respectively | | Common stock, $0.001 par value, 75,000,000 shares authorized; 50,821,459 and 50,318,726 shares issued, respectively; 46,140,736 and 45,638,003 shares outstanding, respectively | 51 | | | 50 | |
Additional paid-in capital | 202,905 |
| | 175,678 |
| Additional paid-in capital | 606,599 | | | 590,475 | |
Treasury stock, 4,417,585 common shares, at cost | (13,938 | ) | | (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 | (221,205 | ) | | (160,259 | ) | Accumulated deficit | (623,189) | | | (590,898) | |
Accumulated other comprehensive loss | (3,209 | ) | | (4,910 | ) | Accumulated other comprehensive loss | (5,068) | | | (5,253) | |
Total stockholders' equity | (35,411 | ) | | (3,394 | ) | |
Total liabilities and stockholders' equity | $ | 292,629 |
| | $ | 227,654 |
| |
| Total stockholders' (deficit) equity | | Total stockholders' (deficit) equity | (51,454) | | | (35,473) | |
Total liabilities and stockholders' (deficit) equity | | Total liabilities and stockholders' (deficit) equity | $ | 433,964 | | | $ | 452,952 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PROS Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)Loss
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenue: | | | | | | | |
Subscription | $ | 57,304 | | | $ | 50,386 | | | $ | 113,273 | | | $ | 99,151 | |
Maintenance and support | 5,093 | | | 7,249 | | | 10,805 | | | 15,104 | |
Total subscription, maintenance and support | 62,397 | | | 57,635 | | | 124,078 | | | 114,255 | |
| | | | | | | |
Services | 13,395 | | | 10,727 | | | 24,896 | | | 20,599 | |
Total revenue | 75,792 | | | 68,362 | | | 148,974 | | | 134,854 | |
Cost of revenue: | | | | | | | |
Subscription | 14,059 | | | 13,746 | | | 28,152 | | | 27,525 | |
Maintenance and support | 1,876 | | | 1,988 | | | 4,158 | | | 4,155 | |
Total cost of subscription, maintenance and support | 15,935 | | | 15,734 | | | 32,310 | | | 31,680 | |
| | | | | | | |
Services | 12,636 | | | 11,907 | | | 25,803 | | | 23,322 | |
Total cost of revenue | 28,571 | | | 27,641 | | | 58,113 | | | 55,002 | |
Gross profit | 47,221 | | | 40,721 | | | 90,861 | | | 79,852 | |
Operating expenses: | | | | | | | |
Selling and marketing | 24,880 | | | 24,020 | | | 50,890 | | | 49,307 | |
Research and development | 21,847 | | | 23,401 | | | 44,138 | | | 47,868 | |
General and administrative | 13,849 | | | 13,837 | | | 27,984 | | | 28,166 | |
| | | | | | | |
Impairment of fixed assets | — | | | — | | | — | | | 1,551 | |
Loss from operations | (13,355) | | | (20,537) | | | (32,151) | | | (47,040) | |
Convertible debt interest and amortization | (1,576) | | | (1,576) | | | (3,152) | | | (3,152) | |
Other income (expense), net | 1,791 | | | (2) | | | 3,242 | | | (420) | |
Loss before income tax provision | (13,140) | | | (22,115) | | | (32,061) | | | (50,612) | |
Income tax provision | 149 | | | 291 | | | 230 | | | 434 | |
Net loss | $ | (13,289) | | | $ | (22,406) | | | $ | (32,291) | | | $ | (51,046) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net loss per share: | | | | | | | |
Basic and diluted | $ | (0.29) | | | $ | (0.50) | | | $ | (0.70) | | | $ | (1.13) | |
| | | | | | | |
Weighted average number of shares: | | | | | | | |
| | | | | | | |
Basic and diluted | 46,101 | | | 45,222 | | | 46,013 | | | 45,154 | |
Other comprehensive loss, net of tax: | | | | | | | |
Foreign currency translation adjustment | $ | 9 | | | $ | (628) | | | $ | 185 | | | $ | (850) | |
| | | | | | | |
Other comprehensive income (loss), net of tax | 9 | | | (628) | | | 185 | | | (850) | |
Comprehensive loss | $ | (13,280) | | | $ | (23,034) | | | $ | (32,106) | | | $ | (51,896) | |
| | | | | | | |
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue: | | | | | | | |
Subscription | $ | 15,809 |
| | $ | 9,852 |
| | $ | 41,457 |
| | $ | 27,196 |
|
Maintenance and support | 17,124 |
| | 17,666 |
| | 52,332 |
| | 51,103 |
|
Total subscription, maintenance and support | 32,933 |
| | 27,518 |
| | 93,789 |
| | 78,299 |
|
License | 603 |
| | 2,419 |
| | 3,883 |
| | 8,178 |
|
Services | 8,401 |
| | 8,447 |
| | 24,800 |
| | 26,873 |
|
Total revenue | 41,937 |
| | 38,384 |
| | 122,472 |
| | 113,350 |
|
Cost of revenue: | | | | | | | |
Subscription | 7,868 |
| | 4,808 |
| | 19,605 |
| | 12,342 |
|
Maintenance and support | 2,859 |
| | 3,416 |
| | 8,886 |
| | 10,266 |
|
Total cost of subscription, maintenance and support | 10,727 |
| | 8,224 |
| | 28,491 |
| | 22,608 |
|
License | 73 |
| | 38 |
| | 210 |
| | 199 |
|
Services | 6,924 |
| | 7,380 |
| | 21,718 |
| | 24,594 |
|
Total cost of revenue | 17,724 |
| | 15,642 |
| | 50,419 |
| | 47,401 |
|
Gross profit | 24,213 |
| | 22,742 |
| | 72,053 |
| | 65,949 |
|
Operating expenses: | | | | | | | |
Selling and marketing | 16,980 |
| | 13,641 |
| | 50,625 |
| | 47,725 |
|
General and administrative | 10,324 |
| | 9,253 |
| | 30,514 |
| | 27,910 |
|
Research and development | 14,046 |
| | 12,964 |
| | 42,429 |
| | 39,454 |
|
Acquisition-related | 613 |
| | — |
| | 613 |
| | — |
|
Loss from operations | (17,750 | ) | | (13,116 | ) | | (52,128 | ) | | (49,140 | ) |
Convertible debt interest and amortization | (4,094 | ) | | (2,339 | ) | | (9,078 | ) | | (6,943 | ) |
Other income (expense), net | 347 |
| | (26 | ) | | 315 |
| | (139 | ) |
Loss before income tax provision | (21,497 | ) | | (15,481 | ) | | (60,891 | ) | | (56,222 | ) |
Income tax (benefit) provision | (271 | ) | | 227 |
| | 55 |
| | 490 |
|
Net loss | $ | (21,226 | ) | | $ | (15,708 | ) | | $ | (60,946 | ) | | $ | (56,712 | ) |
| | | | | | | |
Net loss per share: | | | | | | | |
Basic and diluted | $ | (0.67 | ) | | $ | (0.52 | ) | | $ | (1.93 | ) | | $ | (1.87 | ) |
Weighted average number of shares: | | | | | | | |
Basic and diluted | 31,867 |
| | 30,469 |
| | 31,527 |
| | 30,341 |
|
Other comprehensive income (loss), net of tax: | | | | | | | �� |
Foreign currency translation adjustment | $ | 329 |
| | $ | 176 |
| | $ | 1,705 |
| | $ | 538 |
|
Unrealized gain (loss) on available-for-sale securities | 6 |
| | (8 | ) | | (4 | ) | | 18 |
|
Other comprehensive income (loss), net of tax | 335 |
| | 168 |
| | 1,701 |
| | 556 |
|
Comprehensive loss | $ | (20,891 | ) | | $ | (15,540 | ) | | $ | (59,245 | ) | | $ | (56,156 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PROS Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2023 | | 2022 |
Operating activities: | | | | Operating activities: | | | |
Net loss | $ | (60,946 | ) | | $ | (56,712 | ) | Net loss | $ | (32,291) | | | $ | (51,046) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
Depreciation and amortization | 7,047 |
| | 7,396 |
| Depreciation and amortization | 5,752 | | | 8,448 | |
Amortization of debt discount and issuance costs | 6,363 |
| | 4,786 |
| |
Amortization of debt issuance costs | | Amortization of debt issuance costs | 746 | | | 746 | |
Share-based compensation | 17,665 |
| | 14,445 |
| Share-based compensation | 20,656 | | | 21,991 | |
Deferred income tax, net | (453 | ) | | 64 |
| |
Provision for doubtful accounts | — |
| | (226 | ) | |
| Provision for credit losses | | Provision for credit losses | 88 | | | (300) | |
Loss on disposal of assets | | Loss on disposal of assets | 35 | | | — | |
Impairment of fixed assets | | Impairment of fixed assets | — | | | 1,551 | |
| Changes in operating assets and liabilities: | | | | Changes in operating assets and liabilities: | |
Accounts and unbilled receivables | (141 | ) | | 12,899 |
| Accounts and unbilled receivables | (6,070) | | | 6,441 | |
Deferred costs | | Deferred costs | 341 | | | 132 | |
Prepaid expenses and other assets | (6,301 | ) | | (746 | ) | Prepaid expenses and other assets | (1,449) | | | (1,395) | |
Operating lease right-of-use assets and liabilities | | Operating lease right-of-use assets and liabilities | (1,237) | | | (1,117) | |
Accounts payable and other liabilities | 1,734 |
| | (2,546 | ) | Accounts payable and other liabilities | (1,252) | | | 1,629 | |
Accrued liabilities | (473 | ) | | 887 |
| Accrued liabilities | 1,077 | | | (68) | |
Accrued payroll and other employee benefits | (5,722 | ) | | 709 |
| Accrued payroll and other employee benefits | (3,688) | | | (9,144) | |
Deferred revenue | 11,379 |
| | 11,885 |
| Deferred revenue | 4,607 | | | 9,187 | |
Net cash used in operating activities | (29,848 | ) | | (7,159 | ) | Net cash used in operating activities | (12,685) | | | (12,945) | |
Investing activities: | | | | Investing activities: | |
Purchases of property and equipment | (1,235 | ) | | (6,524 | ) | Purchases of property and equipment | (1,823) | | | (769) | |
Acquisition of Vayant, net of cash acquired | (34,130 | ) | | — |
| |
Capitalized internal-use software development costs | (1,996 | ) | | (569 | ) | |
Purchase of intangible assets | (75 | ) | | — |
| |
Purchases of short-term investments | — |
| | (144,934 | ) | |
Proceeds from maturities of short-term investments | 15,992 |
| | 96,500 |
| |
| Investment in equity securities | | Investment in equity securities | — | | | (169) | |
| Net cash used in investing activities | (21,444 | ) | | (55,527 | ) | Net cash used in investing activities | (1,823) | | | (938) | |
Financing activities: | | | | Financing activities: | |
Exercise of stock options | 6,347 |
| | 420 |
| |
| Proceeds from employee stock plans | 1,535 |
| | 1,090 |
| Proceeds from employee stock plans | 1,137 | | | 1,443 | |
Tax withholding related to net share settlement of stock awards | (7,243 | ) | | (5,244 | ) | Tax withholding related to net share settlement of stock awards | (5,668) | | | (212) | |
Payments of notes payable | (155 | ) | | (196 | ) | |
Debt issuance costs related to Revolver | (150 | ) | | — |
| |
Debt issuance cost related to convertible debt | (2,673 | ) | | — |
| |
Proceeds from issuance of convertible debt, net | 93,500 |
| | — |
| |
Net cash provided by (used in) financing activities | 91,161 |
| | (3,930 | ) | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (4,531) | | | 1,231 | |
Effect of foreign currency rates on cash | (549 | ) | | 54 |
| Effect of foreign currency rates on cash | (21) | | | 277 | |
Net change in cash and cash equivalents | 39,320 |
| | (66,562 | ) | Net change in cash and cash equivalents | (19,060) | | | (12,375) | |
Cash and cash equivalents: | | | | Cash and cash equivalents: | |
Beginning of period | 118,039 |
| | 161,770 |
| Beginning of period | 203,627 | | | 227,553 | |
End of period | $ | 157,359 |
| | $ | 95,208 |
| End of period | $ | 184,567 | | | $ | 215,178 | |
| Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | |
Noncash investing activities: | | Noncash investing activities: | |
Purchase of property and equipment accrued but not paid | | Purchase of property and equipment accrued but not paid | $ | 194 | | | $ | 140 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PROS Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
(In thousands, except share data)
(Unaudited)
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| Three Months Ended June 30, 2023 |
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| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated other comprehensive loss | | Total Stockholders’ (Deficit) Equity |
| Shares | | Amount | | | Shares | | Amount | | | |
Balance at March 31, 2023 | 46,031,241 | | | $ | 51 | | | $ | 596,805 | | | 4,680,723 | | | $ | (29,847) | | | $ | (609,900) | | | $ | (5,077) | | | $ | (47,968) | |
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Stock awards net settlement | 109,495 | | | — | | | (958) | | | — | | | — | | | — | | | — | | | (958) | |
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Noncash share-based compensation | — | | | — | | | 10,752 | | | — | | | — | | | — | | | — | | | 10,752 | |
| | | | | | | | | | | | | | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | 9 | | | 9 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (13,289) | | | — | | | (13,289) | |
Balance at June 30, 2023 | 46,140,736 | | | $ | 51 | | | $ | 606,599 | | | 4,680,723 | | | $ | (29,847) | | | $ | (623,189) | | | $ | (5,068) | | | $ | (51,454) | |
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| Three Months Ended June 30, 2022 |
| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated other comprehensive loss | | Total Stockholders’ (Deficit) Equity |
| Shares | | Amount | | | Shares | | Amount | | |
Balance at March 31, 2022 | 45,179,184 | | | $ | 50 | | | $ | 559,148 | | | 4,680,723 | | | $ | (29,847) | | | $ | (537,292) | | | $ | (4,881) | | | $ | (12,822) | |
Stock awards net settlement | 68,095 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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Noncash share-based compensation | — | | | — | | | 10,766 | | | — | | | — | | | — | | | — | | | 10,766 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (628) | | | (628) | |
Net loss | — | | | — | | | — | | | — | | | — | | | (22,406) | | | — | | | (22,406) | |
Balance at June 30, 2022 | 45,247,279 | | | $ | 50 | | | $ | 569,914 | | | 4,680,723 | | | $ | (29,847) | | | $ | (559,698) | | | $ | (5,509) | | | $ | (25,090) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PROS Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity (Continued)
(In thousands, except share data)
(Unaudited)
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| Six Months Ended June 30, 2023 |
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| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated other comprehensive loss | | Total Stockholders’ (Deficit) Equity |
| Shares | | Amount | | | Shares | | Amount | | | |
Balance at December 31, 2022 | 45,638,003 | | | $ | 50 | | | $ | 590,475 | | | 4,680,723 | | | $ | (29,847) | | | $ | (590,898) | | | $ | (5,253) | | | $ | (35,473) | |
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Stock awards net settlement | 447,584 | | | 1 | | | (5,669) | | | — | | | — | | | — | | | — | | | (5,668) | |
Proceeds from employee stock plans | 55,149 | | | — | | | 1,137 | | | — | | | — | | | — | | | — | | | 1,137 | |
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Noncash share-based compensation | — | | | — | | | 20,656 | | | — | | | — | | | — | | | — | | | 20,656 | |
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Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | 185 | | | 185 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (32,291) | | | — | | | (32,291) | |
Balance at June 30, 2023 | 46,140,736 | | | $ | 51 | | | $ | 606,599 | | | 4,680,723 | | | $ | (29,847) | | | $ | (623,189) | | | $ | (5,068) | | | $ | (51,454) | |
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| Six Months Ended June 30, 2022 |
| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated other comprehensive loss | | Total Stockholders’ (Deficit) Equity |
| Shares | | Amount | | | Shares | | Amount | | |
Balance at December 31, 2021 | 44,520,542 | | | $ | 49 | | | $ | 546,693 | | | 4,680,723 | | | $ | (29,847) | | | $ | (508,652) | | | $ | (4,659) | | | $ | 3,584 | |
Stock awards net settlement | 677,492 | | | 1 | | | (213) | | | — | | | — | | | — | | | — | | | (212) | |
Proceeds from employee stock plans | 49,245 | | | — | | | 1,443 | | | — | | | — | | | — | | | — | | | 1,443 | |
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Noncash share-based compensation | — | | | — | | | 21,991 | | | — | | | — | | | — | | | — | | | 21,991 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (850) | | | (850) | |
Net loss | — | | | — | | | — | | | — | | | — | | | (51,046) | | | — | | | (51,046) | |
Balance at June 30, 2022 | 45,247,279 | | | $ | 50 | | | $ | 569,914 | | | 4,680,723 | | | $ | (29,847) | | | $ | (559,698) | | | $ | (5,509) | | | $ | (25,090) | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
PROS Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Nature of Operations
PROS Holdings, Inc., a Delaware corporation, through its operating subsidiaries (collectively, the "Company"), is a cloud software company powering the shift to modern commerce by helping companies create personalizedprovides solutions that optimize shopping and frictionless buying experiences for their customers. Fueled by dynamic pricing science and machine learning,selling experiences. PROS solutions make it possibleleverage artificial intelligence ("AI"), self-learning and automation to ensure that every transactional experience is fast, frictionless and personalized for every shopper, supporting both business-to-business ("B2B") and business-to-consumer ("B2C") companies across industry verticals. Companies can use these selling, pricing, revenue optimization, distribution and retail, and digital offer marketing solutions to price, configureassess their market environments in real time to deliver customized prices and selloffers. The Company's solutions enable their customers to provide the buyers of their products and services in an omnichannel environmentthe ability to move fluidly from one sales channel to another, whether direct, partner, online, mobile or other emerging channels, each with speed, precision and consistency. PROS customers, who are leaders in their markets, benefit froma personalized experience regardless of which channel is used. The Company's decades of data science and AI expertise are infused into its industry solutions. The Company provides its solutions and are designed to enterprises across the manufacturing, distribution,reduce time and services industries, including automotive and industrial, business-to-business ("B2B") services, cargo, chemicals and energy, consumer goods, insurance, food and beverage, healthcare, high tech, and travel. The Company offers its solutions via a SaaS delivery model as well as on a more limited basis, via perpetual licenses. The Company also provides professional services to implement its software applications as well as business consulting. In addition, the Company provides product maintenance and support to its customerscomplexity through which they receive unspecified upgrades, maintenance releases and bug fixes during the term of the support period on a when-and-if-available basis.actionable intelligence.
2. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements reflect the application of significant accounting policies as described below and elsewhere in these notes to the condensed consolidated financial statements.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial reporting and applicable quarterly reporting regulations of the Securities and Exchange Commission ("SEC"). In management's opinion, the accompanying interim unaudited condensed consolidated financial statements include all adjustments necessary for a fair statement of the financial position of the Company as of SeptemberJune 30, 2017,2023, the results of operations for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016, and2022, cash flows for the ninesix months ended SeptemberJune 30, 20172023 and 2016.
2022, and stockholders' (deficit) equity for the three and six months ended June 30, 2023 and 2022.
Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162022 ("Annual Report") filed with the SEC. The unaudited condensed consolidated balance sheet as of December 31, 20162022 was derived from the Company's audited consolidated financial statements but does not include all disclosures required under GAAP.
Basis of consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and a subsidiary where the Company exercises control. All intercompany transactions and balances have been eliminatedChanges in consolidation. The functional currency of PROS France SAS, formerly known as Cameleon Software SA ("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 period for revenue and expenses. Translation gains (losses) are recorded in accumulated other comprehensive loss as a component of stockholders' equity.
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 Company makes estimates and assumptions in the preparation of its unaudited condensed consolidated financial statements, and its estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. The complexity and judgment required in the Company's estimation process, as well as issues related to the assumptions, risks and uncertainties inherent in the application of the percentage-of-completion method of accounting, affect the amounts of revenue, expenses, unbilled receivables and deferred revenue. Estimates are also used for, but not limited to, receivables, allowance for doubtful accounts, useful lives of assets, depreciation and amortization, 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. The critical accounting policies related to the estimates and judgments are discussed in the Company's Annual Report under management's discussion and analysis of financial condition and results of operations.
There have been no significantmaterial changes toin the Company's criticalCompany’s significant accounting policies as described in the Company's Annual Report.
Revenue recognition
The Company derives its revenues primarily from subscription services fees, professional services, the perpetual licensing of its software products and the associated software maintenance and support services.
The Company commences revenue recognition when all of the following criteria are met:
there is persuasive evidence of an arrangement;
the service has been or is being provided to the customer;
collection of the fee is reasonably assured; and
the amount of fees to be paid by the customer is fixed and determinable.
Subscription services revenue
Subscription services revenue is generally recognized ratably over the contractual term of the arrangement beginning on the date that the Company's service is made available to the customer, assuming all other revenue recognition criteria have been met. The Company's subscription contracts do not provide customers with the right to take possession of the software supporting the applications and, as a result, are accounted for as service contracts. Any revenue related to up-front activation or set-up fees are deferred and recognized ratably over the estimated period that the customer benefits from the related services. Direct and incremental costs related to up-front activation or set-up activities are capitalized until the date the Company's service is made available and then expensed ratably over the estimated period that the customer benefits from the related services.
For the Company's subscription services that include professional services, the Company determines whether the professional services have standalone value. Professional services deemed to have standalone value are accounted for separately from subscription services and the subscription services revenue recognition commences on the date that the Company's service is made available to the customer. If determined that the professional services do not have standalone value, the transaction is treated as a single element and the subscription services and professional services revenue is deferred until the customer commences use of the subscription services, and the subscription services revenue is recognized over the remaining term of the arrangement.
Maintenance and support revenue
Maintenance and support revenue includes post-implementation customer support and the right to unspecified software updates and enhancements on a when-and-if-available basis. The Company recognizes revenue from maintenance arrangements ratably over the period in which the services are provided.
License revenue
The Company derives the majority of its license revenue from the sale of perpetual licenses. For software license arrangements that do not require significant modification or customization of the underlying software, the Company recognizes software licenses revenues upon software delivery, assuming all other revenue recognition criteria have been met.
The Company evaluates the nature and scope of professional services for each arrangement, and if it determines that the professional services revenue should not be accounted for separately from license revenue, the license revenue is recognized together with the professional services revenue using the percentage-of-completion method or completed contract method. The completed contract method is also used for contracts where there is a risk over final acceptance by the customer or for contracts that are short-term in nature.
The percentage-of-completion method is measured by the percentage of man-days incurred during the reporting periodtheir application as compared to the estimated total man-days necessarysignificant accounting policies described in the Company’s Annual Report on Form 10-K for each contract for implementationthe year ended December 31, 2022.
Fair value measurement
The Company's financial assets that are included in cash and cash equivalents and that are measured at fair value on a recurring basis consisted of $171.2 million and $168.1 million at June 30, 2023 and December 31, 2022, respectively, and were invested in treasury money market funds. The fair value of the software solutions.treasury money market funds is determined based on quoted market prices, which represents level 1 in the fair value hierarchy as defined by ASC 820.
Trade and other receivables
Trade and other receivables are primarily comprised of trade receivables, net of allowance for credit losses, contract assets and unbilled receivables. The Company believes thatrecords trade accounts receivable for each such project, man-days expended in proportionits unconditional rights to total estimated man-days at completion represents the most reliable and meaningful measure for determining a project's progress toward completion. Underconsideration arising from the Company's fixed-fee arrangements, shouldperformance 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 credit losses, represents their estimated net realizable value. When developing its estimate of expected credit losses on trade and other receivables, the Company considers the available information relevant to assessing the
collectability of cash flows, which includes a loss be anticipatedcombination of both internal and external information relating to past events, current conditions, and future forecasts as well as relevant qualitative and quantitative factors that relate to the environment in which the Company operates.
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 revenue that have been recognized in advance of billing the customer.
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 contract,straight-line basis over the full amountperiod of benefit, which the loss is recorded whenCompany has determined to be five to eight years. The Company determined the loss is determinable.
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 for renewals), the Company's technology and other factors. The Company also licenses software solutionsdefers amounts earned by employees other than sales representatives who earn incentive payments under term license agreements that typically include maintenance duringcompensation plans also tied to the license term. When maintenancevalue of customer contracts acquired. Deferred costs were $14.5 million and $14.8 million as of June 30, 2023 and December 31, 2022, respectively. Amortization expense for the deferred costs was $1.5 million and $1.4 million for the three months ended June 30, 2023 and 2022, respectively, and $2.9 million for both the six months ended June 30, 2023 and 2022. Amortization of deferred costs is included forin selling and marketing expense in the entire termaccompanying unaudited condensed consolidated statements of comprehensive loss.
Deferred implementation costs
The Company capitalizes certain contract fulfillment costs, including personnel and other costs (such as hosting, employee salaries, benefits and payroll taxes), associated with arrangements where professional services are not distinct from other undelivered performance obligations in its customer contracts. The Company analyzes implementation costs and capitalizes those costs directly related to customer contracts expected to be recoverable to satisfy the term license, there is no renewal rate and the Company has not established vendor specific objective evidence ("VSOE") of fair value for the maintenance on term licenses. For term license agreements, revenue and the associatedundelivered performance obligations in those contracts. Deferred implementation costs are deferred until the delivery of the solution and recognizedamortized ratably over the remaining license term.
Professional servicescontract term once the revenue
Professional services revenues are generally recognized as the services are rendered for time and material contracts, or on a proportional performance basis for fixed price contracts. The majority of the Company's professional services contracts are on a time and materials basis. Training revenues are recognized as the services are rendered.
For the Company's subscription services that include professional services, the Company determines whether the professional services have standalone value. Professional services deemed to have standalone value are accounted for separately from subscription services and typically recognized as the services are performed. If determined that the professional services do not have standalone value, the transaction is treated as a single element, the professional services revenue is deferred until the customer commences use of the subscription services, and the professional services revenue is recognized over the remaining term of the arrangement.
For software license arrangements that include professional services, the Company determines whether the professional services are considered essential to the functionality of the software using factors such as: the nature of its software products; whether they are ready for use by the customer upon receipt; the nature of professional services; the availability of services from other vendors; whether the timing of payments for license revenue coincides with performance of services; and whether milestones or acceptance recognition criteria exist that affect the realizability of the software license fee. For professional services considered essential to the functionality of the software, the license revenue is recognized together with the professional services revenue using the percentage-of-completion method or completed contract method. The completed contract method is also used for contracts where there is a risk over final acceptance by the customer or for contracts that are short-term in nature.
Multiple element arrangements
For arrangements with multiple deliverables, the Company evaluates whether the individual deliverables qualify as separate units of accounting. In order to treat deliverables in a multiple deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, the Company accounts for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered.
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price. Multiple deliverable arrangement accounting guidance provides a hierarchy when determining the relative selling price for each unit of accounting. VSOE of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence ("TPE") of selling price is used to establish the selling price if it exists. If neither VSOE nor TPE exist for a deliverable, arrangements with multiple deliverables can be separated into discrete units of accounting based on the Company's best estimate of selling price ("BESP"). The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. The amount of arrangement fee allocated is limited by contingent revenues, if any. For transactions that only include softwareperformance obligation has been met and software-related elements, the Company continues to account for such arrangements under the software revenue recognition standards which require it to establish VSOEcommences. Deferred implementation costs were$1.3 million and $1.6 million as of fair value to allocate arrangement consideration to multiple deliverables.
For multiple-element arrangements that contain softwareJune 30, 2023 and nonsoftware elements such as its subscription services, the Company allocates revenue between the software and software related elements as a group and any nonsoftware elements based on a relative fair value allocation. The Company determines fair value for each deliverable using the selling price hierarchy described above and utilizing VSOE of fair value if it exists.
The Company applies the residual method to recognize revenueDecember 31, 2022, respectively. Amortization expense for the delivered elements in standalone software transactions. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration, less the aggregate fair value of any undelivered elements, typically maintenance, provided that VSOE of fair value existsdeferred implementation costs was $0.2 million and $0.3 million for all undelivered elements. VSOE of fair value is based on the price charged when the element is sold separately or, in the case of maintenance, substantive renewal rates for maintenance.
Revenue that has been recognized, but for which the Company has not invoiced the customer, is recorded as unbilled receivables. Invoices that have been issued before revenue has been recognized are recorded as deferred revenue in the accompanying consolidated balance sheets.
Business Combinations
The Company records tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition 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.
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.
The Company uses its best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. The Company continues to collect information and reevaluates these estimates and assumptions quarterly and records any adjustments to the Company’s preliminary estimates to goodwill, provided that the Company is within the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s condensed consolidated statements of operations.
Internal-use software
Costs incurred to develop internal-use software during the development stage are capitalized, stated at cost, and depreciated using the straight-line method over the estimated useful lives of the assets. Development stage costs generally include salaries and personnel costs and third-party contractor expenses associated with internal-use software configuration, coding, installation and testing. For the three months ended SeptemberJune 30, 20172023 and 2016, the Company capitalized $0.7 million and $0.5 million,2022, respectively, and for the nine months ended September 30, 2017 and 2016, the Company capitalized $2.2$0.4 million and $0.6 million respectively, of internal-use software development costs related to cloud-based offerings. Capitalized internal-use software development costs related to cloud-based offerings are amortized usingfor the straight-line method over the useful life of the asset. For the three and ninesix months ended SeptemberJune 30, 2017, the Company amortized an immaterial amount of capitalized internal-use software development costs. For the three2023 and nine months ended September 30, 2016, the Company amortized no capitalized internal-use software development costs. Capitalized software for internal use is2022, respectively. Deferred implementation costs are included in propertyprepaid and equipment, netother current assets and other assets, noncurrent in the unaudited condensed consolidated balance sheets. Amortization of capitalized internal-use software developmentdeferred implementation costs once it commences, is included in cost of subscription and cost of services revenues in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).loss.
Impairment of long-lived assetsLong-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'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 recorded no impairment charges during the three and nine months ended September 30, 2017 and 2016.
Noncash share-based compensation
The Company measures all share-based payments to its employees based on the grant date fair value of the awards and recognizes expenses in the Company's unaudited consolidated statement of comprehensive income (loss) on a straight-line basis over the periods during which the recipient is required to perform services (generally over the vesting period of the awards). To date, the Company has granted stock options, Restricted Stock Units ("RSUs"), stock settled Stock Appreciation Rights ("SARs"), and Market Stock Units ("MSUs"). RSUs include (i) time-based awards, and (ii) 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. MSUs are performance-based awards in which the number of shares that vest are based upon the Company's relative stockholder return.
The following table presents the number of shares or units outstanding for each award type as of September 30, 2017 and December 31, 2016, respectively, (in thousands):
|
| | | | | | |
Award type | | September 30, 2017 | | December 31, 2016 |
Stock options | | 148 |
| | 734 |
|
Restricted stock units (time-based) | | 2,180 |
| | 2,237 |
|
Restricted stock units (market-based) | | 345 |
| | 460 |
|
Stock appreciation rights | | 391 |
| | 515 |
|
Market stock units | | 347 |
| | 342 |
|
Stock options, time-based RSUs and SARs vest ratably between one and four years. 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 actual number of MSUs that will be eligible to vest is based on the total stockholder return of the Company relative to the total stockholder return of the Russell 2000 Index ("Index") over their respective performance periods, as defined by each award's plan documents. The Company did not grant any stock options or SARs duringDuring the three and ninesix months ended SeptemberJune 30, 2017 or 2016.
The fair value of the time-based RSUs is based on the closing price of the Company's stock on the date of grant.
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. The model requires the use of a number of assumptions including the expected volatility of the Company's stock, its risk-free interest rate and expected dividends. The Company's expected volatility at the date of grant was based on the historical volatility of2023, the Company over the performance period.
The fair value of the market-based RSUs is expensed over the derived service period for each separate vesting tranche. The derived service period for the vesting tranches of the market-based RSUs ranges between 1.01 and 1.98 years.
The Company estimates the fair value of MSUs on the date of grant using a Monte Carlo simulation model. The determination of 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 weighted average assumptions used to value the MSUs granted during the three and nine months ended September 30, 2017 were as follows:
|
| | |
| | September 30, 2017 |
Volatility | | 45.88% |
Risk-free interest rate | | 1.52% |
Expected option life in years | | 3.10 |
Dividend yield | | — |
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 dividing net income (loss) attributable to common stockholders by the weighted average number of common shares and dilutive potential
common shares then outstanding. Diluted earnings per share reflect the assumed conversion of all dilutive securities, using the treasury stock method. Dilutive potential common shares consist of shares issuable upon the exercise of stock options, shares of unvested restricted 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 and restricted stock units 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.
Short-term investments
The Company's investments are available-for-sale commercial paper and certificate of deposit that are recorded at fair value in the consolidated balance sheets. The Company classifies all commercial paper regardless of original maturity at purchase date as investments. Unrealized gains and losses on available-for-sale securities are recorded, net of tax, as a component of accumulated other comprehensive income (loss), unlesszero impairment is considered to be other-than-temporary. Other-than-temporary unrealized losses on available-for-sale securities are generally recorded in gain (loss) on investments, net, in the consolidated statements of comprehensive income (loss) unless certain criteria are met. The primary factors considered when determining if a charge must be recorded because a decline in the fair value of an investment is other-than-temporary include whether: (i) the fair value of the investment is significantly below the Company's cost basis; (ii) the financial condition of the issuer of the security has deteriorated; (iii) if a debt security, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the security; (iv) the decline in fair value has existed for an extended period of time; (v) if a debt security, such security has been downgraded by a rating agency; and (vi) the Company has the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. Investments with remaining maturities of twelve months or less are classified as short-term investments since they are readily convertible to cash to fund short-term operations. Investments with remaining maturities of more than twelve months are classified as long-term investments. All of the Company's investments had contractual maturities of less than twelve months as of September 30, 2017.
Cost method investment
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 using the cost method of accounting, carrying the investment at historical cost. If there are no identified events or changes in circumstances that might have an adverse effect on the cost method investments, the Company does not estimate the investments' fair value. For all investments, if a decline in the fair value of an investment below the carrying value is determined to be other-than-temporary, such investment is written down to its estimated fair value with a charge to current earnings.
At September 30, 2017 and December 31, 2016, the Company held $2.0 million of equity securities in a privately held company. This investment is accounted for under the cost method and the Company measures it at fair value on a nonrecurring basis when it is deemed to be other-than-temporarily impaired. The Company estimates fair value of its cost method investment considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data, which represents level 3 in the fair value hierarchy. As of September 30, 2017, the Company determined there were no other-than-temporary impairments on its cost method investment.
Fair value measurement
The Company's financial assets that are included in cash and cash equivalents and that are measured at fair value on a recurring basis consisted of $144.4 million and $106.3 million at September 30, 2017 and December 31, 2016, respectively, and were 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 Company's short-term investments that are measured at fair value are comprised of zero and $10.0 million invested in available-for-sale commercial paper as of September 30, 2017 and December 31, 2016, respectively, and zero and $6.0 million invested in certificate of deposit at September 30, 2017 and December 31, 2016, respectively. The fair value of these accounts is determined based on quoted market prices for similar assets in active markets, which represents level 2 in the fair value hierarchy. The Company recorded an immaterial amount of unrealized gain related to the short-term investments forcharge. During the three and ninesix months ended SeptemberJune 30, 2017 and 2016. Reclassification adjustments for realized gain (loss) on available-for-sale securities in net income were immaterial for the three and nine months ended September 30, 2017 and 2016.
Deferred revenue and unbilled receivables
Software license and implementation services that have been performed, but for which the Company has not invoiced the customer, are recorded as unbilled receivables, and invoices that have been issued before the software license and implementation, maintenance and subscription services have been performed are recorded as deferred revenue in the accompanying unaudited condensed consolidated balance sheets.
Credit facility
On January 27, 2017, the Company, through its wholly owned subsidiary PROS, Inc., entered into a Seventh Amendment (the "Seventh Amendment") to the $50 million secured Credit Agreement ("Revolver"). The Seventh Amendment provides for, among other things, an extension of the maturity date of the Revolver to July 2, 2022, and additional financial covenants with which the Company must comply if the Company's liquidity falls below an increased amount of $50 million or upon the occurrence of an event of default. The remaining material terms of the Revolver remain unchanged, and are summarized in the Company's Annual Report, Note 14.
As of September 30, 2017, the Company had no outstanding borrowings under the Revolver, and $0.2 million of unamortized debt issuance costs related to the Revolver is included in prepaid and other current assets and other long-term assets in the condensed consolidated balance sheets. For the three and nine months ended September 30, 2017 and 2016, the Company recorded an immaterial amountzero and $1.6 million, respectively, of amortization of debt issuance cost which is included in other expense, net in the unaudited condensed consolidated statements of comprehensive income (loss).
Income taxes
The Company recorded an income tax benefit of $0.3 million and tax provision of $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and tax provision of $0.1 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively, primarilyimpairment charge related to foreign income taxes and state taxes not based on income.fixed assets. The effective tax rate for the three and nine months ended September 30, 2017 was 1% and 0%, respectively. The effective tax rate for both the three and nine months ended September 30, 2016 was (1)%. The income tax rates vary2022 impairment resulted from the federal and state statutory rates primarily due to the valuation allowances on the Company’s deferred taxCompany's changed intentions for these assets the limitation on deductibility of certain officers’ compensation, and foreign and state taxes not based on income. During the three months ended September 30, 2017, the Company recognized a deferred tax benefit due to the acquisition of Vayant Travel Technologies, Inc. The recorded deferred tax liability was driven by unamortizable intangible assets that required the company to release $0.5 million of valuation allowance. The Company estimates its annual effective tax rate at the end of each quarterly period. Jurisdictionsin connection with a projected loss for the year where no tax benefit can be recognized due to the valuation allowances on the Company’s deferred tax assets are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result innew agreement with a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.
Recently adopted accounting pronouncements
In March 2016, the FASB issued ASU 2016-09, "Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" which is intended to simplify several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard is effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted this standard on January 1, 2017. Upon adoption, the Company recognized the previously unrecognized excess tax benefits using the modified retrospective transition method, which resulted in a cumulative-effect adjustment of $4.2 million to accumulated deficit. The previously unrecognized excess tax effects were recorded as a deferred tax asset, which was fully offset by a valuation allowance and as such the cumulative adjustment had no net impact on the Company's financial statements. As required by ASU 2016-09, excess tax benefits recognized on stock-based compensation expense are reflected in the condensed consolidated statements of operations as a component of the provision for income taxes on a prospective basis. In addition, ASU 2016-09 allows companies to account for forfeitures as they occur or estimate expected forfeitures over the course of a vesting period; the Company has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized each period.software vendor.
RecentRecently issued accounting pronouncements not yet adopted
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes nearly all existing revenue recognition guidance under GAAP and permits the use of either the retrospective or cumulative effect
transition method. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers: Deferral of the Effective Date" which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” which clarifies the implementation of guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligation and Licensing" which clarifies the implementation of guidance on identifying performance obligations and licensing. In May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients", which clarifies the disclosure requirements for an entity that retrospectively applies the guidance in Topic 606. These standards are effective for the Company in the first quarter of fiscal 2018. The Company expects to adopt this updated standard on a modified retrospective basis and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.
The Company continues to assess all potential impacts of the new standard on its consolidated financial statements and related disclosures, and currently believes the most significant impact relates to its accounting for arrangements that include term-based software licenses bundled with maintenance and support, the deferral of incremental costs of obtaining a contract with a customer, including the period of amortization of such costs, and additional disclosures. Under current GAAP, the revenue attributable to these term-based software licenses is recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered maintenance and support element as it is not sold separately. The requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated under the new standard. Accordingly, under the new standard, the Company will be required to recognize as revenue a portion of the arrangement fee upon delivery of the software license. In addition, under current GAAP, the Company defers only direct and incremental commission costs to obtain a contract and amortizes those costs over the term of the related contract. Under the new standard, the Company will defer all incremental costs related to the customer contract and will amortize these costs over the expected period of customer benefit. While the Company currently expects revenue related to professional services and subscription services to remain substantially unchanged, it is still in the process of evaluating the impact of the new standard on these types of customer arrangements, including the impact of the deferral of incremental costs of obtaining a contract with a customer.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" which requires the lessee to recognize most leases on the balance sheet thereby resulting in the recognition of lease assets and liabilities for those leases currently classified as operating leases. Lessor accounting remains largely unchanged from current guidance, however, ASU 2016-02 provides improvements that are intended to align lessor accounting with the lessee model and with updated revenue recognition guidance. This standard is effective for interim and annual reporting periods beginning after December 15, 2018. The Company is currently assessing the impact of ASU 2016-02 on its condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" which is intended to reduce the diversity in practice on classification of certain transactions in the statement of cash flows. This standard is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. The Company is currently assessing the impact of ASU 2016-15 on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment", 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 on testing dates after January 1, 2017. The Company is currently assessing the impact of ASU 2017-04 on its condensed consolidated financial statements.
With the exception of the new standards discussed above, thereThere have been no other recent accounting pronouncements or changes in accounting pronouncements during the ninesix months ended SeptemberJune 30, 2017,2023, as compared to the recent accounting pronouncements described in the Company's Annual Report, that are of significance or potential significance to the Company.
3. Business CombinationDeferred Revenue and Performance Obligations
On August 3, 2017, Deferred Revenue
For the three months ended June 30, 2023 and 2022, the Company acquired Vayant Travel Technologies, Inc. ("Vayant"), a privately held company based in Sofia, Bulgaria, for total cash consideration, net of cash acquired, of recognized approximately $34.1 million. Vayant is a cloud software company that provides advanced shopping, merchandising$52.0 million and inspirational travel solutions. The acquisition of Vayant strengthens the Company's modern commerce solutions$48.6 million, respectively, and for the travel industrysix months ended June 30, 2023 and positions it to deliver greater value to its travel customers
through an end-to-end offer optimization solution designed to help travel companies deliver personalized offers and expanded choices that drive loyalty and growth.
Since the acquisition date,2022, the Company hasrecognized approximately $81.5 million and $71.2 million, respectively, of revenue that was included $1.3in the deferred revenue balances at the beginning of the respective periods and primarily related to subscription, maintenance and support, and services.
Performance Obligations
As of June 30, 2023, the Company expects to recognize approximately $407.6 million of revenue from remaining performance obligations. The Company expects, based on the terms of the related, underlying contractual arrangements, to recognize revenue on approximately$204.2 million of these performance obligations over the next 12 months, with the balance recognized thereafter. Remaining performance obligations represent contractually committed revenue that has not yet been recognized, which includes deferred revenue and $0.5 millionunbilled amounts that will be recognized as revenue in future periods.
4. Disaggregation of net lossRevenue
Revenue by Geography
The geographic information in the table below is presented for the three and six months ended June 30, 2023 and 2022. The Company categorizes geographic revenues based on the location of the customer's headquarters. Because the Company's contracts are predominately denominated in U.S. dollars, it has limited exposure to foreign currency exchange risk as discussed under "Foreign Currency Exchange Risk" of Part I, Item 3 below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
(in thousands) | Revenue | | Percent | | Revenue | | Percent | | Revenue | | Percent | | Revenue | | Percent |
United States of America | $ | 27,224 | | | 36 | % | | $ | 23,908 | | | 35 | % | | $ | 53,456 | | | 36 | % | | $ | 47,102 | | | 35 | % |
Europe | 24,748 | | | 33 | % | | 20,865 | | | 30 | % | | 47,697 | | | 32 | % | | 41,688 | | | 31 | % |
The rest of the world | 23,820 | | | 31 | % | | 23,589 | | | 35 | % | | 47,821 | | | 32 | % | | 46,064 | | | 34 | % |
Total revenue | $ | 75,792 | | | 100 | % | | $ | 68,362 | | | 100 | % | | $ | 148,974 | | | 100 | % | | $ | 134,854 | | | 100 | % |
5. 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 10 years. Some of these leases include options to extend for up to 15 years, and some include options to terminate within 1 year.
As of June 30, 2023, the Company did not have any finance leases.
Supplemental cash flow information related to Vayant in its consolidated income statement. During the quarter ended September 30, 2017, the Company incurred acquisition-related costs of $0.6 million consisting primarily of advisory, legal fees, and retention of key employees.
All of the assets acquired and the liabilities assumed in the transaction have been recognized at their acquisition date fair values at August 3, 2017.
The preliminary allocation of the total purchase price for Vayant isleases was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Cash paid for operating lease liabilities | $ | 1,657 | | | $ | 2,353 | | | $ | 3,908 | | | $ | 4,195 | |
Right-of-use asset obtained in exchange for operating lease liability | $ | 279 | | | $ | 243 | | | $ | 279 | | | $ | 243 | |
|
| | | |
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 |
|
In January 2023 and 2022, an existing operating lease was modified due to a change in future payments. The following are the identifiable intangible assets acquired (in thousands) and their respective useful lives:
|
| | | | | |
| | | Useful Life |
| Amount | | (years) |
Developed technology | $ | 11,600 |
| | 7 |
Customer relationships | 7,000 |
| | 5 |
Total | $ | 18,600 |
| | |
In performing the preliminary purchase price allocation, the Company considered, among other factors, its anticipated future useresult of the acquired assets, analysis2023 modification was a decrease in the related right-of-use asset and corresponding lease liability of historical financial performance, and estimates of future cash flows from Vayant's products and services. The allocation resulted in acquired intangible assets of $18.6 million. The acquired intangible assets consisted of developed technology and customer relationships and were valued using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to price the transaction,$1 million and the discount rates applied were benchmarked with reference toresult of the implied rate of return from the transaction model as well as the weighted average cost of capital. Additionally, the Company assumed certain liabilities2022 modification was a decrease in the acquisition, including deferred revenue to which a fair valuerelated right-of-use asset and corresponding lease liability of $0.6 million was ascribed using a cost-plus profit approach.$2.7 million.
The Company has made a preliminary determination that $0.5 millionAs of net deferred taxJune 30, 2023, maturities of lease liabilities were assumed on the acquisition date. The deferred tax liability is comprised of the value of intangible assets partially offset by a deferred tax asset related to net operating losses.as follows (in thousands):
| | | | | | | | |
Year Ending December 31, | | Amount |
Remaining 2023 | | $ | 4,598 | |
2024 | | 5,019 | |
2025 | | 4,057 | |
2026 | | 4,039 | |
2027 | | 3,965 | |
2028 | | 4,029 | |
Thereafter | | 19,223 | |
Total operating lease payments | | 44,930 | |
Less: Imputed interest | | (13,611) | |
| | |
Total operating lease liabilities | | $ | 31,319 | |
The excess of the purchase price over the estimated amounts of net assets as of the effective date of the acquisition was allocated to goodwill. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Vayant acquisition. These benefits include the expectation that the combined company’s complementary products will strengthen the Company's modern commerce solutions for the travel industry.
The Company believes the combined company will benefit from a broader global presence and, with the Company’s direct sales force and larger channel coverage, significant cross-selling opportunities. None of the goodwill is expected to be currently deductible for tax purposes. In accordance with applicable accounting standards, goodwill will not be amortized but instead will be tested for impairment at least annually, or more frequently if certain indicators are present. In the event that the management of the combined company determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of the impairment during the fiscal quarter in which the determination is made.
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of operations of the Company and Vayant, on a pro forma basis, as though the Company had acquired Vayant on January 1, 2016. The pro forma information for all periods presented also includes the effect of business combination accounting resulting from the acquisition, including amortization charges from acquired intangible assets.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except earnings per share) | 2017 | | 2016 | | 2017 | | 2016 |
Total revenue | $ | 42,738 |
| | $ | 40,316 |
| | $ | 127,522 |
| | $ | 118,770 |
|
Net loss | (23,150 | ) | | (17,081 | ) | | (64,496 | ) | | (61,815 | ) |
Earnings per share - basic and diluted | $ | (0.73 | ) | | $ | (0.56 | ) | | $ | (2.05 | ) | | $ | (2.04 | ) |
4.6. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016:2022:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 | (in thousands, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
Numerator: | | | | | | | | Numerator: | | | | | | | |
Net loss | $ | (21,226 | ) | | $ | (15,708 | ) | | $ | (60,946 | ) | | $ | (56,712 | ) | Net loss | $ | (13,289) | | | $ | (22,406) | | | $ | (32,291) | | | $ | (51,046) | |
Denominator: | | | | | | | | Denominator: | |
Weighted average shares (basic) | 31,867 |
| | 30,469 |
| | 31,527 |
| | 30,341 |
| Weighted average shares (basic) | 46,101 | | | 45,222 | | | 46,013 | | | 45,154 | |
Dilutive effect of potential common shares | — |
| | — |
| | — |
| | — |
| Dilutive effect of potential common shares | — | | | — | | | — | | | — | |
Weighted average shares (diluted) | 31,867 |
| | 30,469 |
| | 31,527 |
| | 30,341 |
| Weighted average shares (diluted) | 46,101 | | | 45,222 | | | 46,013 | | | 45,154 | |
Basic loss per share | $ | (0.67 | ) | | $ | (0.52 | ) | | $ | (1.93 | ) | | $ | (1.87 | ) | Basic loss per share | $ | (0.29) | | | $ | (0.50) | | | $ | (0.70) | | | $ | (1.13) | |
Diluted loss per share | $ | (0.67 | ) | | $ | (0.52 | ) | | $ | (1.93 | ) | | $ | (1.87 | ) | Diluted loss per share | $ | (0.29) | | | $ | (0.50) | | | $ | (0.70) | | | $ | (1.13) | |
Dilutive potential common shares consist of shares issuable upon the exercise of stock options, settlement of SARs, and the vesting of RSUsrestricted stock units ("RSUs"), market stock units ("MSUs") and MSUs.equity consideration related to the EveryMundo LLC acquisition. Potential common shares determined to be antidilutive and excluded from diluted weighted average shares outstanding were approximately 2.01.7 million and 2.02.4 million, for the three months ended September June 30, 20172023 and 2016,2022, respectively, and 2.21.7 million and 1.92.6 million for the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, respectively. BasicIn addition, potential common shares related to the convertible notes determined to be antidilutive and excluded from diluted weighted average shares outstanding were used to calculate loss per share5.8 million for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016.2022.
Since the Company has the intention and ability to settle the principal amount of its Notes (see Note 5) in cash, the treasury stock method is expected to be used for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of common stock for a given period exceeds the conversion price of $33.79 and $48.63 per share, for the 2019 Notes and 2047 Notes, respectively.
5.7. Noncash Share-based Compensation
The Company's 2017 Equity Incentive Plan (as amended and restated, the "2017 Stock Plan") has an aggregate authorized limit of 7,650,000 shares for issuance. In May 2023, the Company's stockholders approved an amendment to the 2017 Stock Plan increasing the aggregate amount of shares available for issuance to 10,550,000. As of June 30, 2023, 4,228,133 shares remain available for issuance under the 2017 Stock Plan.
The following table presents the number of shares or units outstanding for each award type as of June 30, 2023 and December 31, 2022, respectively, (in thousands):
| | | | | | | | | | | | | | |
Award type | | June 30, 2023 | | December 31, 2022 |
| | | | |
Restricted stock units (time-based) | | 3,107 | | | 2,235 | |
| | | | |
| | | | |
| | | | |
Market stock units | | 358 | | | 216 | |
EveryMundo equity consideration | | 137 | | | 137 | |
During the three months ended SeptemberJune 30, 2017,2023, the Company granted 10,78866,799 RSUs (time-based) with a weighted average grant-date fair value of $26.09$25.24 per share. The Company did not grant any MSUs, stock options and SARs during the three months ended September 30, 2017.
During the ninesix months ended SeptemberJune 30, 2017,2023, the Company granted 902,1781,614,406 RSUs (time-based) with a weighted average grant-date fair value of $21.43$25.58 per share. The Company also granted 110,100142,386 MSUs with a weighted average grant-date fair value of $26.99$30.42 to certain executive employees during the ninesix months ended SeptemberJune 30, 2017.2023. These MSUs vest on March 1, 2020January 31, 2026 and the actual number of MSUs that will be eligible to vest is based on the total stockholder return of the Company relative to the total stockholder return of the Index over the Performance Period,performance period, as defined by each award's plan documents or individual award agreements. The Company did not grant any stock options or SARsmaximum number of shares issuable upon vesting is 200% of the MSUs initially granted.
The assumptions used to value the MSUs granted during the ninesix months ended SeptemberJune 30, 2017.2023 were as follows:
| | | | | | | |
| Six Months Ended June 30, 2023 | | |
Volatility | 63.26 | % | | |
Risk-free interest rate | 3.76 | % | | |
Expected award life in years | 2.97 | | |
Dividend yield | — | % | | |
Share-based compensation expense is allocated to expense categories on the unaudited condensed consolidated statements of comprehensive income (loss).loss. The following table summarizes share-based compensation expense included in the Company's
unaudited condensed consolidated statements of comprehensive income (loss)loss for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016:2022:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2023 | | 2022 | | 2023 | | 2022 |
Share-based compensation: | | | | | | | | Share-based compensation: | | | | | | | |
Cost of revenue | $ | 479 |
| | $ | 544 |
| | $ | 1,569 |
| | $ | 1,720 |
| Cost of revenue | $ | 985 | | | $ | 1,006 | | | $ | 1,817 | | | $ | 1,831 | |
Operating expenses: | | | | | | | | Operating expenses: | |
Selling and marketing | 909 |
| | (918 | ) | | 3,313 |
| | 2,559 |
| Selling and marketing | 3,103 | | | 3,276 | | | 6,031 | | | 6,516 | |
Research and development | | Research and development | 2,673 | | | 2,899 | | | 5,023 | | | 6,612 | |
General and administrative | 2,864 |
| | 2,235 |
| | 8,546 |
| | 6,267 |
| General and administrative | 3,991 | | | 3,585 | | | 7,785 | | | 7,032 | |
Research and development | 1,319 |
| | 1,331 |
| | 4,237 |
| | 3,899 |
| |
Total included in operating expenses | 5,092 |
| | 2,648 |
| | 16,096 |
| | 12,725 |
| Total included in operating expenses | 9,767 | | | 9,760 | | | 18,839 | | | 20,160 | |
Total share-based compensation expense | $ | 5,571 |
| | $ | 3,192 |
| | $ | 17,665 |
| | $ | 14,445 |
| Total share-based compensation expense | $ | 10,752 | | | $ | 10,766 | | | $ | 20,656 | | | $ | 21,991 | |
In January 2017, the number of shares available for issuance increased by 900,000 to 10,868,000 under an evergreen provision in the Company's 2007 Equity Incentive Plan ("2007 Stock Plan"). The 2007 Stock Plan expired on March 26, 2017. On March 24, 2017, the Board of Directors adopted the 2017 Equity Incentive Plan (2017 Stock Plan), and recommended that the Company’s stockholders approve the 2017 Stock Plan. The 2017 Stock Plan was approved by the stockholders in May 2017 and reserved an aggregate amount of 2,500,000 shares for issuance. As of September At June 30, 2017, 2,489,212 shares remain available for issuance under the 2017 Stock Plan.
At September 30, 2017,2023, the Company had an estimated $35.4 $91.0 million of total unrecognized compensation costs related to share-based compensation arrangements. These costs will be recognized over a weighted average period of 2.4of 2.8 years.
The Company's Employee Stock Purchase Plan ("ESPP"(as amended, the "ESPP") provides forpermits eligible employees to purchase Company 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 DecemberDecember 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. In May 2021, the Company's stockholders approved an amendment to the ESPP Plan increasing the aggregate amount of shares available for issuance under the ESPP to 1,000,000. During the three and ninesix months ended SeptemberJune 30, 2017,2023, the Company issued 41,282zero and 92,20955,149 shares respectively, under the ESPP.ESPP, respectively. As of SeptemberJune 30, 2017, 291,101 2023, 331,976 shares remain authorized and available for issuance under the ESPP. As of SeptemberJune 30, 2017,2023, the Company held
approximately $0.5 $1.0 million on behalf of employees for future purchases under the ESPP, and this amount was recorded in accrued liabilitiespayroll and other employee benefits in the Company's unaudited condensed consolidated balance sheet.
6.8. Convertible DebtSenior Notes
The Company issued $143.8 million principal amountfollowing is a summary of the Company's convertible senior notes in December 2014 (the "2019 Notes")as of June 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date of Issuance | | Unpaid Principal Balance | | Net Carrying Amount | | Contractual Interest Rates |
| | | Current | | Noncurrent | |
| | | | | | | | | |
| | | | | | | | | |
1% Convertible Notes due in 2024 ("2024 Notes") | May 2019 | | $ | 143,750 | | | $ | 143,003 | | | $ | — | | | 1% |
2.25% Convertible Notes due in 2027 ("2027 Notes") | September 2020 | | $ | 150,000 | | | $ | — | | | $ | 147,522 | | | 2.25% |
The 2027 and $106.3 million principal amount of convertible senior notes in June 2017 (the "2047 Notes" and collectively with the 20192024 Notes (collectively, the "Notes"). The interest rates for the Notes are fixed at 2.0% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2015 for the 2019 Notes, and on December 1, 2017 for the 2047 Notes. The 2019 Notes mature on December 1, 2019, unless redeemed or converted in accordance with their terms prior to such date. The 2047 Notes mature on June 1, 2047, unless repurchased, redeemed or converted in accordance with their terms prior to such date.
Each $1,000 of principal of the 2019 Notes will initially be 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 amount at maturity of the 2047 Notes had an issue price of $880, and will initially be 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. An amount equal to the difference between the issue price and the principal amount at maturity will accrete to the 2047 Notes in accordance with the schedule set forth in the 2047 Notes. The issue price plus such accreted amount of the 2047 Notes is referred to herein as the “accreted principal amount.” On June 1, 2022, the accreted principal amount will accrete to 100% of the principal amount at maturity.
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 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 September 1, 2019Interest related to the close2027 Notes is payable semiannually in arrears in cash on March 15 and September 15 of businesseach year, beginning on March 15, 2021. Interest related to the second scheduled trading day immediately preceding2024 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2019.
The 2027 Notes mature on September 15, 2027 and the maturity date, holders may convert all2024 Notes mature on May 15, 2024, unless redeemed or any portion ofconverted in accordance with their 2019 Notes regardless of the contingent conversion conditions described herein. Upon conversion,terms prior to such date. At June 30, 2023, the Company will pay or deliver cash, shares of its common stock or a combinationhad $184.6 million of cash and sharescash equivalents. The Company believes its existing cash and cash equivalents, including current estimates of future operating cash flows and funds available under its common stock, at$50 million Credit Agreement (see Note 11), will provide adequate liquidity and capital resources to meet its election, as describedoperational requirements, anticipated capital expenditures, coupon interest and principal payments for the Notes for the next twelve months. Capital markets have tightened recently in the indenture governing the 2019 Notes.
On or before June 1, 2021, and subjectresponse to the satisfaction of certain conditions,macroeconomic environment making new financing more difficult and/or expensive and the Company is entitledmay not be able to electobtain such financing on terms acceptable to redeem all or any portionit.
Each $1,000 of principal of the 20472027 Notes at a redemption price equal to 100% of the accreted principal amount of the 2047 Notes, plus accrued and unpaid interest to, but excluding, the redemption date, if the daily volume weighted average pricewill initially be convertible into 23.9137 shares of the Company’s common stock, which is greater than or equalequivalent to 130%an initial conversion price of approximately $41.82 per share. Each $1,000 of principal of the conversion price for at least 20 trading days during any 30 consecutive trading day period. After June 1, 2021, the Company2024 Notes will initially be entitled to elect to redeem all or any portion of the 2047 Notes (without regard to the priceconvertible into 15.1394 shares of the Company’s common stock) at a redemption price equalstock, which is equivalent to the then current accreted principal amount of the 2047 Notes, plus accrued and unpaid interest to, but excluding, the redemption date.
Holders may convert their 2019 Notes at their option at any time prior to the close of business on the business day immediately preceding September 1, 2019 only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on March 31, 2015, if the last reported salean initial conversion price of the common stock for at least 20 trading days (whether or not consecutive) during 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 theapproximately $66.05 per share. The initial conversion price on each applicable trading day;
duringfor the five consecutive business day period immediately following any five consecutive trading day period in which the trading price per $1,000 principal amount of 2019 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock2027 and the conversion rate on each such trading day; or
2024 Notes is subject to adjustment upon the occurrence of certain specified corporate events.
Holders may convert their 2047 Notes at their option on any day prior to the close of business on the business day immediately preceding March 1, 2047 under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending September 30, 2017, if the last reported sale price of the Company's 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 exceeds 130% of the applicable conversion price in effect on each such trading day;
during the five consecutive business day period immediately following any five consecutive trading day period (the "Measurement Period") in which the trading price per 2047 Note 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; or
upon the occurrence of specified corporate events.
The 2047 Notes will also be convertible, regardless of the foregoing circumstances, at any time from, and including, March 1, 2047 until the close of business on the second scheduled trading day immediately preceding the applicable maturity date. Each holder of the 2047 Notes has the right to require the Company to repurchase for cash all or any portion of such holder's 2047 Notes on June 1, 2022 at a price per $1,000 principal amount of the 2047 Notes equal to the accreted principal amount at maturity plus accrued and unpaid interest to, but excluding, the repurchase date.
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 2019 Notes and 2047 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. If such a fundamental change occurs prior to June 1, 2022, holders of the 2047 Notes may also require the Company to repurchase all or a portion of their notes for cash at a repurchase price equal to the then current accreted principal amount of the Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date.
In addition, if specific corporate events occur prior to the applicable maturity date, the Company will be required to increase the conversion rate for holders who elect to convert their notes in certain circumstances. Holders who convert their 2047 Notes in connection with a Make-Whole Fundamental Change (as defined in the indenture governing the 2047 Notes) or in connection with a redemption of such 2047 Notes on or prior to June 1, 2021 will, under certain circumstances, be entitled to a make-whole premium in the form of an increase in the conversion rate determined by reference to a make-whole table set forth in such indenture.
As of SeptemberJune 30, 2017,2023, the 2019 Notes2027 and the 20472024 Notes are not yet convertible.
In accordance with accounting guidance on embedded conversion features, the Company valuedconvertible and bifurcated the conversion options associated with each of the 2019 Notestheir remaining term is approximately 50 months and 2047 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 issuance, 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 and $2.7 million for the 2047 Notes, are being amortized to expense over the expected life of each notes 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 and $0.3 million for the 2047 Notes, were netted with the equity component in stockholders' equity. As of September 30, 2017, no cash payments were made for the debt issuance cost related to the 2047 Notes.
The Notes consist of the following (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Liability component: | | | |
Principal | $ | 250,000 |
| | $ | 143,750 |
|
Less: debt discount and issuance cost, net of amortization | (39,688 | ) | | (21,451 | ) |
Net carrying amount | $ | 210,312 |
| | $ | 122,299 |
|
| | | |
Equity component (1) | $ | 37,560 |
| | $ | 28,714 |
|
(1) Recorded within additional paid-in capital in the consolidated balance sheet. As of September 30, 2017, 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,10 months, respectively.
The following table sets forth total interest expense recognized related to the Notes (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
2.0% coupon | $ | 1,250 |
| | $ | 719 |
| | $ | 2,741 |
| | $ | 2,157 |
|
Amortization of debt issuance costs | 340 |
| | 209 |
| | 782 |
| | 620 |
|
Amortization of debt discount | 2,504 |
| | 1,411 |
| | 5,555 |
| | 4,166 |
|
Total | $ | 4,094 |
| | $ | 2,339 |
| | $ | 9,078 |
| | $ | 6,943 |
|
As of SeptemberJune 30, 20172023 and December 31, 2016,2022, the fair value of the principal amount of the Notes in the aggregate was $239.7$285.3 million and $141.1$263.7 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.
As of September 30, 2017, the remaining lifeThe Notes consist of the 2019following (in thousands):
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| | | |
Principal | $ | 293,750 | | | $ | 293,750 | |
Less: debt issuance cost, net of amortization | (3,225) | | | (3,971) | |
Net carrying amount | $ | 290,525 | | | $ | 289,779 | |
| | | |
| | | |
The following table sets forth total interest expense recognized related to the Notes and the 2047 Notes is approximately 26 months and 56 months, respectively.(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Coupon interest | $ | 1,203 | | | $ | 1,203 | | | $ | 2,406 | | | $ | 2,406 | |
Amortization of debt issuance costs | 373 | | | 373 | | | 746 | | | 746 | |
| | | | | | | |
Total | $ | 1,576 | | | $ | 1,576 | | | $ | 3,152 | | | $ | 3,152 | |
Note Hedge and Warrant
Capped Call Transactions
ConcurrentlyIn September 2020 and in May 2019, in connection with the offering of the 20192027 and 2024 Notes, respectively, the Company entered into separate convertible note hedge (the "Note Hedge") and warrant (the "Warrant") transactions. Taken together,privately negotiated capped call transactions (collectively, the purchase"Capped Call") with certain option counterparties. The Capped Call transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Note Hedge andCompany’s common stock initially underlying the saleNotes, at a strike price that corresponds to the initial conversion price of the WarrantNotes, also subject to adjustment, and are
intended to offset any actual dilution from the exercisable upon conversion of the 2019Notes. The Capped Call transactions are intended to reduce potential dilution to the Company’s common stock and/or offset any cash payments the Company will be required to make in excess of the principal amounts upon any conversion of Notes, and to effectively increase the overall conversion price of the 20192027 Notes from $33.79$41.82 to $45.48$78.90 per share, and for the 2024 Notes from $66.05 to $101.62 per share. As the Capped Call transactions meet certain accounting criteria, they are recorded in stockholders’ equity and are not accounted for as derivatives. The total cost of the Note Hedge transactionCapped Call was $29.4 million. The Company received $17.1$25.3 million in cash proceeds from the sale of the Warrant.
Pursuant to the Warrants, if the average market value per share of the Company's common stockand $16.4 million for the reporting period, as measured under the Warrant, exceeds the strike price of the Warrant, the Warrant will have a dilutive effect on the Company's earnings per share. Holders of the 20192027 and 2024 Notes, respectively, and Note Hedge will not have any rights with respect to the Warrant, as the Note Hedge is not part of the 2019 Notes or the Warrant. The Warrant is not part of the 2019 Notes or Note Hedge. Both the Note Hedge and Warrant have been accounted forwas recorded as part of additional paid-in capital.
7.9. Commitments and Contingencies
Litigation
In the ordinary course of business, the Company regularly becomes involved in contract and other negotiations and, in more limited circumstances, becomes involved in legal proceedings, claims and litigation. The outcomes of these matters are inherently unpredictable. The Company is not currently involved in any outstanding litigation that it believes, individually or in the aggregate, will have a material adverse effect on its business, financial condition, results of operations or cash flows.
Purchase commitments
In the ordinary course of business, the Company enters ininto various purchase commitments for goods and services, mainly related to infrastructure platforms, business technology software and support, and other services.
In June 2017, the Company entered in a noncancelable agreement with a computing infrastructure vendor that expires on June 30, 2020. The purchase commitment as of September 30, 2017 was $19.7 million for the remaining period under the three-year agreement.
Lease commitments
The Company leases office space and office equipment under noncancelable operating leases that expire at various dates. As a result of the Vayant acquisition, the Company assumed an operating lease in Sofia, Bulgaria for office space that expires in early 2018. In August 2017,January 2023, the Company entered into a newnoncancelable agreement for software support services with a four-year term. The remaining purchase commitment as of June 30, 2023 was $3.5 million and the agreement expires in March 2027. There were no other material changes outside the ordinary course of business to the noncancellable purchase commitments disclosed in the Annual Report.
10. Severance and Other Related Costs
In the first quarter of 2023, the Company made additional organizational changes and incurred approximately zero and $3.6 million of severance, employee benefits, outplacement and related costs during the three and six months ended June 30, 2023, respectively. These costs were recorded primarily as operating lease expenses in Sofiathe unaudited condensed consolidated statements of comprehensive loss, mainly research and development, and sales and marketing. During the three and six months ended June 30, 2023, cash payments of $0.6 million and $3.7 million, respectively, were recorded for the incurred costs. The Company expects to replacesettle the expiring Sofia lease.remaining accrued expense of approximately $0.7 million during the second half of 2023.
11. Subsequent Event
On July 21, 2023, the Company, through its wholly owned subsidiary PROS, Inc., entered into a three-year secured credit agreement ("Credit Agreement") with a bank lender providing for a revolving line of credit of up to $50 million, with interest paid monthly, at the 30-day secured overnight financing rate ("SOFR") plus an applicable margin of 4.25%. As of September 30, 2017,July 25, 2023, there were no borrowings outstanding under the future minimum lease commitmentsCredit Agreement. The Company incurred approximately $0.8 million of debt issuance cost related to lease agreements were as follows:the Credit Agreement.
|
| | | | |
Year Ending December 31, | | Amount |
Remaining 2017 | | $ | 569 |
|
2018 | | 3,553 |
|
2019 | | 2,923 |
|
2020 | | 1,443 |
|
2021 | | 957 |
|
2022 and thereafter | | 718 |
|
Total minimum lease payments | | $ | 10,163 |
|
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “we,” “us,” “PROS““PROS” and “our” refer to PROS Holdings, Inc. and all of its subsidiaries that are consolidated in conformity with generally accepted accounting principles in the United States.
This management's discussion and analysis of financial condition and results of operations should be read along with the unaudited condensed consolidated financial statements and unaudited notes to unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q,("Interim Condensed Consolidated Financial Statements (Unaudited)"), as well as the audited consolidated financial statements and notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations set forth in our Annual Report.
Overview
PROS is a cloud software company powering the shift to modern commerce by helping companies create personalized and frictionless buying experiences for their customers. Fueled by dynamic pricing science and machine learning, our solutions make it possible for companies to price, configure and sell their products and services in an omnichannel environment with speed, precision and consistency. Our customers, who are leaders in their markets, benefit from decades of data science expertise infused into our industry solutions. We also provide professional services to implement our software solutions.
Q3 2017Q2 2023 Financial Overview
We continue to reach key milestones in our cloud transformation efforts originally announced in June 2015. In the thirdsecond quarter of 2017,2023, we continued to make substantial progress in the execution of our cloud-first strategy, asgrow our subscription revenue, increasedincreasing subscription revenue by 60%14% for both the three and six months ended SeptemberJune 30, 20172023, each as compared to the same period in 2016,2022. Total revenue increased 11% and our10% for the three and six months ended June 30, 2023, respectively, as compared to the same periods in 2022.
For the three and six months ended June 30, 2023, recurring revenue which(which consists of subscription revenue and maintenance and subscriptionsupport revenue) accounted for 82% and 83% of total revenue, grew by 20% over the third quarter of 2016,respectively. Recurring revenue accounted for 84% and made up 79%85% of total revenue for the three and six months ended SeptemberJune 30, 2017.2022, respectively. Our gross revenue retention rates remained above 93% during the twelve months ended June 30, 2023.
In August 2017, we acquired Vayant Travel Technologies, Inc. ("Vayant"), a privately held company based in Sofia, Bulgaria. Vayant is a cloud software company that provides advanced shopping, merchandising and inspirational travel solutions. The acquisition of Vayant strengthens our modern commerce solutions for the travel industry and positions us to deliver greater value to our travel customers through an end-to-end offer optimization solution designed to help travel companies deliver personalized offers and expanded choices that drive loyalty and growth.
Cash used in operating activities was $29.8$12.7 million for the ninesix months ended SeptemberJune 30, 2017,2023 and remained relatively consistent as compared to $7.2$12.9 million for the ninesix months ended SeptemberJune 30, 2016. The increase in net cash used in operating activities was primarily due to the net impact of working capital changes, mainly driven by a decrease in operating cash provided by accounts receivable of approximately $13.0 million as a result of $12.9 million of cash generated in the nine months ended September 30, 2016 due to improved collections. In addition, operating cash outflow was impacted by an increase in our prepaid assets for payments for cloud infrastructure and a decrease in accrued payroll and other employee benefits due to an increase in the annual incentive paid in the first quarter of 2017 over the amount paid in the first quarter of 2016.2022.
Free cash flow is a key metric to assess the strength of our business. FreeWe define free cash flow, is a non-GAAP financial measure, which is defined as net cash provided or used by (used in) operating activities, excluding severance payments, less additions to property, plant and equipment,capital expenditures, 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 othersother users of our financial information in evaluating the amount of cash generated by our business operations. Free cash flow use forused during the threemonths ended SeptemberJune 30, 20172023 was $9.8$6.2 million, compared to free cash flow of $0.5$2.2 million for the three months ended SeptemberJune 30, 2016.2022. The three-month decreaseincrease primarily related to timing of collections and an increase in marketing events payments. Free cash flow used during the sixmonths ended June 30, 2023 was $10.8 million, compared to $13.7 million for the six months ended June 30, 2022. The improvement was primarily attributable to increased cash collections during the period and a $10.8 million decreaselower annual incentive payment in operating cash flow. Free cash flow use for the nine months ended September 30, 2017 was $33.2 million,2023 as compared to $14.3 million for the nine months ended September 30, 2016. The nine-month decrease was primarily attributable to a $22.7 million decrease in operating cash flow due to our shift to a subscription based revenue model. prior year. The following is a reconciliation of free cash flow to the most comparable GAAP measure, net cash used in operating activities:activities (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net cash used in operating activities | $ | (6,542) | | | $ | (1,931) | | | $ | (12,685) | | | $ | (12,945) | |
Severance | 579 | | | — | | | 3,749 | | | — | |
Purchase of property and equipment | (277) | | | (308) | | | (1,823) | | | (769) | |
| | | | | | | |
| | | | | | | |
Free Cash Flow | $ | (6,240) | | | $ | (2,239) | | | $ | (10,759) | | | $ | (13,714) | |
Factors Affecting Our Performance
Key factors and trends that have affected, and we believe will continue to affect, our operating results include:
•Macroeconomic Environment. The industries and companies we serve are navigating a complex macroeconomic environment impacted by inflation, higher interest rates, volatile capital and financial markets, supply chain disruptions, tight labor markets, pricing volatility, the Russia-Ukraine conflict, and other local and regional macroeconomic conditions. In this challenging and constantly changing environment, we remain confident in our ability to help optimize shopping and selling experiences for our customers. For example, pricing volatility and inflation are catalysts for demand for our price management and optimization solutions, and the pace of change is driving businesses to replace manual selling processes with our AI-powered digital solutions. Partly, as a result, we grew both subscription revenue and total revenue by double digits in the first half of 2023. Because uncertain macroeconomic and industry conditions in countries and regions in which we operate create a challenging selling
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net cash used in operating activities | | $ | (8,539 | ) | | $ | 2,213 |
| | $ | (29,848 | ) | | $ | (7,159 | ) |
Purchase of property and equipment | | (540 | ) | | (1,185 | ) | | (1,235 | ) | | (6,524 | ) |
Purchase of intangible assets | | (75 | ) | | — |
| | (75 | ) | | — |
|
Capitalized internal-use software development costs | | (688 | ) | | (497 | ) | | (1,996 | ) | | (569 | ) |
Free Cash Flow | | $ | (9,842 | ) | | $ | 531 |
| | $ | (33,154 | ) | | $ | (14,252 | ) |
Total deferredenvironment for large enterprise technology deployments, we believe in the near term that new customers increasingly will emphasize smaller scope initial purchases with faster implementations. While our recurring revenue was $91.8 millionand earnings are relatively predictable as a result of September 30, 2017, as compared to $79.7 million asour subscription-based business model, the broader implications of December 31, 2016, an increasethese macroeconomic events on our business, results of $12.0 million, or 15%, primarilyoperations, cash flows and overall financial position, particularly in the long term, remain uncertain. Under this model, our lower subscription bookings during the pandemic adversely impacted our subscription revenue growth rates in subsequent periods due to an increase inthe timing lag between subscription deferred revenue.
Revenue by Geography
The following geographic information is presented forbookings and the three and nine months ended September 30, 2017 and 2016. We categorize geographic revenues basedrevenue recognized on those bookings. For a full discussion on the location of the customer's headquarters. Because our contracts are predominately denominated in U.S. dollars, we have limited exposure to foreign currency exchange risk as discussed under Item 3 "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Exchange Risk".
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| Revenue | | Percent | | Revenue | | Percent | | Revenue | | Percent | | Revenue | | Revenue |
United States of America | $ | 15,829 |
| | 38 | % | | $ | 13,436 |
| | 35 | % | | $ | 46,858 |
| | 38 | % | | $ | 41,618 |
| | 37 | % |
Europe | 12,574 |
| | 30 | % | | 10,379 |
| | 27 | % | | 35,056 |
| | 29 | % | | 32,447 |
| | 29 | % |
The rest of the world | 13,534 |
| | 32 | % | | 14,569 |
| | 38 | % | | 40,558 |
| | 33 | % | | 39,285 |
| | 35 | % |
Total revenue | $ | 41,937 |
| | 100 | % | | $ | 38,384 |
| | 100 | % | | $ | 122,472 |
| | 100 | % | | $ | 113,350 |
| | 100 | % |
Opportunities, Trends and Uncertainties
We have noted opportunities, trendsrisks and uncertainties that we believe are particularly significant to understand our financial results and condition.business, please see the "Risk Factors" section in our Annual Report.
•Profitable Growth as a Priority. We believe our market opportunity is large and underpenetrated, and therefore we intend to continue investing in our business to create awareness for long-term growth.our solutions, acquire new customers, and expand within our existing customer base globally. We have invested,are also focusing on our cash flow and expectprofitability, and plan to mitigate the growth in our costs and reduce our existing cost structure. We also plan to continue to invest,investing in product development to enhance our existing technologiestechnologies. This includes initiatives to accelerate customer time-to-value, improve efficiency, provide out-of-the-box integration with third-party commerce solutions and develop new applications and technologies. In addition,
•Travel Industry Recovering. Despite operational headwinds and regional variances in the timing of travel restrictions being lifted, the travel industry, particularly the airline industry, continues to recover from the unprecedented disruption caused by the pandemic. While global capacity has not fully returned to pre-pandemic levels, demand for air travel continues to increase as restrictions have been lifted. North American travel has led this recovery with Asia Pacific lagging, particularly as China only recently lifted international travel restrictions. The International Air Transport Association forecasts airline industry profitability in 2023 with certain U.S.-based airlines already publicly reporting profitable quarters. However, the rate of airline industry recovery and profitability could be impacted negatively if inflation impacts consumer disposable income or if business travel does not recover to pre-pandemic levels. While we planexpect airlines to increasingly prioritize technology investments as travel returns to pre-COVID levels, most of our airline industry customers are based outside the U.S. and there is significant geographic and individual airline variation in pace of recovery and capacity for technology projects.
•Digital Purchasing Driving Technology Adoption. We believe the long-term trends toward digital purchasing by both consumers and corporate buyers drives demand for technology that provides fast, frictionless and personalized buying experiences across direct sales, partner, online, mobile and emerging channels. Buyers often prefer not to interact with sales representatives as their primary source of research, and to buy online when they have already decided what to buy. For example, in the airline industry, the pandemic accelerated a long-term trend towards direct booking channels, and we anticipate airlines continuing to invest in technology, including mobile device-enabled solutions, to enhance their ability to capture a greater percentage of bookings through their own channels such as their websites. We believe companies must adopt technologies which power these types of experiences across sales channels as they modernize their sales process to compete in digital commerce.
•Artificial Intelligence Becoming Mainstream. Recent mainstream adoption of generative AI and associated media attention on AI are driving increased interest and conversations by companies around business applications leveraging AI. For example, companies are looking to AI to quickly extract actionable insights from their data, improve and customize their offerings, and drive process and operating efficiencies. Our AI-powered solutions enable buyers to move fluidly and with personalized experiences across our customers’ sales channels, and our digital offer marketing solutions help our customers drive their buyers directly into their direct selling channels. Our solutions have utilized AI for years, and our legacy of AI development continues to influence our category-leading solutions. For example, our platform is now powered by our 4th generation AI, using a deep neural network that leverages all available data and attributes to improve prediction accuracy.
•Cloud Migrations. We continue to expandencourage our abilitycustomers to sellmigrate to our subscription offerings globally through investments in sales and marketing andcurrent cloud solutions as we discontinue support and infrastructure. These investments will increase our costs on an absolute basis in the near-term.
Since 2016, we have sold more subscription-based solutions and very few perpetual licenses as partfor certain of our on-premises solutions. As our on-premises customers continue to migrate from our legacy solutions to our current cloud strategy, andsolutions, we expect this trend to continue. This increase in the sales of subscription-based solutions has resulted in an increase in our subscription revenue, and deferred more of our revenue recognition to later periods than we experienced prior to the announcement of our cloud-first strategy in 2015. We also expect that the trend in sales of subscription-based solutions will result in a decrease in ourfuture maintenance and support revenue over time.
Since 2016, the global economic environment has continued to shown signs of uncertainty regarding continued future domestic and global economic growth. Despite generally strong performance in capital markets, certain foreign countrieswill continue to face significant economic, politicaldecline and social crises, and it is possible that these crises could result in economic deterioration in the markets in which we operate. During timesour subscription revenue will increase.
Our income tax rates vary from the federal and state statutory rates due to the valuation allowances on our deferred tax assets and foreign withholding taxes; changing tax laws, regulations, and interpretations in multiple jurisdictions in which we operate; changes to the financial accounting rules for income taxes; unanticipated changes in tax rates; differences in accounting and tax treatment of our equity-based compensation and the tax effects of purchase accounting for acquisitions. We expect this fluctuation in income tax rates to continue as well as its potential impact on our results of operations.
Results of Operations
The following table sets forth certain items in our Condensed Consolidated Statementsunaudited condensed consolidated statements of Comprehensive Income (Loss)comprehensive loss as a percentage of total revenues for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenue: | | | | | | | |
Subscription | 76 | % | | 74 | % | | 76 | % | | 74 | % |
Maintenance and support | 7 | | | 11 | | | 7 | | | 11 | |
Total subscription, maintenance and support | 82 | | | 84 | | | 83 | | | 85 | |
| | | | | | | |
Services | 18 | | | 16 | | | 17 | | | 15 | |
Total revenue | 100 | | | 100 | | | 100 | | | 100 | |
Cost of revenue: | | | | | | | |
Subscription | 19 | | | 20 | | | 19 | | | 20 | |
Maintenance and support | 2 | | | 3 | | | 3 | | | 3 | |
Total cost of subscription, maintenance and support | 21 | | | 23 | | | 22 | | | 23 | |
| | | | | | | |
Services | 17 | | | 17 | | | 17 | | | 17 | |
Total cost of revenue | 38 | | | 40 | | | 39 | | | 41 | |
Gross profit | 62 | | | 60 | | | 61 | | | 59 | |
Operating Expenses: | | | | | | | |
Selling and marketing | 33 | | | 35 | | | 34 | | | 37 | |
Research and development | 29 | | | 34 | | | 30 | | | 35 | |
General and administrative | 18 | | | 20 | | | 19 | | | 21 | |
| | | | | | | |
Impairment of fixed assets | — | | | — | | | — | | | 1 | |
Total operating expenses | 80 | | | 90 | | | 83 | | | 94 | |
Convertible debt interest and amortization | (2) | | | (2) | | | (2) | | | (2) | |
Other income (expense), net | 2 | | | — | | | 2 | | | — | |
Loss before income tax provision | (17) | | | (32) | | | (22) | | | (38) | |
Income tax provision | — | | | — | | | — | | | — | |
Net loss | (18) | % | | (33) | % | | (22) | % | | (38) | % |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue: | | | | | | | |
Subscription | 38 | % | | 26 | % | | 34 | % | | 24 | % |
Maintenance and support | 41 |
| | 46 |
| | 43 |
| | 45 |
|
Total subscription, maintenance and support | 79 |
| | 72 |
| | 77 |
| | 69 |
|
License | 1 |
| | 6 |
| | 3 |
| | 7 |
|
Services | 20 |
| | 22 |
| | 20 |
| | 24 |
|
Total revenue | 100 |
| | 100 |
| | 100 |
| | 100 |
|
Cost of revenue: | | | | | | | |
Subscription | 19 |
| | 13 |
| | 16 |
| | 11 |
|
Maintenance and support | 7 |
| | 9 |
| | 7 |
| | 9 |
|
Total cost of subscription, maintenance and support | 26 |
| | 21 |
| | 23 |
| | 20 |
|
License | — |
| | — |
| | — |
| | — |
|
Services | 17 |
| | 19 |
| | 18 |
| | 22 |
|
Total cost of revenue | 42 |
| | 41 |
| | 41 |
| | 42 |
|
Gross profit | 58 |
| | 59 |
| | 59 |
| | 58 |
|
Operating Expenses: | | | | | | | |
Selling and marketing | 40 |
| | 36 |
| | 41 |
| | 42 |
|
General and administrative | 25 |
| | 24 |
| | 25 |
| | 25 |
|
Research and development | 33 |
| | 34 |
| | 35 |
| | 35 |
|
Acquisition-related | 1 |
| | — |
| | 1 |
| | — |
|
Total operating expenses | 100 |
| | 93 |
| | 101 |
| | 102 |
|
Convertible debt interest and amortization | (10 | ) | | (6 | ) | | (7 | ) | | (6 | ) |
Other income (expense), net | 1 |
| | — |
| | — |
| | — |
|
Loss before income tax provision | (51 | ) | | (40 | ) | | (50 | ) | | (50 | ) |
Income tax (benefit) provision | (1 | ) | | 1 |
| | — |
| | — |
|
Net loss | (51 | )% | | (41 | )% | | (50 | )% | | (50 | )% |
Revenue:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Variance | | Nine Months Ended September 30, | | Variance |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Subscription | $ | 15,809 |
| | $ | 9,852 |
| | $ | 5,957 |
| | 60 | % | | $ | 41,457 |
| | $ | 27,196 |
| | $ | 14,261 |
| | 52 | % |
Maintenance and support | 17,124 |
| | 17,666 |
| | (542 | ) | | (3 | )% | | 52,332 |
| | 51,103 |
| | 1,229 |
| | 2 | % |
Total subscription, maintenance and support | 32,933 |
| | 27,518 |
| | 5,415 |
| | 20 | % | | 93,789 |
| | 78,299 |
| | 15,490 |
| | 20 | % |
License | 603 |
| | 2,419 |
| | (1,816 | ) | | (75 | )% | | 3,883 |
| | 8,178 |
| | (4,295 | ) | | (53 | )% |
Services | 8,401 |
| | 8,447 |
| | (46 | ) | | (1 | )% | | 24,800 |
| | 26,873 |
| | (2,073 | ) | | (8 | )% |
Total revenue | $ | 41,937 |
| | $ | 38,384 |
| | $ | 3,553 |
| | 9 | % | | $ | 122,472 |
| | $ | 113,350 |
| | $ | 9,122 |
| | 8 | % |
Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance |
(Dollars in thousands) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Subscription | $ | 57,304 | | | $ | 50,386 | | | $ | 6,918 | | | 14 | % | | $ | 113,273 | | | $ | 99,151 | | | $ | 14,122 | | | 14 | % |
Maintenance and support | 5,093 | | | 7,249 | | | (2,156) | | | (30) | % | | 10,805 | | | 15,104 | | | (4,299) | | | (28) | % |
Total subscription, maintenance and support | 62,397 | | | 57,635 | | | 4,762 | | | 8 | % | | 124,078 | | | 114,255 | | | 9,823 | | | 9 | % |
Services | 13,395 | | | 10,727 | | | 2,668 | | | 25 | % | | 24,896 | | | 20,599 | | | 4,297 | | | 21 | % |
Total revenue | $ | 75,792 | | | $ | 68,362 | | | $ | 7,430 | | | 11 | % | | $ | 148,974 | | | $ | 134,854 | | | $ | 14,120 | | | 10 | % |
Subscription revenue.Subscription revenue increased primarily due to an increase in the number of customers purchasing our subscription servicesnew and existing customers purchasing additional products and services. The total number of customers generatingcustomer subscription revenue increased 49% and 40%, respectively, for the three and nine months ended September 30, 2017.contracts.
In addition, the increase in subscription revenue included $1.2 million related to our acquisition of Vayant. We expect our subscription revenue will continue to increase as we focus on subscription based sales and phase out perpetual license offerings.
Maintenance and support revenue.The three-month decrease in maintenance Maintenance and support revenue was principally thedecreased primarily as a result of severalexisting maintenance customers converting their maintenance contractsmigrating to subscription as part of our cloud strategysolutions and, to a lesser extent, the timing of certain cash collections,customer maintenance churn. We expect maintenance revenue to continue to decline as a portion of ourwe continue to migrate maintenance contracts are recognized on a cash basis. The nine-month increase in maintenance and support revenue was principally a result of the timing of certain cash collections. These maintenance contracts may create some variability in maintenance revenue. As a result ofcustomers to our cloud strategy, we expect that maintenance revenue will decline over time as we sell fewer licenses and more subscription services and convert existing maintenance contracts to the cloud.solutions.
License revenue. Our license revenue depends on the amount of perpetual licenses sold in the period and the timing of license revenue recognition. As a result of our cloud strategy, for the three and nine months ended September 30, 2017, we sold fewer perpetual licenses and experienced a corresponding decrease in license revenue, which included a decrease of $1.9 million and $5.0 million, respectively, in license revenue recognized on a percentage of completion basis, partially offset by an increase of approximately $0.1 million and $0.7 million, respectively, in license revenue recognized upon software delivery. As a result of our cloud strategy, we expect to sell fewer licenses and more subscription services, resulting in lower future license revenue and higher subscription services revenue.
Services revenue.Services revenue remained effectively unchanged for the three months ended September 30, 2017. Services revenue decreased for the nine months ended September 30, 2017increased primarily as a result of large customer implementations completed in 2016. The decrease was also due to lower levelshigher sales of professional services required forrelated to our new subscription sales,contracts and follow-on professional services revenue on certain subscription contracts which is deferred until the customer commences use of the subscription because the professional services were deemed not to have standalone value.existing customers. Services revenue can varyvaries from period to period
depending on different factors, including the level of professional services required to implement our solutions, the timing of services revenue recognition on certain subscription contracts and any additionalefficiencies in our solutions implementations requiring less professional services requested from our customers during a particular period.
Cost of revenue and gross profit: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Variance | | Nine Months Ended September 30, | | Variance |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Cost of subscription | $ | 7,868 |
| | $ | 4,808 |
| | $ | 3,060 |
| | 64 | % | | $ | 19,605 |
| | $ | 12,342 |
| | $ | 7,263 |
| | 59 | % |
Cost of maintenance and support | 2,859 |
| | 3,416 |
| | (557 | ) | | (16 | )% | | 8,886 |
| | 10,266 |
| | (1,380 | ) | | (13 | )% |
Total cost of subscription, maintenance and support | 10,727 |
| | 8,224 |
| | 2,503 |
| | 30 | % | | 28,491 |
| | 22,608 |
| | 5,883 |
| | 26 | % |
Cost of license | 73 |
| | 38 |
| | 35 |
| | 92 | % | | 210 |
| | 199 |
| | 11 |
| | 6 | % |
Cost of services | 6,924 |
| | 7,380 |
| | (456 | ) | | (6 | )% | | 21,718 |
| | 24,594 |
| | (2,876 | ) | | (12 | )% |
Total cost of revenue | 17,724 |
| | 15,642 |
| | 2,082 |
| | 13 | % | | 50,419 |
| | 47,401 |
| | 3,018 |
| | 6 | % |
Gross profit | $ | 24,213 |
| | $ | 22,742 |
| | $ | 1,471 |
| | 6 | % | | $ | 72,053 |
| | $ | 65,949 |
| | $ | 6,104 |
| | 9 | % |
profit: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance |
(Dollars in thousands) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Cost of subscription | $ | 14,059 | | | $ | 13,746 | | | $ | 313 | | | 2 | % | | $ | 28,152 | | | $ | 27,525 | | | $ | 627 | | | 2 | % |
Cost of maintenance and support | 1,876 | | | 1,988 | | | (112) | | | (6) | % | | 4,158 | | | 4,155 | | | 3 | | | — | % |
Total cost of subscription, maintenance and support | 15,935 | | | 15,734 | | | 201 | | | 1 | % | | 32,310 | | | 31,680 | | | 630 | | | 2 | % |
| | | | | | | | | | | | | | | |
Cost of services | 12,636 | | | 11,907 | | | 729 | | | 6 | % | | 25,803 | | | 23,322 | | | 2,481 | | | 11 | % |
Total cost of revenue | 28,571 | | | 27,641 | | | 930 | | | 3 | % | | 58,113 | | | 55,002 | | | 3,111 | | | 6 | % |
Gross profit | $ | 47,221 | | | $ | 40,721 | | | $ | 6,500 | | | 16 | % | | $ | 90,861 | | | $ | 79,852 | | | $ | 11,009 | | | 14 | % |
Cost of subscription. The three and nine-month increase in costCost of subscription wasincreased slightly primarily attributabledue to an increase of $2.8 million and $6.8 million, respectively, inincreased infrastructure cost to support the increase in our current and anticipated subscription customer base which included $1.1 million relatedand higher employee-related costs mainly due to the acquisition of Vayant. The remaining increase in cost of subscriptionheadcount. The increase was partially offset by a decrease in amortization expense for intangible assets for the three and ninesix months of $0.3 million ended June 30, 2023, and $0.5 million, respectively, was related to personnel cost growth commensurate with our subscription revenue growth. Theinternal-use software expense for the six months ended June 30, 2023. Our subscription gross profit percentagepercentages were 75% and 73% for the three months ended SeptemberJune 30, 20172023 and 2016, was 50%2022, respectively, and 51%, respectively. The subscription gross profit percentage75% and 72% for the ninesix months ended SeptemberJune 30, 20172023 and 2016, was 53% and 55%,2022, respectively.
Cost of maintenance and support. The decrease in During the three months ended June 30, 2023, cost of maintenance and support was primarily attributabledecreased due to a decrease in personnel cost mainlycosts as a result of the need to support a declining maintenance customer base due to efficienciesmigrations to our subscription solutions. During the six months ended June 30, 2023, cost of maintenance and support remained relatively unchanged as compared to the same period in labor and less maintenance customers. The maintenance2022. Maintenance and support gross profit percentage was 83%percentages were 63% and 81%73% for the three months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, and 62% and 72% for the six months ended June 30, 2023 and 2022, respectively. TheGross profit percentages decreased primarily due to lower maintenance and support gross profit percentage was 83%revenue as we continue to migrate customers to our subscription solutions and the cost of maintenance and 80% for the nine months ended September 30, 2017 and 2016, respectively.support being relatively fixed.
Cost of license.services. Cost of license consists of third-party fees for licensed software and remained consistent forservices increased primarily due to higher personnel costs to support the three and nine months ended September 30, 2017 and 2016. Licenseincrease in our services revenue during the period. Services gross profit percentages were 6% and (11)% for the three months ended SeptemberJune 30,
2017 2023 and 2016, were 88%2022, respectively, and 98%, respectively. License gross profit percentages(4)% and (13)% for the ninesix months ended SeptemberJune 30, 20172023 and 2016, were 95% and 98%, respectively.
Cost of services. The three and nine-month decrease in cost of services was primarily attributable to a decrease in personnel cost used in our software implementations of $0.3 million and $2.3 million, respectively, and a decrease in other overhead expenses of $0.2 million and $0.6 million,2022, respectively. Services gross profit percentages for the three months ended September 30, 2017improved in 2023 compared to 2022 primarily due to an increase in services revenue and 2016, were 18% and 13%, respectively.a lesser increase in cost of services due to greater efficiencies. Services gross profit percentages for the nine months ended September 30, 2017 and 2016, were 12% and 8%, respectively. Services gross profit percentages can vary from period to period depending on different factors, including the level of professional services required to implement our solutions, our effective man-day rates and the utilization of our professional services personnel.employees and our effective man-day rates.
Gross profit. The increase in overall gross profit forOperating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance |
(Dollars in thousands) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Selling and marketing | $ | 24,880 | | | $ | 24,020 | | | $ | 860 | | | 4 | % | | $ | 50,890 | | | $ | 49,307 | | | $ | 1,583 | | | 3 | % |
Research and development | 21,847 | | | 23,401 | | | (1,554) | | | (7) | % | | 44,138 | | | 47,868 | | | (3,730) | | | (8) | % |
General and administrative | 13,849 | | | 13,837 | | | 12 | | | — | % | | 27,984 | | | 28,166 | | | (182) | | | (1) | % |
| | | | | | | | | | | | | | | |
Impairment of fixed assets | — | | | — | | | — | | | — | % | | — | | | 1,551 | | | (1,551) | | | (100) | % |
Total operating expenses | $ | 60,576 | | | $ | 61,258 | | | $ | (682) | | | (1) | % | | $ | 123,012 | | | $ | 126,892 | | | $ | (3,880) | | | (3) | % |
Selling and marketing expenses.During the three and ninesix months ended SeptemberJune 30, 2017 was primarily attributable to an increase of 9% and 8%, respectively, in total revenue as compared to the same periods in 2016.
Operating expenses:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Variance | | Nine Months Ended September 30, | | Variance |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Selling and marketing | $ | 16,980 |
| | $ | 13,641 |
| | $ | 3,339 |
| | 24 | % | | $ | 50,625 |
| | $ | 47,725 |
| | $ | 2,900 |
| | 6 | % |
General and administrative | 10,324 |
| | 9,253 |
| | 1,071 |
| | 12 | % | | 30,514 |
| | 27,910 |
| | 2,604 |
| | 9 | % |
Research and development | 14,046 |
| | 12,964 |
| | 1,082 |
| | 8 | % | | 42,429 |
| | 39,454 |
| | 2,975 |
| | 8 | % |
Acquisition-related | 613 |
| | — |
| | 613 |
| | nm |
| | 613 |
| | — |
| | 613 |
| | nm |
|
Total operating expenses | $ | 41,963 |
| | $ | 35,858 |
| | $ | 6,105 |
| | 17 | % | | $ | 124,181 |
| | $ | 115,089 |
| | $ | 9,092 |
| | 8 | % |
Selling2023, selling and marketing expenses. The three-monthexpenses increased primarily due to an increase in sales and marketing expenses was primarily attributable to an increase of $1.7 million in non-personnel cost, which included $0.5 million intangible amortization related to our acquisition of Vayant, an increase of $0.4 million in travel expenses, $0.4 million in recruiting expenses, $0.3 million for sales and marketing events and $0.1 million for facilityinitiatives, and other overhead expense.travel expenses. The remaining increase was in personnel cost mainly attributable to an increase of $1.8 million in noncash share-based compensation expense, partially offset by a decrease of $1.2 million in severance expense related to the change in employment status of our former Chief Operating Officer in July 2016, an increase of $0.6 million in commissions and $0.4 increase in other personnel costs.
The nine-month increase in sales and marketing expense was primarily attributable to an increase of $2.4 million in non-personnel cost, which included an increase of $0.8 million for sales and marketing events, $0.6 million in travel expenses, $0.5 million in recruiting expenses and $0.5 million intangible amortization related to our acquisition. The remaining increase of $0.5 million was attributable to a $1.7 million increase in personnel cost partially offset by a decrease of $1.2 million in severance expense associated with the change in employment status of our former Chief Operating Officer in July 2016.
General and administrative expenses. The three-month increase in general and administrative expenses was primarily attributable to an increase of $0.9 million in personnel cost mainly driven by $0.6 million in noncash share-based compensation expense and $0.2 million related to our acquisition. The remaining increase of $0.2 million was attributable to facility and other overhead expenses.
The nine-month increase in general and administrative expenses was primarily attributable to an increase of $2.2 million in noncash share-based compensation expense and $0.8 million in other personnel costs as a result of an increase in headcount, which also included $0.2 million related to our acquisition of Vayant. This increase was partially offset by a $0.6 million decrease in legal, facilityemployee-related costs mainly due to prior organizational changes and other overhead expenses.a decrease in intangible asset amortization expense.
Research and development expenses. TheDuring the three and nine-month increase inmonths ended June 30, 2023, research and development expenses wasdecreased primarily attributabledue to an increasea decrease in employee-related costs mainly due to prior organizational changes and a
decreased use of an increase in headcount to support our current and future product development and growth objectives, which also included $0.4 million related to our acquisition of Vayant. This increase was partially offset by an increase in our capitalized internal-use software development costs of $0.2 million and $1.3 million, respectively. The remaining increase incontracted resources. During the six months ended June 30, 2023, research and development expenses decreased primarily due to a decrease in noncash share-based compensation and a decreased use of $0.2 millioncontracted resources. The noncash share-based compensation was higher in prior year mainly due to the acceleration of equity awards related to the retirement of a senior officer in the first quarter of 2022.
General and $1.2 million, respectively, was attributableadministrative expenses.As a result of our efforts to non-personnel costsfind greater efficiencies, general and related overheadadministrative expenses associated with higher personnel cost.
Acquisition-related expenses. Acquisition-related expenses were $0.6 millionremained relatively consistent for the three and ninesix months ended SeptemberJune 30, 2017 consisting primarily2023 as compared with the same periods in 2022.
Impairment of advisoryfixed assets. During the six months ended June 30, 2023 and legal fees, accounting2022, we recorded zero and other professional fees, and retention bonuses$1.6 million impairment charge related to fixed assets, respectively. The 2022 impairment resulted from changes to our acquisition and integration of Vayant.intentions for certain fixed assets in connection with a new agreement with a software vendor.
Other expense, net:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Variance | | Nine Months Ended September 30, | | Variance |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Convertible debt interest and amortization | $ | (4,094 | ) | | $ | (2,339 | ) | | $ | (1,755 | ) | | 75 | % | | $ | (9,078 | ) | | $ | (6,943 | ) | | $ | (2,135 | ) | | 31 | % |
Other income (expense), net | $ | 347 |
| | $ | (26 | ) | | $ | 373 |
| | (1,435 | )% | | $ | 315 |
| | $ | (139 | ) | | $ | 454 |
| | (327 | )% |
Non-operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance |
(Dollars in thousands) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Convertible debt interest and amortization | $ | (1,576) | | | $ | (1,576) | | | $ | — | | | — | % | | $ | (3,152) | | | $ | (3,152) | | | $ | — | | | — | % |
Other income (expense), net | $ | 1,791 | | | $ | (2) | | | $ | 1,793 | | | (89,650) | % | | $ | 3,242 | | | $ | (420) | | | $ | 3,662 | | | (872) | % |
Convertible debt interest and amortization. The convertible Convertible debt expense for the three and ninesix months ended SeptemberJune 30, 20172023 and 20162022 related to coupon interest and amortization of debt discount and issuance costs attributable to our 2019 Notes issued in December 2014 and our 2047 Notes issued in June 2017.Notes.
Other income (expense) net.Other income (expense), netnet.The change by $0.4 million and $0.5 millionin other income (expense), net for the three and ninesix months ended SeptemberJune 30, 2017,2023, primarily related to higher interest income mainly driven by an increase in interest rates in 2023 as compared to prior year, and to a lesser extent due to foreign currency exchange rate fluctuations during the period.fluctuations.
Income tax (benefit) provision:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Variance | | Nine Months Ended September 30, | | Variance |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Effective tax rate | 1 | % | | (1 | )% | | n/a |
| | n/a |
| | — | % | | (1 | )% | | n/a |
| | n/a |
|
Income tax (benefit) provision | $ | (271 | ) | | $ | 227 |
| | $ | (498 | ) | | (219 | )% | | $ | 55 |
| | $ | 490 |
| | $ | (435 | ) | | (89 | )% |
provision: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance |
(Dollars in thousands) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
Effective tax rate | (1.1) | % | | (1.3) | % | | n/a | | n/a | | (0.7) | % | | (0.9) | % | | n/a | | n/a |
Income tax provision | $ | 149 | | | $ | 291 | | | $ | (142) | | | (49) | % | | $ | 230 | | | $ | 434 | | | $ | (204) | | | (47) | % |
Income tax (benefit) provision. The tax benefit of $0.3 million and tax provision of $0.1 million, respectively, for the three and ninesix months ended SeptemberJune 30, 2017 include2023 included both foreign taxesincome and state taxes not based on pre-tax income.withholding 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.
During the three months ended September 30, 2017, we acquired Vayant which reflected a net deferred tax liability position at acquisition. The additional deferred tax liability allowed us to release $0.5 million of valuation allowance and reflect the deferred tax benefit of the release reducing the total tax expense in the three-month period. The total tax expense of $0.1 million for the nine months ended September 30, 2017 includes foreign and state taxes not based on pre-tax income offset by the benefit recorded for the release of the valuation allowance.
Our effective tax rate was 1%(1.1)% and 0%(1.3)% for the three and nine months ended SeptemberJune 30, 2017,2023 and 2022, respectively, and (1)(0.7)% and (0.9)% for both the three and ninesix months ended SeptemberJune 30, 2016.2023 and 2022, respectively. The income tax rate varies from the 34%21% federal statutory rate primarily due to the valuation allowances on our deferred tax assets and the limitation on deductibility of certain officers’ compensation.assets. While our expected tax rate would be 0% due to the full valuation allowance on theour deferred tax assets, the 1%income tax rate for the three months ended September 30, 2017provision and the (1)%related effective tax rate for the three and nine months ended September 30, 2016 arerates is due to foreign and state taxes not based on pre-tax income and the benefit recorded for the release of the valuation allowance during the three months ended September 30, 2017.withholding taxes.
Jurisdictions with a projected loss for the year where no tax benefit can be recognized due to the valuation allowances on our deferred tax assets are excluded from the estimated annual federal effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.
Liquidity and Capital Resources
At SeptemberJune 30, 2017,2023, we had $157.4$184.6 million of cash and cash equivalents and $105.8$(48.6) million of working capital as compared to $118.0$203.6 million of cash and cash equivalents and $76.9$106.3 million of working capital at December 31, 2016. We had zero and $16.02022. The change in working capital was mainly driven by our 2024 Notes, with a principal amount of $143.8 million, which became a current liability in the second quarter of short-term investments as2023.
Our principal sources of liquidity are our cash and cash equivalents, short-term investments, cash flows generated from operations and potential borrowings under our secured$50 million Credit Agreement, (the "Revolver") with the lenders party thereto and Wells
Fargo Bank, National Association as agentsee Note 11 for the lenders party thereto. details. In December 2014,addition, we issued the 2019 Notes and in June 2017, we issued the 2047 Notes could access capital markets 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. The primary source of operating cash flows is the collection of accounts receivable from our customers. Ourcustomers. Our operating cash flows are also impacted by the timing of payments to our vendors and the payments of our other liabilities. We generally pay our vendors and service providers in accordance with the invoice terms and conditions.
We believe our existing cash and cash equivalents, and short-term investments balances, including funds provided by the issuance of our Notes, funds available under our Revolver and our current estimates of future operating cash flows and funds available under our Credit Agreement, will provide adequate liquidity and capital resources to meet our operational requirements, anticipated capital expenditures, coupon interest and couponprincipal 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 customer subscription services, future acquisitions we might undertake, and expansion into complementary businesses. If such need arises,businesses, timing of adoption and implementation of our solutions and customer churn. Capital markets have tightened in response to the macroeconomic environment making new financing more difficult and/or expensive and we may raise additional funds through equity or debt financings.not be able to obtain such financing on terms acceptable to us. During the first half of 2023, the financial markets experienced disruption due to certain bank failures. We have not experienced any material impact from the disruption but will continue to monitor the situation and take action accordingly.
The following table presents key components of our unaudited condensed consolidated statements of cash flows for the ninesix months ended SeptemberJune 30, 20172023 and 2016:2022:
| | | Nine Months Ended September 30, | | Six Months Ended June 30, |
(Dollars in thousands) | 2017 | | 2016 | (Dollars in thousands) | 2023 | | 2022 |
Net cash used in operating activities | $ | (29,848 | ) | | $ | (7,159 | ) | Net cash used in operating activities | $ | (12,685) | | | $ | (12,945) | |
Net cash used in investing activities | (21,444 | ) | | (55,527 | ) | Net cash used in investing activities | (1,823) | | | (938) | |
Net cash provided by (used in) financing activities | 91,161 |
| | (3,930 | ) | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | (4,531) | | | 1,231 | |
Cash and cash equivalents (beginning of period) | 118,039 |
| | 161,770 |
| Cash and cash equivalents (beginning of period) | 203,627 | | | 227,553 | |
Cash and cash equivalents (end of period) | $ | 157,359 |
| | $ | 95,208 |
| Cash and cash equivalents (end of period) | $ | 184,567 | | | $ | 215,178 | |
Operating Activities
Net cash used in operating activities. The $22.7 for the six months ended June 30, 2023 was $12.7 million increaseand remained relatively consistent with prior year. While we had an improvement of $18.8 million in net cash used in operating activitiesloss period over period, it was primarily due to the net impact of working capitalmainly offset by changes mainly driven by a decrease in operating cash provided by accounts receivable of approximately $13.0 million as a result of $12.9 million of cash generated in the nine months ended September 30, 2016 due to improved collections. In addition, operating cash outflow was impacted by an increase in our prepaid assets for payments for cloud infrastructure and a decrease in accrued payroll and other employee benefits due to an increase in the annual incentive paid in the first quarter of 2017 over the amount paid in the first quarter of 2016.working capital.
Investing Activities
Net cash used in investing activities. for the six months ended June 30, 2023 was $1.8 million. The $34.1 million decrease in net cash used in investing activitiesincrease was primarily due to $64.4 millionhigher capital expenditures, primarily related to the timing of purchases and maturities of short-term investments, partially offset by the consideration of $34.1 million paid for the acquisition of Vayant and payment of $0.1 million for non-acquisition related intangible assets. In addition, capital expenditures decreased by $5.3 million and capitalized internal-usethird-party software increased by $1.4 millionlicense renewal, in the nine months ended September 30, 20172023 as compared to the same period in 2016.prior year.
Financing Activities
Net cash provided by (used in)used in financing activities. for the six months ended June 30, 2023 was $4.5 million. The increase of $95.1 million in net cash provided by financing activitieswas primarily consisted ofattributable to higher tax withholding payments on the proceeds from the issuance of our 2047 Notes of $93.5 million, higher proceeds from the exercise of stock options and employee stock plans, $5.9 million and $0.4 million, respectively, partially offset by payment of $2.7 million of debt issuance cost on our 2047 Notes, an increase of $2.0 million in tax withholdings on vesting of employee share-based awards, and paymentan increase of $0.2$5.5 million in debt issuance costs oncash used as compared to the Revolver renewal.same period in 2022.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material. We do not have any relationships with unconsolidated entities or financial partnerships, such as variable interest entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
Other than the changes described in Note 7,9 above and noted below, there have been no material changes to our contractual obligations and commitments disclosed in our Annual Report.
Our Credit facility
Agreement 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 July 2012, we entered into the Revolver. In January 2017, we extended the maturity date of the Revolver through July 2022. There were no outstanding borrowings under the Revolver as of September 30, 2017. As of September 30, 2017, we had $0.2 million of unamortized debt issuance costs related to the Revolver included in prepaids and other current assets and other long-term assetsaddition, our Credit Agreement contains certain financial covenants which become effective in the unaudited condensed consolidated balance sheets. For the three and nine months ended September 30, 2017 and 2016, we recorded an immaterial amount of amortization of debt issuance cost which is included in other expense, netevent our liquidity (as defined in the unaudited condensed consolidated statements of comprehensive income (loss).Credit Agreement) falls below a certain level.
Recent Accounting Pronouncements
See "Recently issued accounting pronouncements not yet adopted" in Note 2 “Recent Accounting Pronouncements” of Notes to Unaudited Condensed Consolidated Financial Statements of this Form 10-Qabove for discussion of recent accounting pronouncements including the respective expected dates of adoption.adoption, if any.
Critical accounting policies and estimates
Our consolidated financial statements are prepared in accordance with GAAP. 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. Actual results could differ from those estimates. The complexity and judgment required in our 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 credit losses, operating lease right-of-use assets and operating lease liabilities, useful lives of assets, depreciation, income taxes and deferred tax asset valuation, valuation of stock awards, other current liabilities and accrued liabilities. Numerous internal and external factors can affect estimates. Our critical accounting policies related to the estimates and judgments are discussed in our Annual Report under management's discussion and analysis of financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Our Although our contracts are predominately denominated in U.S. dollars. Wedollars, we are exposed to foreign currency exchange risk because we also have some contracts denominated in foreign currencies. The effect of a hypothetical 10% adverse change in exchange rates on our foreign denominated receivables as of SeptemberJune 30, 20172023 would result in a loss of approximately $0.2 $0.7 million. We are also exposed to foreign currency risk due to our French subsidiary, PROS France.operating subsidiaries in France, United Kingdom, Canada, Germany, Ireland, Australia, Bulgaria, Ecuador and United Arab Emirates. A hypothetical 10% adverse change in the value of the U.S. dollar in relation to the Euro,euro, which is the Company'sour single most significant foreign currency exposure, would have changeddecreased revenue for the three and ninesix months ended SeptemberJune 30, 20172023 by approximately $0.3$1.2 million and $0.7$2.3 million, respectively. In addition, we have operating subsidiaries in the United Kingdom, Canada, Germany, Ireland, Australia, Bulgaria and United Arab Emirates. However, due to the relatively low volume of paymentspayments made and received by the Company 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 matter and may consider hedging certain foreign exchange risks through the use of currency futures or optionsderivatives in future years.
Interest Rate Risk
The Company is exposed to market risk for changes in interest rates related to the variable interest rate on borrowings under the Revolver. As of SeptemberJune 30, 2017, the Company had no borrowings under the Revolver.
Our investment portfolio mainly consists of short-term interest-bearing obligations, including government and investment grade debt securities and money market funds. These securities are classified as available-for-sale and, consequently, are recorded in the unaudited condensed consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. Our investment strategy is focused on the preservation of capital and supporting our working capital requirements. We do not enter into investments for trading or speculative purposes. 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.
As of September 30, 2017,2023, we had outstanding principal amountamounts of $150.0 million and $143.8 million of the 2027 and $106.3 million,the 2024 Notes, respectively, of 2019 Notes and 2047 Notes, which are fixed rate instruments. Therefore, our results of operations are not subject to fluctuations in interest rates. The fair value of the 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 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as(as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act of 1934, as amended (the "Exchange Act")Act) as of SeptemberJune 30, 2017.2023. Based on our evaluation of our disclosure controls and procedures as of SeptemberJune 30, 2017,2023, our chief executive officer and chief financial officer 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 chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
In August 2017, we acquired Vayant Travel Technologies, Inc. in an all-cash transaction. See Note 3, "Business Combinations" to the unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of this acquisition and related financial data. Management has considered this acquisition material to the results of operations, cash flows and financial position from the date of the acquisition through September 30, 2017. In accordance with SEC guidance, management plans to exclude Vayant Travel Technologies, Inc. from management’s assessment of, and report on, internal controls over financial reporting from the date of the acquisition through December 31, 2017. We are in the process of reviewing the operations of Vayant Travel Technologies, Inc. and evaluating the impact of the acquisition on our internal controls over financial reporting. Excluding this acquisition, there There have been no changes in our internal control over financial reporting
during the three months ended SeptemberJune 30, 20172023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to legal proceedings and claims arising in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
There Other than as set forth below, there have been no material changes toin the Company's risk factors as presentedfrom those disclosed in Part I, Item 1A, of our Annual ReportReport.
We incurred indebtedness by issuing convertible notes, we may borrow under our Credit Agreement, and our debt repayment obligations may adversely affect our financial condition and cash flows 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 Form 10-K for the year ended December 31, 2016, as updated in our Quarterly Report on Form 10-Q for the quarter ended March 15 and September 15 of each year. As of June 30, 2017.2023, 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 terms prior to such date. Interest is payable semi-annually in arrears on May 15 and November 15 of each year. As of June 30, 2023, the entire $143.8 million of aggregate principal amount of 2024 Notes are outstanding.
Our Credit Agreement provides for a $50.0 million revolving line of credit, none of which was drawn as of July 25, 2023. The Credit Agreement 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, the Credit Agreement contains certain financial covenants which become effective in the event our liquidity (as defined in the Credit Agreement) falls below a certain level. The Credit Agreement contains customary events of default relating to, among other things, payment defaults, breach of covenants, cross acceleration to material indebtedness, bankruptcy-related defaults, judgment defaults, and the occurrence of certain change of control events. The occurrence of an event of default may result in the termination of the Credit Agreement and acceleration of repayment obligations with respect to any outstanding principal amounts.
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 other factors. We cannot control many of these factors. Our future operations may not generate sufficient cash to enable us to repay our debt. If we fail to comply with any covenants contained in the agreements governing any of our debt, or make 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 pay our indebtedness when due, we may be required to renegotiate the terms of the indebtedness, seek to refinance all or a portion of the indebtedness, and/or obtain additional financing. There can be no assurance that, in 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have an ongoing authorization from our Boardboard of Directorsdirectors to repurchase up to $15.0 million in shares of our common stock in the open market or through privately negotiated transactions. As of SeptemberJune 30, 2017,2023, $10.0 million remained available for repurchase under the existing repurchase authorization. We did not make any purchases of our common stock under this program for the three months ended SeptemberJune 30, 2017.2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
None.
ITEM 5. OTHER INFORMATION
None.During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6. EXHIBITS
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Index to Exhibits |
| | | | Provided | | Incorporated by Reference |
Exhibit No. | | Description | | Herewith | | Form | | SEC File No. | | Filing Date |
| | | | | | | | | | |
10.1 | | | | | | 8-K | | 333-141884 | | 8/3/2017 |
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31.1 | | | | X | | | | | | |
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31.2 | | | | X | | | | | | |
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32.1* | | | | X | | | | | | |
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Exhibit No. | | Description | | | | | | | | |
101.INS | | XBRL Instance Document. | | | | | | | | |
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101.SCH | | XBRL Taxonomy Extension Schema Document. | | | | | | | | |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | | | |
| | | | | | | | | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | | | |
| | | | | | | | | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | | | | | | | |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | | | |
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* | This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | PROS HOLDINGS, INC. |
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July 25, 2023 | By: | | PROS HOLDINGS, INC. |
| | | |
October 26, 2017 | By: | | /s/ Andres Reiner |
| | | Andres Reiner |
| | | President and Chief Executive Officer (Principal Executive Officer)
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October 26, 2017July 25, 2023 | By: | | /s/ Stefan Schulz |
| | | Stefan Schulz |
| | | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
|