UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

___________________________________________________________________________

FORM 10-Q

___________________________________________________________________________



ý☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2018~~2019



¨☐	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)

~~___________________________________________________________________________~~__________________________________________________________________________



Delaware		76-0168604
(State of Incorporation)		(I.R.S. Employer Identification No.)



3100 Main Street, Suite 900 ~~Houston TX~~				77002
Houston	TX			77002
(Address of Principal Executive Offices)				(Zip Code)
		(713)	335-5151
(Registrant's telephone number, including area code)

~~(Former Name, Former Address and Former Fiscal Year, if changed Since Last Report)~~Securities registered pursuant to Section 12(b) of the Act:



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. Yesx☒ 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). Yesx☒ 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. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



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 ~~37,149,951~~42,076,535 as of October ~~22, 2018.~~21, 2019.

PROS Holdings, Inc.

Form 10-Q

For the Quarterly Period Ended September 30, ~~2018~~2019

Table of Contents



		Page
PART I. FINANCIAL INFORMATION
Item 1.	Interim Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statements of Stockholders' Equity	8
	Notes to Condensed Consolidated Financial Statements	710
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2223
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosure	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Forward-looking statements relate to future events or our future financial performance. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts and projections, and the beliefs and assumptions 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 of words and similar expressions are intended to identify these forward-looking statements. You should also carefully review the risk factors and cautionary statements described in our Annual Report on Form 10-K in the section titled “Risk Factors.” 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 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, 2018			December 31, 2017			September 30, 2019			December 31, 2018
Assets:
Current assets:
Cash and cash equivalents	$	281,889		$	160,505		$	319,162		$	295,476
Trade and other receivables, net of allowance of $981 and $760, respectively	46,170			32,484
Deferred costs	3,413			3,137
Trade and other receivables, net of allowance of $968 and $978, respectively							55,986			41,822
Deferred costs, current							5,415			4,089
Prepaid and other current assets	7,123			5,930			8,764			4,756
Total current assets	338,595			202,056			389,327			346,143
Property and equipment, net	14,855			14,007			13,972			14,676
Long-term deferred costs	11,481			3,194
Operating lease right-of-use assets							28,548			—
Deferred costs, noncurrent							15,172			13,373
Intangibles, net	21,229			26,929			16,191			19,354
Goodwill	38,373			38,458			48,878			38,231
Other long-term assets	4,643			4,039
Other assets, noncurrent							6,650			5,190
Total assets	$	429,176		$	288,683		$	518,738		$	436,967
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable and other liabilities	$	5,542		$	2,976		$	7,003		$	6,934
Accrued liabilities	6,313			6,733			17,433			9,506
Accrued payroll and other employee benefits	16,375			16,712			27,420			22,519
Deferred revenue	100,504			75,604
Operating lease liabilities, current							7,222			—
Deferred revenue, current							113,430			99,262
Current portion of convertible debt, net							42,343			136,529
Total current liabilities	128,734			102,025			214,851			274,750
Long-term deferred revenue	14,492			19,591
Deferred revenue, noncurrent							14,502			17,903
Convertible debt, net	222,124			213,203			109,024			88,661
Other long-term liabilities	815			843
Operating lease liabilities, noncurrent							23,377			—
Other liabilities, noncurrent							1,032			754
Total liabilities	366,165			335,662			362,786			382,068
Commitments and contingencies (see Note 11)
Commitments and contingencies (see Note 10)
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued	—			—			—			—
Common stock, $0.001 par value, 75,000,000 shares authorized; 41,556,620 and 36,356,760 shares issued, respectively; 37,139,035 and 31,939,175 shares outstanding, respectively	42			36
Common stock, $0.001 par value, 75,000,000 shares authorized; 46,460,212 and 41,573,491 shares issued, respectively; 42,042,627 and 37,155,906 shares outstanding, respectively							47			42
Additional paid-in capital	360,021			207,924			518,456			364,877
Treasury stock, 4,417,585 common shares, at cost	(13,938		)	(13,938		)	(13,938		)	(13,938		)
Accumulated deficit	(279,948		)	(238,185		)	(344,489		)	(292,708		)
Accumulated other comprehensive loss	(3,166		)	(2,816		)	(4,124		)	(3,374		)
Total stockholders' equity	63,011			(46,979		)	155,952			54,899
Total liabilities and stockholders' equity	$	429,176		$	288,683		$	518,738		$	436,967

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PROS Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenue:
Subscription	$	23,888		$	15,809		$	66,876		$	41,457		$	37,463		$	23,888		$	100,958		$	66,876
Maintenance and support	16,238			17,124			49,037			52,332			14,405			16,238			44,772			49,037
Total subscription, maintenance and support	40,126			32,933			115,913			93,789			51,868			40,126			145,730			115,913
License	1,093			603			2,854			3,883			1,129			1,093			3,663			2,854
Services	7,856			8,401			25,644			24,800			11,153			7,856			34,766			25,644
Total revenue	49,075			41,937			144,411			122,472			64,150			49,075			184,159			144,411
Cost of revenue:
Subscription	9,053			7,868			26,308			19,605			11,039			9,053			30,543			26,308
Maintenance and support	2,852			2,859			8,762			8,886			2,632			2,852			8,269			8,762
Total cost of subscription, maintenance and support	11,905			10,727			35,070			28,491			13,671			11,905			38,812			35,070
License	63			73			200			210			51			63			152			200
Services	7,508			6,924			22,451			21,718			12,661			7,508			31,792			22,451
Total cost of revenue	19,476			17,724			57,721			50,419			26,383			19,476			70,756			57,721
Gross profit	29,599			24,213			86,690			72,053			37,767			29,599			113,403			86,690
Operating expenses:
Selling and marketing	17,513			16,980			53,671			50,625			21,600			17,513			66,030			53,671
General and administrative	10,179			10,324			31,013			30,514			11,553			10,179			35,260			31,013
Research and development	13,773			14,046			41,517			42,429			16,878			13,773			50,132			41,517
Acquisition-related	—			613			95			613			248			—			248			95
Loss from operations	(11,866		)	(17,750		)	(39,606		)	(52,128		)	(12,512		)	(11,866		)	(38,267		)	(39,606		)
Convertible debt interest and amortization	(4,266		)	(4,094		)	(12,671		)	(9,078		)	(3,717		)	(4,266		)	(12,347		)	(12,671		)
Other income, net	521			347			967			315
Loss before income tax provision (benefit)	(15,611		)	(21,497		)	(51,310		)	(60,891		)
Income tax provision (benefit)	175			(271		)	176			55
Other (expense) income, net													(1,010		)	521			(601		)	967
Loss before income tax provision													(17,239		)	(15,611		)	(51,215		)	(51,310		)
Income tax provision													108			175			566			176
Net loss	$	(15,786	)	$	(21,226	)	$	(51,486	)	$	(60,946	)	$	(17,347	)	$	(15,786	)	$	(51,781	)	$	(51,486	)

Net loss per share:
Basic and diluted	$	(0.44	)	$	(0.67	)	$	(1.53	)	$	(1.93	)	$	(0.42	)	$	(0.44	)	$	(1.31	)	$	(1.53	)
Weighted average number of shares:
Basic and diluted	35,676			31,867			33,568			31,527			41,276			35,676			39,438			33,568
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	$	(88	)	$	329		$	(350	)	$	1,705		$	(658	)	$	(88	)	$	(750	)	$	(350	)
Unrealized gain (loss) on available-for-sale securities	—			6			—			(4		)
Other comprehensive income (loss), net of tax	(88		)	335			(350		)	1,701			(658		)	(88		)	(750		)	(350		)
Comprehensive loss	$	(15,874	)	$	(20,891	)	$	(51,836	)	$	(59,245	)	$	(18,005	)	$	(15,874	)	$	(52,531	)	$	(51,836	)

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,						Nine Months Ended September 30,
	2018			2017			2019			2018
Operating activities:
Net loss	$	(51,486	)	$	(60,946	)	$	(51,781	)	$	(51,486	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	9,785			7,047			10,264			9,785
Amortization of debt discount and issuance costs	8,958			6,363			9,159			8,958
Share-based compensation	16,355			17,665			18,234			16,355
Deferred income tax, net	(252		)	(453		)	—			(252		)
Provision for doubtful accounts	215			—			—			215
Loss on disposal of assets	37			—			—			37
Loss on debt extinguishment							5,000			—
Changes in operating assets and liabilities:
Accounts and unbilled receivables	(13,898		)	(141		)	(13,888		)	(13,898		)
Deferred costs	(1,517		)	—			(3,124		)	(1,517		)
Prepaid expenses and other assets	(1,884		)	(6,301		)	(4,582		)	(1,884		)
Accounts payable and other liabilities	2,569			1,734			(492		)	2,569
Accrued liabilities	(533		)	(473		)	9,877			(533		)
Accrued payroll and other employee benefits	(342		)	(5,722		)	2,717			(342		)
Deferred revenue	22,508			11,379			11,009			22,508
Net cash used in operating activities	(9,485		)	(29,848		)	(7,607		)	(9,485		)
Investing activities:
Purchases of property and equipment	(1,406		)	(1,235		)	(3,360		)	(1,406		)
Acquisition of Vayant, net of cash acquired	—			(34,130		)
Capitalized internal-use software development costs	(3,686		)	(1,996		)	(1,021		)	(3,686		)
Acquisition of Travelaer, net of cash acquired							(10,510		)	—
Investment in equity securities							(180		)	—
Purchase of intangible assets	—			(75		)	(50		)	—
Proceeds from maturities of short-term investments	—			15,992
Net cash used in investing activities	(5,092		)	(21,444		)	(15,121		)	(5,092		)
Financing activities:
Exercise of stock options	1,142			6,347			—			1,142
Proceeds from employee stock plans	1,720			1,535			1,995			1,720
Tax withholding related to net share settlement of stock awards	(9,153		)	(7,243		)	(21,598		)	(9,153		)
Proceeds from Secondary Offering, net	141,954			—			—			141,954
Payments of notes payable	(54		)	(155		)	—			(54		)
Debt issuance costs related to Revolver	—			(150		)
Proceeds from issuance of convertible debt, net							140,156			—
Debt issuance cost related to convertible debt	—			(2,673		)	(860		)	—
Proceeds from issuance of convertible debt, net	—			93,500
Purchase of capped call							(16,445		)	—
Retirement of convertible debt							(76,018		)	—
Proceeds from termination of bond hedge							64,819			—
Payment for termination of warrant							(45,243		)	—
Net cash provided by financing activities	135,609			91,161			46,806			135,609
Effect of foreign currency rates on cash	352			(549		)	(392		)	352
Net change in cash and cash equivalents	121,384			39,320			23,686			121,384
Cash and cash equivalents:
Beginning of period	160,505			118,039
End of period	$	281,889		$	157,359



Cash and cash equivalents:
Beginning of period	295,476		160,505
End of period	$	319,162	$	281,889

Supplemental disclosure of cash flow information:
Noncash investing activities:
Purchase of property and equipment accrued but not paid	$	422	$	8

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

PROS Holdings, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)



	Three Months Ended September 30, 2019
	Common Stock			Additional Paid-In Capital			Treasury Stock				Accumulated (Deficit) Retained Earnings			Accumulated other comprehensive loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital			Shares	Amount			Accumulated (Deficit) Retained Earnings			Accumulated other comprehensive loss			Total Stockholders’ Equity
Balance at June 30, 2019	40,183,723	$	45	$	439,995		4,417,585	$	(13,938	)	$	(327,142	)	$	(3,466	)	$	95,494
Stock awards net settlement	69,764	—		(2,956		)	—	—			—			—			(2,956		)
Proceeds from employee stock plans	39,964	—		1,052			—	—			—			—			1,052
Retirement of convertible debt	1,749,176	2		74,176			—	—			—			—			74,178
Noncash share-based compensation	—	—		6,189			—	—			—			—			6,189
Other comprehensive income (loss)	—	—		—			—	—			—			(658		)	(658		)
Net loss	—	—		—			—	—			(17,347		)	—			(17,347		)
Balance at September 30, 2019	42,042,627	$	47	$	518,456		4,417,585	$	(13,938	)	$	(344,489	)	$	(4,124	)	$	155,952



	Three Months Ended September 30, 2018
	Common Stock			Additional Paid-In Capital			Treasury Stock				Accumulated (Deficit) Retained Earnings			Accumulated other comprehensive loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital			Shares	Amount			Accumulated (Deficit) Retained Earnings			Accumulated other comprehensive loss			Total Stockholders’ Equity
Balance at June 30, 2018	32,711,339	$	37	$	212,481		4,417,585	$	(13,938	)	$	(264,161	)	$	(3,078	)	$	(68,659	)
Exercise of stock options	2,440	1		(60		)	—	—			—			—			(59		)
Stock awards net settlement	16,825	—		(185		)	—	—			—			—			(185		)
Proceeds from employee stock plans	38,431	—		886			—	—			—			—			886
Proceeds from Secondary Offering, net	4,370,000	4		141,950			—	—			—			—			141,954
Noncash share-based compensation	—	—		4,949			—	—			—			—			4,949
Cumulative effect of adoption of section 606	—	—		—			—	—			(1		)	—			(1		)
Other comprehensive income (loss)	—	—		—			—	—			—			(88		)	(88		)
Net loss	—	—		—			—	—			(15,786		)	—			(15,786		)
Balance at September 30, 2018	37,139,035	$	42	$	360,021		4,417,585	$	(13,938	)	$	(279,948	)	$	(3,166	)	$	63,011

PROS Holdings, Inc.

Condensed Consolidated Statements of Stockholders’ Equity (Continued)

(In thousands, except share data)

(Unaudited)



	Nine Months Ended September 30, 2019
	Common Stock			Additional Paid-In Capital			Treasury Stock				Accumulated (Deficit) Retained Earnings			Accumulated other comprehensive loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital			Shares	Amount			Accumulated (Deficit) Retained Earnings			Accumulated other comprehensive loss			Total Stockholders’ Equity
Balance at December 31, 2018	37,155,906	$	42	$	364,877		4,417,585	$	(13,938	)	$	(292,708	)	$	(3,374	)	$	54,899
Stock awards net settlement	885,740	1		(21,599		)	—	—			—			—			(21,598		)
Proceeds from employee stock plans	75,304	—		1,995			—	—			—			—			1,995
Retirement of convertible debt	3,925,677	4		118,985			—	—			—			—			118,989
Termination of bond hedge	—	—		64,819			—	—			—			—			64,819
Termination of warrant	—	—		(45,243		)	—	—			—			—			(45,243		)
Equity component of the convertible debt issuance, net	—	—		32,883			—	—			—			—			32,883
Purchase of capped call	—	—		(16,445		)	—	—			—			—			(16,445		)
Noncash share-based compensation	—	—		18,184			—	—			—			—			18,184
Other comprehensive income (loss)	—	—		—			—	—			—			(750		)	(750		)
Net loss	—	—		—			—	—			(51,781		)	—			(51,781		)
Balance at September 30, 2019	42,042,627	$	47	$	518,456		4,417,585	$	(13,938	)	$	(344,489	)	$	(4,124	)	$	155,952



	Nine Months Ended September 30, 2018
	Common Stock			Additional Paid-In Capital			Treasury Stock				Accumulated (Deficit) Retained Earnings			Accumulated other comprehensive loss			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital			Shares	Amount			Accumulated (Deficit) Retained Earnings			Accumulated other comprehensive loss			Total Stockholders’ Equity
Balance at December 31, 2017	31,939,175	$	36	$	207,924		4,417,585	$	(13,938	)	$	(238,185	)	$	(2,816	)	$	(46,979	)
Exercise of stock options	161,997	1		1,141			—	—			—			—			1,142
Stock awards net settlement	592,317	1		(9,154		)	—	—			—			—			(9,153		)
Proceeds from employee stock plans	75,546	—		1,720			—	—			—			—			1,720
Proceeds from Secondary Offering, net	4,370,000	4		141,950			—	—			—			—			141,954
Noncash share-based compensation	—	—		16,440			—	—			—			—			16,440
Cumulative effect of adoption of section 606	—	—		—			—	—			9,723			—			9,723
Other comprehensive income (loss)	—	—		—			—	—			—			(350		)	(350		)
Net loss	—	—		—			—	—			(51,486		)	—			(51,486		)
Balance at September 30, 2018	37,139,035	$	42	$	360,021		4,417,585	$	(13,938	)	$	(279,948	)	$	(3,166	)	$	63,011

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" ~~or "PROS"~~), provides ~~end-to-end Artificial Intelligence~~artificial intelligence ("AI")~~-powered~~ solutions that ~~enable~~power commerce in the digital economy by providing fast, frictionless and personalized buying ~~experiences for businesses to compete in today’s digital economy.~~experiences. PROS solutions ~~provide actionable intelligence that~~ enable dynamic buying experiences for both business-to-business ("B2B") and business-to-consumer ("B2C") companies across industry verticals. ~~The~~Companies can use the Company's ~~end-to-end solutions drive~~dynamic pricing optimization, sales effectiveness, ~~and~~ revenue management ~~by enabling companies to create data-driven, personalized buying experiences. Companies can use PROS~~and commerce solutions to assess ~~the~~their market ~~environment~~environments in real time to deliver customized prices and offers. ~~PROS~~The Company's solutions enable buyers to move fluidly across ~~PROS~~its customers’ direct sales, online, mobile and partner channels ~~and have~~with personalized experiences ~~however~~regardless of which channel those customers ~~choose to buy.~~choose. The Company's decades of data science and AI expertise are infused into its solutions and are designed to reduce time and complexity ~~and add~~through actionable ~~intelligence to help PROS customers outperform in their markets.~~intelligence. The Company provides ~~standardized~~standard configurations of its software based on the industries it serves and offers professional services to configure these solutions to meet the specific needs of each customer.

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 unaudited 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 September 30, ~~2018,~~2019, the results of operations for the three and nine months ended September 30, ~~2018~~2019 and ~~2017, and~~2018, cash flows for the nine months ended September 30, 2019 and 2018, and ~~2017.~~stockholders' equity for the three and nine months ended September 30, 2019 and 2018.

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, ~~2017~~2018 ("Annual Report") filed with the SEC. The unaudited condensed consolidated balance sheet as of December 31, ~~2017~~2018 was derived from the Company's audited consolidated financial statements but does not include all disclosures required under GAAP.

Changes in accounting policies

The Company has consistently applied these accounting policies to all periods presented in these consolidated financial statements, except for the Company's adoption of certain accounting standards described in more detail under "Recently adopted accounting pronouncements" in this Note 2below.

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 eliminated in consolidation. The functional currency of PROS France SAS ("PROS France") is the euro. The financial statements of this subsidiary are translated into U.S. dollars using period-end rates of exchange for assets and liabilities, historical rates of exchange for equity, and average rates of exchange for the 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 determining the ~~application~~nature and timing of satisfaction of performance obligations and determining the ~~percentage-of-completion method~~standalone selling price of ~~accounting,~~performance obligations, affect the amounts of revenue, expenses, unbilled receivables and deferred revenue. Estimates are also used for, but not limited to, receivables, allowance for doubtful accounts, operating lease right-of-use assets and operating lease liabilities, 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 estimates and judgments are discussed in the Annual Report under management's discussion and analysis of financial condition and results of operations and are also discussed under Item 2 "Management's discussion and analysis of financial condition and results of operations".

Revenue recognition

The Company derives its revenues primarily from subscription services, professional services, perpetual licensing of its software products and associated software maintenance and support services.

The Company determines revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer;

Identification of the performance obligations in the customer contract(s);

Determination of the transaction price;

Allocation of the transaction price to each performance obligation in the customer contract(s); and

Recognition of revenue when, or as, the Company satisfies a performance obligation.

Subscription services revenue

Subscription services ~~revenue~~ primarily ~~consists of fees that give customers~~include customer access to one or more of the Company's cloud applications ~~with routine~~and associated customer support. Subscription services revenue is generally recognized ratably over the contractual subscription term, ~~of the arrangement~~ beginning on the date that the Company's subscription service is made available to the customer. The Company's subscription contracts do not provide customers with the right to take possession of the software supporting the ~~applications~~service and, as a result, are accounted for as service contracts. The Company's subscription contracts are generally two to five years in length, billed annually in advance, and ~~are~~ non-cancelable.

Maintenance and support revenue

Maintenance and support revenue includes post-implementation customer support for on-premise licenses and the right to unspecified software updates and enhancements. The Company recognizes revenue from maintenance and support arrangements ratably over the period in which the services are provided. The Company's maintenance and support contracts are generally one to three years in length, billed annually in advance, and non-cancelable.

License revenue

Licenses ~~for~~to on-premise software provide the customer with a right to use, in the customer's environment, the Company's software as it exists when made available to the customer. License revenue from customer contracts with distinct on-premises licenses is recognized at the point in time when the software is made available to the customer. For customer contracts that contain license and professional services that are not considered distinct, both the license and professional services are determined to be a single performance obligation and the revenue is recognized over time based upon the Company's efforts to satisfy the performance obligation.

Professional services revenue

Professional services revenue primarily consists of fees for deployment and configuration services, as well as ~~training.~~training services. 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~~fee contracts. The majority of the Company's professional services contracts are on a ~~time and materials~~fixed fee basis. Training revenues are recognized as the services are rendered.

Significant ~~judgments are~~judgment is required in determining whether professional services ~~that are~~ contained in a customer subscription services ~~contracts are considered distinct, including whether the professional services~~contract are capable of being distinct and ~~whether they~~ are separately identifiable in the customer contract. Professional services ~~that are deemed~~determined to be distinct are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If ~~determined that~~ the professional services are not ~~considered~~determined to be distinct, the professional services and the subscription services are ~~determined to be~~accounted for as a single performance obligation and revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer.

Customer ~~Contracts~~contracts with ~~Multiple Performance Obligations~~multiple performance obligations

A portion of the Company's customer contracts contain multiple performance obligations. Significant judgment is required in determining whether multiple performance obligations contained in a single customer ~~contracts~~contract are capable of being distinct and ~~whether they~~ are separately ~~identifiable in customer contracts. If the obligations are~~identifiable. An obligation determined to be distinct ~~each~~is accounted for as a separate performance obligation and revenue for that separate performance obligation is recognized when, or as, the Company satisfies the performance obligation. If ~~the~~ obligations are not determined to be distinct, ~~they~~those obligations are ~~recognized~~accounted for as a single, combined performance obligation. The transaction price is allocated to each performance obligation on a relative standalone selling price basis.

~~Business combinations~~Leases

The Company ~~records tangible~~determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, current operating lease liabilities and ~~intangible~~noncurrent operating lease liabilities in the Company's unaudited condensed consolidated balance sheet.

ROU assets ~~acquired~~represent the Company’s right to use an underlying asset over the lease term and lease liabilities ~~assumed in business combinations under~~represent the ~~acquisition method of accounting. Amounts paid for each acquisition~~Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are ~~allocated to~~recognized at the ~~assets acquired and liabilities assumed~~lease commencement date based on ~~their fair values at~~ the ~~date of acquisition. Significant management judgments and assumptions are required in determining the fair~~estimated present value of ~~acquired assets and liabilities, particularly acquired intangible assets.~~lease payments over the lease term. The ~~valuation~~Company includes any anticipated lease incentives in the determination 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.lease liability.

The Company uses its ~~best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed~~estimated incremental borrowing rate, which is derived from information available at the ~~acquisition date.~~lease commencement date, in determining the present value of lease payments. The ~~Company's estimates are inherently uncertain and subject~~Company gives consideration to ~~refinement. During~~its recent debt issuances as well as publicly available data for instruments with similar characteristics when determining its incremental borrowing rates.

The Company’s lease terms will include options to extend the ~~measurement period, which may be up to one year from the acquisition date,~~lease when it is reasonably certain that 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. Uncertain tax positions and tax-related valuation allowances are initially established in connectionwill exercise that option. Leases with a ~~business combination as~~term of ~~the acquisition date. During the measurement period, the Company reevaluates these estimates and assumptions quarterly and records any adjustments to~~12 months or less are not recorded on the Company's ~~preliminary estimates to goodwill. Any subsequent adjustments are recorded to the Company’s~~unaudited condensed consolidated ~~statements of operations upon the earlier of the conclusion of the measurement period and final determination of the fair~~balance sheet. The Company’s lease agreements do not contain any residual value ~~of assets acquired or liabilities assumed.~~guarantees.

Internal-use software

Costs incurred to develop internal-use software during the development stage are capitalized, stated at cost, and amortized 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 September 30, ~~2018~~2019 and ~~2017,~~2018, the Company capitalized ~~$1.2~~$0.2 million and ~~$0.7~~$1.2 million, respectively, of internal-use software development costs related to cloud-based offerings, and for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company capitalized ~~$3.7~~$1.0 million and ~~$2.2~~$3.7 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 using the straight-line method over the useful life of the asset. For the three ~~and nine~~months ended September 30, 2019 and 2018, the Company amortized $0.8 million and $0.3 million, respectively, and for the nine months ended September 30, 2019 and 2018, the Company amortized $2.0 million and $0.7 million, respectively, ~~of capitalized internal-use software development costs, and for the~~ ~~three and nine~~ ~~months ended September 30, 2017, the Company amortized an immaterial amount~~ of capitalized internal-use software development costs. Capitalized software for internal use is included in property and equipment, net in the unaudited condensed consolidated balance sheets. Amortization of capitalized internal-use software development 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).

Impairment of long-lived assets

Long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes comparison of future cash flows expected to be generated by the asset or group of assets with the associated assets' carrying value. If the carrying value of the asset or group of assets exceeds its expected future cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value. The Company recorded no0 impairment charges during the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018.

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, (ii) performance-based awards in which the number of shares that vest are based upon achievement of certain internal performance metrics set by the Company, and ~~(ii)~~(iii) market-based awards in which the number of shares that vest are based upon attainment of target average per share closing price over a requisite trading period. 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, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, (in thousands):


Award type	September 30, 2018	December 31, 2017	September 30, 2019	December 31, 2018
Stock options	—	135
Restricted stock units (time-based)	1,988	2,133	1,876	1,969
Restricted stock units (performance-based)			114	—
Restricted stock units (market-based)	230	345	—	215
Stock appreciation rights	287	356	165	287
Market stock units	404	387	267	419

Stock options, time-based RSUs and SARs vest ratably between one and ~~four~~4 years. Performance-based RSUs vest on the third anniversary of the grant and the maximum number of shares issuable upon vesting is 200% of the initially granted shares based upon achievement of certain internal performance metrics set by the Company, as defined by each award's plan documents or individual award agreements. 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, SARs or ~~SARs~~MSUs during the three and nine months ended September 30, ~~2018~~2019 or ~~2017.~~2018.

The fair value of the time-based and performance-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 of 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, 2018 were as follows:~~



		~~September 30, 2018~~
~~Volatility~~		~~43.67%~~
~~Risk-free interest rate~~		~~2.12%~~
~~Expected option life in years~~		~~2.97~~
~~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~~giving effect to ~~common stockholders by the weighted average number of common shares and~~all dilutive potential common shares ~~then outstanding. Diluted earnings per share reflect~~outstanding during the ~~assumed conversion of all dilutive securities,~~period using the treasury stock method and convertible notes using the if-converted method. Dilutive potential common shares consist of shares issuable upon the exercise of stock options, shares of unvested restricted stock units and market stock units, and settlement of stock appreciation rights. When the Company incurs a net loss, the effect of the Company's outstanding stock options, stock appreciation rights, ~~and~~ restricted stock units, market stock units and convertible notes are not included in the calculation of diluted earnings (loss) per share as the effect would be anti-dilutive. Accordingly, basic and diluted net loss per share are identical.

~~Cost method~~Equity 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~~at cost, less impairment and adjusted for subsequent observable price changes obtained from orderly transactions for identical or similar investments issued by the ~~cost method of accounting, carrying the investment at historical cost. If there~~same investee. Adjustments resulting from impairment, fair value, or observable price changes 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 declineaccounted for in the ~~fair value~~unaudited condensed consolidated statements 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.~~comprehensive income (loss).

~~At both~~As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company held $2.2 million and $2.0 million, respectively, of equity securities in a privately held company. This investment is accounted for ~~under~~at cost, less impairment and adjusted for subsequent observable price changes obtained from orderly transactions for identical or similar investments issued by 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.~~same investee. The Company estimates fair value of its ~~cost method~~equity 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 defined by Accounting Standard Codification ("ASC") 820, "Fair Value Measurement and Disclosure" ("ASC 820"). As of September 30, 2019 and December 31, 2018, the Company determined there were no other-than-temporary impairments on its ~~cost method~~equity 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 ~~$131.3~~$289.8 million and ~~$131.4~~$268.6 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 ASC 820.

Trade and other receivables

Trade and other receivables are primarily comprised of trade receivables, net of allowance for doubtful accounts, contract assets and unbilled receivables. The Company records trade accounts receivable for its unconditional rights to consideration arising from the Company's performance under contracts with customers. The Company's standard billing terms are that payment is due upon receipt of invoice, payable generally within thirty to sixty days. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The Company estimates its allowance for doubtful accounts for specific trade receivable balances based on historical collection trends, the age of outstanding trade receivables, existing economic conditions, and any financial security associated with the receivables.

Contract assets represent conditional rights to consideration that have been recognized as revenue in advance of billing the customer. Unbilled receivables represent unconditional rights to consideration arising from contingent revenue that have been recognized as revenue in advance of billing the customer.

Deferred costs

Sales commissions earned by the Company's sales representatives are considered incremental and recoverable costs of obtaining a customer contract. Sales commissions are deferred and amortized on a straight-line basis over the period of benefit, which the Company has determined to be five to eight years. The Company determined the period of benefit by taking into consideration its customer contracts, expected renewals asof those customer contracts (as the Company currently does not pay an

incremental sales ~~commission,~~commission), the Company's technology and other factors. The Company also defers amounts earned by employees other than sales representatives who earn incentive payments under compensation plans that are also tied to the value of customer contracts acquired. Deferred costs were ~~$14.9~~$20.6 million and ~~$6.3~~$17.5 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Amortization expense for the deferred costs was $1.3 million and $0.8 million for ~~both~~ the three months ended September 30, 2019 and 2018, respectively, and ~~2017,~~$3.5 million and $2.1 ~~million and $1.8~~ million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Deferred implementation costs

The Company capitalizes certain contract fulfillment costs, including personnel and other costs (such as hosting, employee salaries, benefits and payroll taxes), that are associated with arrangements where professional services are not distinct from other undelivered obligations in its customer contracts. The Company analyzes implementation costs and capitalizes those costs that are directly related to customer contracts, that are expected to be recoverable, and that enhance the resources which will be used to satisfy the undelivered performance obligations in those contracts. Deferred implementation costs are amortized ratably over the remaining contract term once the revenue recognition criteria for the respective performance obligation has been met and revenue recognition commences. Deferred implementation costs were ~~$3.5~~$4.8 million and ~~$2.2~~$3.9 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Amortization expense for the deferred implementation costs was $0.4 million and $0.1 million for ~~both~~ the three months ended September 30, 2019 and 2018, respectively, and ~~2017,~~$1.0 million and $0.4 ~~million and $0.2~~ million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Deferred implementation costs are included in prepaid and other current assets and other ~~long-term~~ assets, noncurrent in the unaudited condensed consolidated balance sheets. Amortization of deferred implementation costs is included in cost of subscription and cost of services revenues in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).

Deferred revenue

Deferred revenue primarily consists of customer invoicing in advance of revenues being recognized. The Company generally invoices its customers annually in advance for subscription services and maintenance and support services. Deferred revenue that is anticipated to be recognized during the next twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as long-term.

Credit facility

As of September 30, ~~2018,~~2019, the Company had no0 outstanding borrowings under its $50.0 million secured Credit Agreement ("Revolver") with the lenders party thereto and Wells Fargo Bank, National Association as agent for the lenders party thereto. The Company included $0.1 million of unamortized debt issuance costs related to the Revolver in prepaid and other current assets and other ~~long-term~~ assets, noncurrent in the unaudited condensed consolidated balance sheets. For the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company recorded an immaterial amount of amortization of debt issuance cost which is included in other income (expense), net in the unaudited condensed consolidated statements of comprehensive income (loss).

Income taxes

The Company recorded an income tax provision of ~~$0.2~~$0.1 million and ~~a tax benefit of $0.3~~$0.2 million for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~a tax provision of $0.2~~$0.6 million and ~~$0.1~~$0.2 million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, primarily related to foreign income taxes and withholding ~~taxes offset by additional release of the valuation allowance.~~taxes. The effective tax rate was (0.6)% and (1.1)% for the three months ended September 30, 2019 and 2018, respectively, and ~~2017 was (1)~~(1.1)% and ~~1%, respectively, and~~(0.3)% for the nine months ended September 30, 2019 and 2018, ~~and 2017 was 0%.~~respectively. The income tax rates vary from the federal and state statutory rates primarily due to the valuation allowances on the Company’s deferred tax assets and foreign and state taxes not based on income. During the nine months ended September 30, 2018, the Company finalized the deferred tax liabilities assumed upon the acquisition of PROS Travel Commerce, Inc. (formerly Vayant Travel Technologies, Inc.) ("Vayant") resulting in an additional release of valuation allowance recorded in the period.

The Company estimates its annual effective tax rate at the end of each quarterly period. Jurisdictions 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 in 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

~~Topic 606~~

~~In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("Topic 606"). Topic 606 replaces the prior revenue recognition requirements in ASC 605,~~ ~~"Revenue Recognition"~~ ("Topic 605" or "Prior Guidance") with a comprehensive revenue measurement and recognition standard, and expanded disclosure requirements. The new standard also provides guidance on the recognition of costs related to obtaining customer contracts. Topic 606 took effect in the first quarter of 2018, including interim periods within that reporting period. The Company adopted Topic 606 and applied Topic 606 to those contracts which were not complete as of January 1, 2018using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of accumulated deficit, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under the Prior Guidance.

The most significant impact of Topic 606 relates to the Company's 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 the Prior Guidance, revenue attributable to term-based software licenses was recognized ratably over the term of the arrangement when vendor-specific objective evidence ("VSOE") did not exist for the undelivered maintenance and support element because it was not sold separately. Topic 606 does not require VSOE for undelivered elements to separate revenue for the delivered software licenses. Accordingly, under the new standard, the Company is required to recognize as revenue a portion of the arrangement fee upon delivery of the software license. The adjustment to the opening balance sheet of the accumulated deficit for all revenue related items was a decrease of approximately $2.7 million.

Topic 606 also requires the Company to capitalize and amortize the costs to obtain a contract over the expected period of customer benefit. The Company previously capitalized and amortized only direct and incremental commission costs over the term of the related contract. The expected period of customer benefit determined under Topic 606 is longer than the typical two to five year term of the Company's contracts as required under the Prior Guidance. As a result of applying Topic 606, the Company recorded a decrease to the opening balance sheet of the accumulated deficit for costs to obtain a contract of approximately $7.0 million.

~~Topic 230~~

~~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. The Company adopted this standard on January 1, 2018 and the adoption had no impact on its condensed consolidated financial statements and related disclosures.

~~In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force~~" which is intended to define the presentation and related disclosures of restricted cash balances. The Company adopted this standard on January 1, 2018 and the adoption had no impact on its condensed consolidated financial statements and related disclosures.

~~Recently issued accounting pronouncements not yet adopted~~

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("Topic 842"), which requires the lessee to recognize most leases on the balance sheet thereby resulting in the recognition of ~~lease~~right-of-use ("ROU") assets and lease liabilities for those leases currently classified as operating leases. Lessor accounting remains largely unchanged from current guidance, however, Topic 842 provides improvements that are intended to align lessor accounting with the lessee model and with updated revenue recognition guidance. This standard took effect in the first quarter of 2019, including interim periods within that reporting

period. The Company adopted Topic 842 as of January 1, 2019using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balances of operating ROU assets and lease liabilities, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under the prior lease accounting rules in ASC 840, "Leases".

The Company elected the package of practical expedients permitted under the transition guidance within the new Topic 842 standard for all asset classes, which among other things, allowed the Company to carryforward the historical lease classification. The Company also elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company made an accounting policy election to not recognize leases with an initial term of 12 months or less on the balance sheet and instead would recognize those lease payments on a straight-line basis over the lease term in the unaudited condensed consolidated statement of comprehensive income (loss).

The adoption of the standard had a material impact on the Company’s unaudited condensed consolidated balance sheet as a result of the increase of $26.9 million in assets and liabilities from recognition of ROU assets and lease liabilities. The standard did not have a material impact on the Company's unaudited condensed consolidated statement of comprehensive income (loss).

In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract" ("Subtopic 350-40"). The amendment aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred to develop or obtain an internal-use software. The standard is effective for annual periods, including interim ~~and~~periods within those annual ~~reporting~~ periods, beginning after December 15, ~~2018.~~2019; early adoption is permitted. The Company ~~is currently assessing~~early adopted Subtopic 350-40 prospectively effective January 1, 2019 and there was no impact on the ~~impact of Topic 842 on its~~Company's unaudited condensed consolidated financial ~~statements.~~statements as of the adoption date. In addition, the new standard had no significant impact on the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2019.

Recently issued accounting pronouncements not yet adopted

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("Topic 350"), which eliminates step two from the goodwill impairment test. Under the amendments in this standard, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

The standard is effective for interim and annual reporting periods beginning after December 15, 2019; earlier adoption is permitted for goodwill impairment tests performed after January 1, 2017. The Company is currently assessing the impact of Topic 350 on its unaudited condensed consolidated financial statements.

With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, ~~2018,~~2019, 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. Deferred Revenue and Performance Obligations

Deferred Revenue

For the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company recognized approximately ~~$32.4~~$45.1 million and ~~$27.9~~$32.4 million, respectively, and for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company recognized approximately ~~$64.4~~$86.2 million and ~~$57.4~~$64.4 million, respectively, in each case of revenue that was included in the deferred revenue balances at the beginning of the respective periods and primarily related to subscription services, maintenance and support, and services.

Performance Obligations

As of September 30, ~~2018,~~2019, the Company expects to recognize approximately ~~$309.4~~$365.2 million of revenue from remaining performance obligations. The Company expects to recognize revenue on approximately ~~$149.8~~$176.6 million of these performance obligations over the next 12 months, with the balance recognized thereafter.

4. Disaggregation of Revenue

Revenue by Geography

The geographic information in the table below is presented for the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018. 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 September 30,								Nine Months Ended September 30,
	2019				2018				2019				2018
	Revenue		Percent		Revenue		Percent		Revenue		Percent		Revenue		Percent
United States of America	$	21,631	34	%	$	16,610	34	%	$	62,273	34	%	$	50,538	35	%
Europe	19,279		30	%	15,019		31	%	55,286		30	%	45,110		31	%
The rest of the world	23,240		36	%	17,446		35	%	66,600		36	%	48,763		34	%
Total revenue	$	64,150	100	%	$	49,075	100	%	$	184,159	100	%	$	144,411	100	%

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Revenue Percent Revenue Percent Revenue Percent Revenue Revenue
United States of America $ 16,610
34 % $ 15,829
38 % $ 50,538
35 % $ 46,858
38 %
Europe 15,019
31 % 12,574
30 % 45,110
31 % 35,056
29 %
The rest of the world 17,446
35 % 13,534
32 % 48,763
34 % 40,558
33 %
Total revenue $ 49,075
100 % $ 41,937
100 % $ 144,411
100 % $ 122,472
100 %

5. ~~Impact on Financial Statements of Changes in Accounting Policies~~

The Company applied Topic 606 using the modified retrospective method by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance sheet at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605. The differences between balances under Topic 606 and Topic 605 are detailed below:

September 30, 2018
(in thousands) As Reported Adjustments Balances Under Topic 605
Balance Sheets
Trade and other receivables, net of allowance $ 46,170
$ (352 ) $ 45,818
Deferred costs, current 3,413
(192 ) 3,221
Long-term deferred costs 11,481
(7,859 ) 3,622
Deferred revenue, current 100,504
1,292
101,796
Long-term deferred revenue 14,492
1,677
16,169
Accumulated deficit $ (279,948 ) $ (11,372 ) $ (291,320 )

Three Months Ended September 30, 2018
(in thousands, except per share amounts) As Reported Adjustments Balances Under Topic 605
Income Statements
Total revenue $ 49,075
$ (500 ) $ 48,575
Total cost of revenue 19,476
216
19,692
Selling and marketing 17,513
379
17,892
General and administrative 10,179
(80 ) 10,099
Research and development 13,773
(59 ) 13,714
Net loss (15,786 ) (956 ) (16,742 )
Basic and diluted loss per share $ (0.44 ) $ (0.03 ) $ (0.47 )

Nine Months Ended September 30, 2018
(in thousands, except per share amounts) As Reported Adjustments Balances Under Topic 605
Income Statements
Total revenue $ 144,411
$ (684 ) $ 143,727
Total cost of revenue 57,721
328
58,049
Selling and marketing 53,671
1,028
54,699
General and administrative 31,013
(239 ) 30,774
Research and development 41,517
(176 ) 41,341
Net loss (51,486 ) (1,625 ) (53,111 )
Basic and diluted loss per share $ (1.53 ) $ (0.05 ) $ (1.58 )

6. Business Combination

On August ~~3, 2017,~~14, 2019, the Company acquired ~~Vayant,~~Travelaer SAS ("Travelaer"), a privately held company based ~~in Sofia, Bulgaria,~~near Nice, France, for a total cash consideration, net of cash acquired, of approximately ~~$34.1~~$10.5 million. ~~Vayant~~Travelaer is a ~~cloud software company that provides advanced shopping, merchandising~~digital innovator for the travel industry with a focus on improving the customer experience across all phases of travel, and ~~inspirational travel solutions.~~

~~For~~brings an Internet booking engine and NDC (New Distribution Capability) platform to the Company's portfolio. The Company has included the financial results of Travelaer in the unaudited condensed consolidated financial statements from the date of the acquisition, which have not been material to date. The transaction cost associated with the acquisition was $0.2 million for the three and nine months ended September 30, ~~2018,~~2019.

The Company accounted for the ~~Company has included $2.3 million~~transaction as a business combination and $7.0 million, respectively, of revenue and $1.6 million and $3.8 million, respectively, of net loss related to Vayant in its consolidated income statement. During the three and nine months ended September 30, 2018, the Company incurred acquisition-related costs of zero and $0.1 million, respectively consisting primarily of integration costs and retention of key employees. During the three and nine months ended September 30, 2017, the Company incurred acquisition-related costs of $0.6 million primarily related to advisory and legal fees, accounting and professional fees, and retention of key employees.

~~All~~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.~~values. The Company recorded approximately $2 million for developed technology and customer relationships with estimated useful lives of seven years and five years, respectively. The Company recorded approximately $11 million of goodwill which is primarily related to the assembled workforce and expanded market opportunities from integrating Travelaer's technology with the Company's solutions. The goodwill balance is not deductible for U.S. income tax purposes. The Company expects to finalize the valuation as soon as practicable, but no later than one year from the acquisition date.

6. Leases

The ~~final allocation~~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 14 years. Some of these leases include options to extend for up to 15 years, and some include options to terminate within 1 year.

In July 2019, the Company amended its existing agreement with a computing infrastructure vendor, the result of which was an increase in future consideration to be paid by the Company. The Company accounted for this change in consideration as a modification and remeasured the value of the ~~total purchase price for Vayant is~~right-of-use asset and related lease liability on such date, which resulted in an increase of $5.7 million to each respectively.

As of September 30, 2019, the Company did not have any finance leases.

The components of operating lease expense were as follows (in thousands):



	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Operating lease cost	$	2,285		$	6,778
Variable lease cost	498			1,389
Sublease income	(99		)	(248		)
Total lease cost	$	2,684		$	7,919

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

~~The following are the identifiable intangible assets acquired~~

Supplemental information related to leases was as follows (in thousands) ~~with respect to the Vayant acquisition, and their respective useful lives:~~:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liability:
Operating cash flows from operating leases	$	1,467	$	4,349

Useful Life
Amount (years)
Developed technology $ 11,600
7
Customer relationships 7,000
5
Total $ 18,600



	September 30, 2019
Weighted average remaining lease term:
Operating leases	7.0 years
Weighted average discount rate:
Operating leases	7.26	%

~~In performing the purchase price allocation,~~

As of September 30, 2019, maturities of lease liabilities were as follows (in thousands):



Year Ending December 31,	Amount
Remaining 2019	$	2,327
2020	7,558
2021	10,109
2022	4,542
2023	4,562
2024 and thereafter	38,654
Total operating lease payments	67,752
Less: Imputed interest	(22,945		)
Less: Anticipated lease incentive	(14,207		)
Total operating lease liabilities	$	30,600

As of September 30, 2019, the Company ~~considered, among other factors, its anticipated future use~~has additional operating leases of the acquired assets, historical financial performance, and estimated 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, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as wellapproximately $1.5 million that have not yet commenced, as the ~~weighted average cost~~lessor has not made the underlying assets available for use by the Company. These operating leases will commence in fiscal year 2020 with lease terms of ~~capital. Additionally, the Company assumed certain liabilities in the acquisition, including deferred revenue with a fair value~~5 years to 14 years.

As of ~~$0.6 million as determined using a cost-plus profit approach.~~

~~The Company made a preliminary determination that $0.5 million of net deferred tax liabilities were assumed on the acquisition date. During the nine months ended September 30,~~December 31, 2018, the ~~Company made a final determination upon filing~~future minimum lease commitments related to lease agreements under Topic 840, the predecessor of ~~the pre-acquisition period tax return that $0.8 million of net deferred tax liabilities~~Topic 842, were assumed on the acquisition date. The measurement period adjustment of $0.3 million to the deferred tax liabilities recorded during the nine months ended September 30, 2018 resulted in an increase to the goodwill and a benefit to the income tax provision.as follows:



Year Ending December 31,	Amount
2019	$	4,164
2020	1,649
2021	5,115
2022	6,181
2023	5,679
2024 and thereafter	57,365
Total minimum lease payments	$	80,153

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 were based on several strategic and synergistic benefits that were 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, for the three and nine months ended September 30, 2017 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 2017
Total revenue $ 42,738
$ 127,522
Net loss (23,150 ) (64,496 )
Earnings per share - basic and diluted $ (0.73 ) $ (2.05 )

7. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)	2019			2018			2019			2018
Numerator:
Net loss	$	(17,347	)	$	(15,786	)	$	(51,781	)	$	(51,486	)
Denominator:
Weighted average shares (basic)	41,276			35,676			39,438			33,568
Dilutive effect of potential common shares	—			—			—			—
Weighted average shares (diluted)	41,276			35,676			39,438			33,568
Basic loss per share	$	(0.42	)	$	(0.44	)	$	(1.31	)	$	(1.53	)
Diluted loss per share	$	(0.42	)	$	(0.44	)	$	(1.31	)	$	(1.53	)

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per share data) 2018 2017 2018 2017
Numerator:
Net loss $ (15,786 ) $ (21,226 ) $ (51,486 ) $ (60,946 )
Denominator:
Weighted average shares (basic) 35,676
31,867
33,568
31,527
Dilutive effect of potential common shares —
—
—
—
Weighted average shares (diluted) 35,676
31,867
33,568
31,527
Basic loss per share $ (0.44 ) $ (0.67 ) $ (1.53 ) $ (1.93 )
Diluted loss per share $ (0.44 ) $ (0.67 ) $ (1.53 ) $ (1.93 )

Dilutive potential common shares consist of shares issuable upon the exercise of stock options, settlement of SARs, and the vesting of RSUs and MSUs. Potential common shares determined to be antidilutive and excluded from diluted weighted average shares outstanding were approximately ~~2.2~~2.1 million and ~~2.0~~2.2 million for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and 2.1 million and ~~2.2~~2.1 million for the nine months ended September 30, 2019 and 2018, ~~and 2017,~~ respectively.

~~Since~~ Potential common shares related to the ~~Company has the intention and ability to settle the principal amount of its Notes (as defined in Note 9 below) in cash, the treasury stock method is expected~~convertible notes determined to be ~~used for calculating any potential dilutive effect of the conversion spread on~~antidilutive and excluded from 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~~weighted average ~~market price of common stock for a given period exceeds the conversion price of $33.79 and $48.63 per share,~~shares outstanding were 3.1 million for the ~~2019 Notes (as defined in Note 9 below)~~three and ~~2047 Notes (as defined in Note 9 below), respectively.~~nine months ended September 30, 2019.

8. Noncash Share-based Compensation

During the three months ended September 30, ~~2018,~~2019, the Company granted ~~18,904~~19,625 RSUs with a weighted average grant-date fair value of ~~$39.41~~$69.13 per share. The Company granted no MSUs, options or SARs during this period.

During the nine months ended September 30, ~~2018,~~2019, the Company granted ~~803,896~~759,084 RSUs (time-based) with a weighted average grant-date fair value of ~~$27.47~~$34.16 per share. The Company also granted ~~116,899 MSUs~~113,919 performance-based RSUs ("PRSUs") with a weighted average grant-date fair value of ~~$38.18~~$33.05 to certain executive employees during the nine months ended September 30, ~~2018.~~2019. These ~~MSUs~~PRSUs vest on January ~~10, 2021~~15, 2022 and the actual number of ~~MSUs~~PRSUs that will be eligible to vest is based ~~on the total stockholder return~~upon achievement of ~~the Company relative to the total stockholder return of the Index over the~~certain internal performance ~~period,~~metrics, as defined by each award's plan documents or individual award agreements. The maximum number of shares issuable upon vesting is 200% of the PRSUs initially granted. The Company did not grant any stock options, SARs or ~~SARs~~MSUs during the nine months ended September 30, ~~2018.~~2019.

Share-based compensation expense is allocated to expense categories on the unaudited condensed consolidated statements of comprehensive income (loss). The following table summarizes share-based compensation expense included in the Company's unaudited condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~

2018:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Share-based compensation:
Cost of revenue	$	503	$	445	$	1,535	$	1,325
Operating expenses:
Selling and marketing	1,515		779		4,329		3,347
General and administrative	2,901		2,635		8,521		8,202
Research and development	1,290		1,098		3,849		3,481
Total included in operating expenses	5,706		4,512		16,699		15,030
Total share-based compensation expense	$	6,209	$	4,957	$	18,234	$	16,355

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Share-based compensation:
Cost of revenue $ 445
$ 479
$ 1,325
$ 1,569
Operating expenses:
Selling and marketing 779
909
3,347
3,313
General and administrative 2,635
2,864
8,202
8,546
Research and development 1,098
1,319
3,481
4,237
Total included in operating expenses 4,512
5,092
15,030
16,096
Total share-based compensation expense $ 4,957
$ 5,571
$ 16,355
$ 17,665

The Company's 2017 Equity Incentive Plan ~~("2017~~(as amended and restated, the "2017 Stock Plan") was approved by stockholders in May 2017 and reserved an aggregate amount of 2,500,000 shares for issuance. In May 2019, the shareholders

approved an amendment to the 2017 Stock Plan which increased the aggregate amount of shares for issuance to a total of 4,550,000. As of September 30, ~~2018, 1,358,775~~2019, 2,512,077 shares remain available for issuance under the 2017 Stock Plan.

At September 30, ~~2018,~~2019, the Company had an estimated ~~$37.9~~$46.7 million of total unrecognized compensation costs related to share-based compensation arrangements. These costs will be recognized over a weighted average period of 2.5 years.

The Company's Employee Stock Purchase Plan ("ESPP") provides for eligible employees to purchase shares on an after-tax basis in an amount between 1% and 10% of their annual pay: (i) on June 30 of each year at a 15% discount of the fair market value of the Company's common stock on January 1 or June 30, whichever is lower, and (ii) on December 31 of each year at a 15% discount of the fair market value of the Company's common stock on July 1 or December 31, whichever is lower. An employee may not purchase more than $5,000 in either of the six-month measurement periods described above or more than $10,000 annually. During the three and nine months ended September 30, ~~2018,~~2019, the Company issued ~~38,431~~39,964 and ~~75,546~~75,304 shares, respectively, under the ESPP. As of September 30, ~~2018, 215,555~~2019, 140,251 shares remain authorized and available for issuance under the ESPP. As of September 30, ~~2018,~~2019, the Company held approximately ~~$0.5~~$0.8 million on behalf of employees for future purchases under the ESPP, and this amount was recorded in accrued payroll and other employee benefits in the Company's unaudited condensed consolidated balance sheet.

9. Convertible Senior Notes

The following is a summary of the Company's convertible senior notes as of September 30, 2019 (in thousands):



	Date of Issuance	Unpaid Principal Balance		Net Carrying Amount				Contractual Interest Rates
	Date of Issuance	Unpaid Principal Balance		Current		Noncurrent		Contractual Interest Rates
2% Convertible Senior Note due in 2019 ("2019 Notes")	December 2014	$	21,606	$	21,415	—		2%
2% Convertible Senior Notes due in 2047 ("2047 Notes")	June 2017	$	24,075	$	20,928	—		2%
1% Convertible Notes due in 2024 ("2024 Notes")	May 2019	$	143,750	$	—	$	109,024	1%

In May 2019, the Company issued ~~$143.8 million~~the 2024 Notes in an aggregate principal amount of convertible senior notes in December 2014 (the "2019 Notes") and $106.3 million principal amount of convertible senior notes in June 2017 (the "2047 Notes" and collectively with the 2019 Notes, the "Notes").$143.8 million. The interest ~~rates~~rate for the 2024 Notes ~~are~~is fixed at ~~2.0%~~1% per annum. Interest is payable semi-annually in arrears on ~~June 1~~May 15 and ~~December 1~~November 15 of each year, commencing on ~~June 1, 2015 for the 2019 Notes, and on December 1, 2017 for the 2047 Notes.~~November 15, 2019. The ~~2019~~2024 Notes mature on ~~December 1, 2019,~~May 15, 2024, 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~~2024 Notes will initially be convertible into ~~29.5972~~15.1394 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$66.05 per share. The initial conversion price for ~~each of~~ the 2024 Notes is subject to adjustment upon the occurrence of certain specified events. ~~An amount~~

On or after February 15, 2024 to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2024 Notes regardless of the contingent conversion conditions described herein. Upon conversion, the Company will pay or deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, as described in the indenture governing the 2024 Notes.

Holders may convert their 2024 Notes at their option at any time prior to the close of business on the business day immediately preceding February 15, 2024 only under the following circumstances:

during the five consecutive business day period immediately following any five consecutive trading day period (the "Measurement Period") in which the trading price per 2024 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;

during any calendar quarter commencing after the calendar quarter ending on June 30, 2019, if the last reported sale price of the common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 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 amount130% of the ~~2047 Notes is referred to herein as~~conversion price on each applicable trading day; or

upon the ~~“accreted principal amount.” On June 1, 2022, the accreted principal amount will accrete to 100%~~occurrence of ~~the principal amount at maturity.~~specified corporate events.

The 2019 Notes, the 2024 Notes and 2047 Notes (collectively, 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 (including trade payables but excluding intercompany obligations owed to the Company or its subsidiaries).

From September 1, 2019 through the end of the second scheduled trading day immediately prior to maturity, holders may convert all or any portion of their 2019 Notes regardless of the contingent conversion conditions described herein. Upon conversion,

~~the Company will pay or deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at its election, as described in the indenture governing the 2019 Notes.~~

On or before June 1, 2021, and subject to the satisfaction of certain conditions, the Company is entitled to elect to redeem all or any portion of the 2047 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 price of the Company’s common stock is greater than or equal to 130% of the conversion price for at least 20 trading days during any 30 consecutive trading day period. After June 1, 2021, the Company will be entitled to elect to redeem all or any portion of the 2047 Notes (without regard to the price of the Company’s common stock) at a redemption price equal 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 sale 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 the conversion price on each applicable trading day;

during 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 stock and the conversion rate on each such trading day; or

~~upon the occurrence of 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 September 30, 2018, the 2019 Notes and the 2047 Notes are not yet convertible.~~

In accordance with accounting guidance on embedded conversion features, the Company valued and bifurcated the conversion options associated with each of the 2019 Notes 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~~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, $3.4 million for the 2024 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, $1.1 million for the 2024 Notes and $0.3 million for the 2047 Notes, were netted with the equity component in stockholders' equity.

~~The Notes consist~~In May 2019, the Company used a portion of the ~~following (in thousands):~~

September 30, 2018 December 31, 2017
Liability component:
Principal $ 250,000
$ 250,000
Less: debt discount and issuance cost, net of amortization (27,876 ) (36,797 )
Net carrying amount $ 222,124
$ 213,203

Equity component⁽¹⁾
$ 37,560
$ 37,560


~~(1)~~	Recorded within additional paid-in capital in the consolidated balance sheet. As of September 30, 2018, it included $28.7 million and $8.8 million related to the 2019 Notes and the 2047 Notes, respectively, net of $1.2 million and $0.3 million issuance cost in equity, respectively.

net proceeds of the offering of the 2024 Notes to exchange and retire $122.1 million in aggregate principal of the 2019 Notes for an aggregate cash consideration of $76.0 million and approximately 2.18 million shares of the Company's common stock (the "Exchange Transactions"). The ~~following table sets forth total interest expense recognized~~Company recorded a $2.3 million loss on debt extinguishment related to the Exchange Transactions. The loss on extinguishment is included in the other (expense) income, net in the the accompanying unaudited condensed consolidated statements of comprehensive income (loss).

In August 2019, the Company issued a notice of redemption to the holders of its outstanding 2047 Notes, ~~(in thousands):~~pursuant to which it will redeem the outstanding 2047 Notes for cash at a price of 92.39% of the principal amount of the 2047 Notes, plus accrued and unpaid interest, if any (the “Redemption”). The Redemption will occur on October 30, 2019, unless earlier converted. Prior to the consummation of the Redemption, the holders of the 2047 Notes are entitled to convert such notes into shares of the Company’s common stock at a rate of 21.2861 shares per $1,000 principal amount of the 2047 Notes, which is equivalent to a conversion price of $46.98 per share. The Company intends to satisfy its conversion obligation with respect to 2047 Notes tendered by delivering shares of its common stock, together with cash in lieu of delivering any fractional shares of common stock (if applicable). As of September 30, 2019, the Company has converted $82.2 million of aggregate principal of the 2047 Notes and delivered approximately 1.7 million shares of its common stock upon conversion. The Company recorded a $2.7 million loss on debt extinguishment related to the Redemption. The loss on extinguishment is included in the other (expense) income, net in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
2.0% coupon $ 1,250
$ 1,250
$ 3,750
$ 2,741
Amortization of debt issuance costs 357
340
1,058
782
Amortization of debt discount 2,659
2,504
7,863
5,555
Total $ 4,266
$ 4,094
$ 12,671
$ 9,078

As of September 30, ~~2018~~2019, the 2019 and 2024 Notes are not yet convertible and the 2047 Notes are convertible pursuant to the Redemption notice issued by the Company. As of September 30, 2019, the remaining term of the Notes is approximately 2 months, 55 months and 1 month, respectively.

As of September 30, 2019 and December 31, ~~2017,~~2018, the fair value of the principal amount of the Notes was ~~$268.3~~$231.0 million and ~~$246.6~~$251.5 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, 2018, the remaining life~~The Notes consist of the following (in thousands):



	September 30, 2019			December 31, 2018
Liability component:
Principal	$	189,431		$	250,000
Less: debt discount and issuance cost, net of amortization	(38,064		)	(24,810		)
Net carrying amount	$	151,367		$	225,190

Equity component⁽¹⁾	$	70,443		$	37,560


(1)	Recorded within additional paid-in capital in the consolidated balance sheet. As of September 30, 2019, it included $28.7 million, $32.9 million and $8.8 million related to the 2019 Notes, the 2024 Notes and the 2047 Notes, respectively, which was net of $1.2 million, $1.1 million and $0.3 million issuance cost in equity, respectively.

The following table sets forth total interest expense recognized related to the Notes ~~and the 2047 Notes is approximately 14 months and 44 months, respectively.~~(in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Coupon interest	$	863	$	1,250	$	3,219	$	3,750
Amortization of debt issuance costs	286		357		992		1,058
Amortization of debt discount	2,568		2,659		8,136		7,863
Total	$	3,717	$	4,266	$	12,347	$	12,671

Note Hedge and Warrant Transactions

Concurrently with the offering of the 2019 Notes, the Company entered into separate convertible note hedge (the "Note Hedge") and warrant (the "Warrant") transactions. Taken together, the purchase of the Note Hedge and the sale of the Warrant are intended to offset any actual dilution from the conversion of the 2019 Notes and to effectively increase the overall conversion price of the 2019 Notes from $33.79 to $45.48 per share. The total cost of the Note Hedge transaction was $29.4 million. The Company received $17.1 million in cash proceeds from the sale of the Warrant.

Pursuant to the Warrant, if the average market value per share of the Company's common stock 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 2019 Notes 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 for as part of additional paid-in capital.

In May 2019, in connection with the Exchange Transactions, the Company entered into certain note hedge termination agreements (the “Note Hedge Termination Agreements”) and warrant termination agreements (the “Warrant Termination Agreements”). The Company received cash proceeds of $64.8 million related to the Note Hedge Termination Agreements and paid $45.2 million related to the Warrant Termination Agreements. The Note Hedge Termination Agreements terminated certain of the Note Hedges that were entered into by the Company in connection with the offering of the 2019 Notes. The Warrant Termination Agreements terminated certain of the Warrants that were entered into by the Company in connection with the offering of the 2019 Notes.

~~10. Equity Offering~~Capped Call Transactions

In ~~August 2018,~~May 2019, in connection with the offering of the 2024 Notes, the Company ~~completed~~entered into privately negotiated capped call transactions (collectively, the "Capped Call") with certain option counterparties. The Capped Call transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock initially underlying the 2024 Notes, at a ~~follow-on public offering~~strike price that corresponds to the initial conversion price of ~~3,800,000 shares~~the 2024 Notes, also subject to adjustment, and are exercisable upon conversion of the 2024 Notes. The Capped Call transactions are intended to reduce potential dilution of the Company's common stock ~~at an offering~~and/or offset any cash payments the Company will be required to make in excess of the principal amount upon any conversion of 2024 Notes, and to effectively increase the overall conversion price of ~~$34~~the 2024 Notes from $66.05 to $101.62 per ~~share (the "Secondary Offering"). Additionally,~~share. As the Capped Call transactions meet certain accounting criteria, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of the Capped Call was $16.4 million and was recorded as part of ~~the Secondary Offering the underwriters exercised, in full, their over-allotment option to purchase an~~ additional 570,000 shares of the Company's common stock at the offering price of $34 per share. The aggregate gross proceeds from the Secondary Offering, including the exercise of the over-allotment, were $148.6 million, and net proceeds received after underwriting fees and offering expenses were approximately $142.0 million.paid-in capital.

~~11.~~10. 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.

In ~~June 2017,~~March 2019, the Company entered in a noncancelable agreement with a computing infrastructure vendor that amended the existing agreement dated June 2017. The amended agreement expires ~~on June 30, 2020.~~in March 2022. The purchase commitment as of September 30, ~~2018~~2019 was ~~$12.6~~$67.0 million for the remaining period ~~under~~through the ~~three-year~~expiration of the agreement.

~~Contractual obligations~~

In September 2018, the Company entered into an agreement of limited partnership related to a venture fund, pursuant to which the Company committed to make a capital contribution of $2.3 million within the next five years.

~~Lease commitments~~

~~The Company leases office space and office equipment under noncancelable operating leases that expire at various dates.~~

~~As of September 30, 2018, the future minimum lease commitments related to lease agreements were as follows:~~

Year Ending December 31, Amount
Remaining 2018 $ 991
2019 3,553
2020 1,666
2021 957
2022 678
2023 and thereafter 43
Total minimum lease payments $ 7,888

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 ("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 provides ~~end-to-end Artificial Intelligence~~artificial intelligence ("AI")~~-powered~~ solutions that ~~enable~~power commerce in the digital economy by providing fast, frictionless and personalized buying ~~experiences for businesses to compete in today’s digital economy. Our~~experiences. PROS solutions ~~provide actionable intelligence that~~ enable dynamic buying experiences for both B2B and B2C companies across industry verticals. ~~Our end-to-end solutions drive~~Companies can use our dynamic pricing optimization, sales effectiveness, ~~and~~ revenue management ~~by enabling companies to create data-driven, personalized buying experiences. Companies can use PROS~~and commerce solutions to assess ~~the~~their market ~~environment~~environments in real time to deliver customized prices and offers. Our solutions enable buyers to move fluidly across our customers’ direct sales, online, mobile and partner channels ~~and have~~with personalized experiences ~~however~~regardless of which channel those customers ~~choose to buy.~~choose. Our decades of data science and AI expertise are infused into our solutions and are designed to reduce time and complexity ~~and add~~through actionable ~~intelligence to help our customers outperform in their markets.~~intelligence. We provide ~~standardized~~standard configurations of our software based on the industries we serve and offer professional services to configure these solutions to meet the specific needs of each customer.

Q3 ~~2018~~2019 Financial Overview

In the third quarter of ~~2018, we continued to make substantial progress in the execution of our cloud-first strategy, leading to an increase in our~~2019, subscription revenue ofincreased 57% and 51% ~~and 61%~~, respectively, for the three and nine months ended September 30, ~~2018, respectively,~~2019, as compared to the same periods in ~~2017.~~2018. Our continuing shift to a subscription-based revenue model also led to a growth of recurring revenue (which consists of subscription revenue and maintenance and support revenue) of ~~22%~~29% and ~~24%~~26%, respectively, as compared to the first three and nine months of ~~2017,~~2018, and accounted for ~~82%~~81% and ~~80%~~79%, respectively, of total revenue for the three and nine months ended September 30, ~~2018.~~2019.

Cash used in operating activities was $7.6 million for the nine months ended September 30, 2019, as compared to $9.5 million for the nine months ended September 30, ~~2018, as compared to $29.8 million for the nine months ended September 30, 2017.~~2018. The ~~improvement~~decrease in net cash used in operating activities was primarily ~~due~~attributable to ~~the net~~changes in working capital partially offset by increased impact of ~~working capital changes and an improvement in our operating results. The change in the working capital was mainly attributable~~adjustments to ~~higher recurring deferred revenue~~net loss primarily driven by ~~our subscription-based sales.~~loss on debt extinguishment.

Free cash flow is aanother key metric to assess the strength of our business. ~~Free~~We define free cash flow, is a non-GAAP financial measure, ~~defined~~ as net cash provided ~~or used~~ by (used in) operating activities ~~less additions to property, plant and equipment,~~minus capital expenditures (excluding expenditures for our new headquarters), purchases of other (non-acquisition-related) intangible assets and capitalized internal-use software development costs. We believe free cash flow may be useful to investors and ~~others~~other users of our financial information in evaluating the amount of cash generated ~~(used)~~ by our business operations. Free cash flow ~~used~~ during the three months ended September 30, ~~2018 improved to $2.6~~2019 was $3.0 million, compared to ~~$9.8~~free cash flow use of $2.6 million for the three months ended September 30, ~~2017. The improvement was primarily attributable to a $7.4 million decrease in our operating cash outflow due to our business performance following our shift to a subscription-based revenue model.~~2018. Free cash flow used during the nine months ended September 30, ~~2018 improved to $14.6~~2019 was $11.8 million, compared to ~~$33.2~~$14.6 million for the nine months ended September 30, ~~2017. The improvement~~2018. This decrease was primarily attributable to a ~~$20.4~~$1.9 million decrease in net cash used in operating ~~cash outflow.~~activities primarily due to changes in working capital partially offset by increased impact of adjustments to net loss primarily driven by loss on debt extinguishment. 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 September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Net cash used in operating activities	$	(1,175	)	$	(8,539	)	$	(9,485	)	$	(29,848	)
Purchase of property and equipment	(219		)	(540		)	(1,406		)	(1,235		)
Net cash provided by (used in) operating activities													$	4,037		$	(1,175	)	$	(7,607	)	$	(9,485	)
Purchase of property and equipment (excluding new headquarters)													(876		)	(219		)	(3,145		)	(1,406		)
Purchase of intangible assets	—			(75		)	—			(75		)	—			—			(50		)	—
Capitalized internal-use software development costs	(1,202		)	(688		)	(3,686		)	(1,996		)	(153		)	(1,202		)	(1,021		)	(3,686		)
Free Cash Flow	$	(2,596	)	$	(9,842	)	$	(14,577	)	$	(33,154	)	$	3,008		$	(2,596	)	$	(11,823	)	$	(14,577	)

Total deferred revenue was ~~$115.0~~$127.9 million as of September 30, ~~2018,~~2019, as compared to ~~$95.2~~$117.2 million as of December 31, ~~2017,~~2018, an increase of ~~$19.8~~$10.8 million, or ~~21%~~9%, primarily due to an increase in subscription deferred revenue.

~~Secondary Offering~~

In August 2018, we completed a follow-on public Secondary Offering of 3,800,000 shares of our common stock at an offering price of $34 per share. Additionally, as part of the Secondary Offering the underwriters exercised, in full, their over-allotment option to purchase an additional 570,000 shares of our common stock at the offering price of $34 per share. The aggregate gross proceeds from the Secondary Offering, including the exercise of the over-allotment, were $148.6 million, and net proceeds received after underwriting fees and offering expenses were approximately $142.0 million.

Factors Affecting Our Performance

Key factors and trends that have affected, and we believe will continue to affect, our operating results include:

•

Buying Preferences Driving Technology Adoption. Corporate buyers are increasingly demanding the same type of digital buying experience that they enjoy as consumers. For example, buyers increasingly prefer to buy online when they have already decided what to buy, and often prefer not to interact with a sales representative as their primary source of research. In response, we believe that businesses are increasingly looking to modernize their sales process to compete in digital commerce by adopting technologies which provide fast, frictionless, and personalized buying experiences across sales channels. We believe we are uniquely positioned to help power these buying experiences with our AI-powered solutions that enable buyers to move fluidly across our customers’ direct sales, online, mobile and partner channels and have personalized experiences however they choose to buy.

•

Continued Investments. We are focused on creating awareness for our solutions, expanding our customer base and growing our recurring revenues. While we incurred losses in the nine months of 2019, we believe our market is large and underpenetrated and therefore we intend to continue investing to expand our ability to sell and renew our subscription offerings globally through investments in sales, marketing, customer success, cloud support, security, privacy, infrastructure and other long-term initiatives. We also plan to continue to invest in product development to enhance our existing technologies and develop new applications and technologies.

~~Cloud Transition~~. In 2015, we began our transition to a cloud business to help accelerate adoption of our solutions and drive recurring revenue. Our cloud strategy has resulted in more sales of subscription-based solutions and very few on-premise licenses since that time, and 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 2015. We also expect that over time, additional sales of our cloud-based solutions will result in a decrease in our maintenance and support revenue, particularly as existing customers migrate from our licensed solutions to our cloud solutions.


•	Cloud Migrations. We expect that over time, additional sales of our cloud-based solutions will result in a decrease in our maintenance and support revenue, particularly as existing customers continue to migrate from our licensed solutions to our cloud solutions.

•

Sales Mix Impacts Subscription Revenue Recognition Timing. The mix of subscription services and professional services can create revenue variability in given periods based on the nature and scope of services sold together. Professional services that are deemed to be distinct from the subscription services are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If determined that the professional services are not considered distinct, the professional services and the subscription services are determined to be a single performance obligation and all revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer, resulting in a deferral of revenue and revenue recognized over a shorter period of time, which would have a negative near-term financial impact.

~~B2B Buying Preferences Driving Technology Adoption~~. B2B buyers are increasingly demanding the same type of digital buying experience that they enjoy as consumers. For example, buyers increasingly prefer to buy online when they have already decided what to buy, and often prefer not to interact with a sales representative as their primary source of research. In response, we believe that businesses are increasingly looking to modernize their sales process to compete in digital commerce by adopting technologies which provide fast, frictionless, and personalized buying experiences across sales channels. We believe we are uniquely positioned to help power these B2B experiences with our AI-powered solutions that enable buyers to move fluidly across our customers’ direct sales, online, mobile and partner channels and have personalized experiences however they choose to buy.

~~Continued Investments~~. We are focused on creating awareness for our solutions, expanding our customer base and growing our recurring revenues. While we incurred losses in the first nine months of 2018, we believe our market is large and underpenetrated and therefore we intend to continue investing to grow our recurring revenue and support our long-term initiatives. We plan to continue to invest in product development to enhance our existing technologies and develop new applications and technologies. In addition, we plan to continue to expand our ability to sell our subscription offerings globally through investments in sales, marketing, cloud support, security, data privacy compliance and infrastructure.

~~Sales Mix Impacts Subscription Revenue Recognition Timing~~. The mix of subscription services and professional services can create revenue variability in given periods based on the nature and scope of services sold together. Professional services that are deemed to be distinct from the subscription services are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If determined that the professional services are not considered distinct, the professional services and the subscription services are determined to be a single performance obligation and all revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer, resulting in a deferral of revenue and revenue recognized over a shorter period of time, which would have a negative near-term financial impact.

Results of Operations

The following table sets forth certain items in our ~~Condensed Consolidated Statements~~unaudited condensed consolidated statements of ~~Comprehensive Income (Loss)~~comprehensive income (loss) as a percentage of total revenues for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Revenue:
Subscription	49	%	38	%	46	%	34	%	58	%	49	%	55	%	46	%
Maintenance and support	33		41		34		43		22		33		24		34
Total subscription, maintenance and support	82		79		80		77		81		82		79		80
License	2		1		2		3		2		2		2		2
Services	16		20		18		20		17		16		19		18
Total revenue	100		100		100		100		100		100		100		100
Cost of revenue:
Subscription	18		19		18		16		17		18		17		18
Maintenance and support	6		7		6		7		4		6		4		6
Total cost of subscription, maintenance and support	24		26		24		23		21		24		21		24
License	—		—		—		—		—		—		—		—
Services	15		17		16		18		20		15		17		16
Total cost of revenue	40		42		40		41		41		40		38		40
Gross profit	60		58		60		59		59		60		62		60
Operating Expenses:
Selling and marketing	36		40		37		41		34		36		36		37
General and administrative	21		25		21		25		18		21		19		21
Research and development	28		33		29		35		26		28		27		29
Acquisition-related	—		1		—		1		—		—		—		—
Total operating expenses	84		100		87		101		78		84		82		87
Convertible debt interest and amortization	(9	)	(10	)	(9	)	(7	)	(6	)	(9	)	(7	)	(9	)
Other income (expense), net	1		1		1		—
Other income net									(2	)	1		—		1
Loss before income tax provision	(32	)	(51	)	(36	)	(50	)	(27	)	(32	)	(28	)	(36	)
Income tax provision	—		(1	)	—		—		—		—		—		—
Net loss	(32	)%	(51	)%	(36	)%	(50	)%	(27	)%	(32	)%	(28	)%	(36	)%

Revenue:


	Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance					Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance
(Dollars in thousands)	2018		2017		$			%		2018		2017		$			%		2019		2018		$			%		2019		2018		$			%
Subscription	$	23,888	$	15,809	$	8,079		51	%	$	66,876	$	41,457	$	25,419		61	%	$	37,463	$	23,888	$	13,575		57	%	$	100,958	$	66,876	$	34,082		51	%
Maintenance and support	16,238		17,124		(886		)	(5	)%	49,037		52,332		(3,295		)	(6	)%	14,405		16,238		(1,833		)	(11	)%	44,772		49,037		(4,265		)	(9	)%
Total subscription, maintenance and support	40,126		32,933		7,193			22	%	115,913		93,789		22,124			24	%	51,868		40,126		11,742			29	%	145,730		115,913		29,817			26	%
License	1,093		603		490			81	%	2,854		3,883		(1,029		)	(27	)%	1,129		1,093		36			3	%	3,663		2,854		809			28	%
Services	7,856		8,401		(545		)	(6	)%	25,644		24,800		844			3	%	11,153		7,856		3,297			42	%	34,766		25,644		9,122			36	%
Total revenue	$	49,075	$	41,937	$	7,138		17	%	$	144,411	$	122,472	$	21,939		18	%	$	64,150	$	49,075	$	15,075		31	%	$	184,159	$	144,411	$	39,748		28	%

~~Subscription revenue.~~Subscription revenue. Subscription revenue for the three and nine months ended September 30, 2019 and 2018 increased primarily due to an increase in the number and size of customer subscriptions purchased by new and existing customers, with the total number of customers generating subscription revenue increasing by 14% and 17%, respectively, for the three and nine months ended September 30, 2018. The increase in subscription revenue also included an increase of $1.1 million and $5.6 million, respectively, from our acquisition of Vayant for the three and nine months ended September 30, 2018 as compared to the ~~same periods in 2017 . We expect our subscription revenue will continue to increase as~~

~~we focus on subscription-based sales.~~prior year. We continued to invest in customer programs and initiatives which helped keep our customer attrition ~~rate~~rates fairly consistent as compared to the prior year. Our ability to maintain consistent customer ~~subscription renewal~~attrition rates will ~~play a role in~~directly impact our ability to continue to grow our subscription revenue.

Maintenance and support revenue.The decrease in maintenance and support revenue was principally a result of customer maintenance churn and ~~converting~~migrating existing maintenance contracts to the cloud during the three and nine months ended September 30, ~~2018. The decrease for the nine months ended September 30, 2018 was also impacted by the timing of certain cash collections during the same period in 2017. As a result of our cloud strategy, we~~2019. We expect maintenance revenue to continue to decline over time as we sell fewer licenses and related maintenance and support, sell more subscription services and ~~convert~~migrate existing maintenance ~~contracts~~customers to ~~the cloud.~~our cloud solutions.

License revenue. License revenue ~~increased~~remained relatively unchanged during the three months ended September 30, ~~2018 primarily due to anincrease in license revenue recognized upon software delivery.~~

2019. License revenue ~~decreased~~increased during the nine months ended September 30, ~~2018~~2019 primarily due to ~~a smaller number of~~an increase in license revenue with existing customers ~~licensing our~~recognized upon software ~~as a result of our strategy to sell fewer licenses and more subscription services.~~delivery.

Services revenue.For the three months ended September 30, 2018, services revenue decreased primarily as a result of the timing of services recognition on certain customer contracts recognized as the performance obligation was satisfied over time, partially offset by higher sales of professional services related to our subscription sales.

~~For the nine months ended September 30, 2018, services~~Services revenue increased primarily as a result of higher sales of professional services related to our subscription sales and add-on professional services revenue from existing ~~customers.~~customers during the three and nine months ended September 30, 2019, as compared to the same periods in 2018. Services revenue varies 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 additional professional services requested by our customers during a particular period.

Cost of revenue and gross profit:


	Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance					Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance
(Dollars in thousands)	2018		2017		$			%		2018		2017		$			%		2019		2018		$			%		2019		2018		$			%
Cost of subscription	$	9,053	$	7,868	$	1,185		15	%	$	26,308	$	19,605	$	6,703		34	%	$	11,039	$	9,053	$	1,986		22	%	$	30,543	$	26,308	$	4,235		16	%
Cost of maintenance and support	2,852		2,859		(7		)	—	%	8,762		8,886		(124		)	(1	)%	2,632		2,852		(220		)	(8	)%	8,269		8,762		(493		)	(6	)%
Total cost of subscription, maintenance and support	11,905		10,727		1,178			11	%	35,070		28,491		6,579			23	%	13,671		11,905		1,766			15	%	38,812		35,070		3,742			11	%
Cost of license	63		73		(10		)	(14	)%	200		210		(10		)	(5	)%	51		63		(12		)	(19	)%	152		200		(48		)	(24	)%
Cost of services	7,508		6,924		584			8	%	22,451		21,718		733			3	%	12,661		7,508		5,153			69	%	31,792		22,451		9,341			42	%
Total cost of revenue	19,476		17,724		1,752			10	%	57,721		50,419		7,302			14	%	26,383		19,476		6,907			35	%	70,756		57,721		13,035			23	%
Gross profit	$	29,599	$	24,213	$	5,386		22	%	$	86,690	$	72,053	$	14,637		20	%	$	37,767	$	29,599	$	8,168		28	%	$	113,403	$	86,690	$	26,713		31	%

Cost of subscription. The three and nine-month increase ~~in cost of subscription~~ was primarily attributable to ~~an increase of $1.1 million and $4.7 million, respectively, associated with the acquisition of Vayant and an increase~~increases in infrastructure ~~IT-related and other~~ costs ~~of $0.1 million and $2.0 million, respectively,~~ to support our current ~~and anticipated~~ subscription customer ~~base. The~~base, increases in personnel cost primarily driven by higher headcount and increased amortization expense associated with our internal-use software. Our subscription gross profit percentage was 71% and 62%, respectively, for the three months ended September 30, ~~2018~~2019 and ~~2017, was 62% and 50%, respectively. The~~2018. Our subscription gross profit percentage was 70% and 61%, respectively, for the nine months ended September 30, ~~2018~~2019 and ~~2017, was 61% and 53%, respectively.~~2018. The three and nine-month increase in gross profit percentage was primarily attributable to a ~~51%~~57% and ~~61%~~51%, respectively, increase in subscription revenue ~~respectively,~~ combined with a smaller increase in cost of subscription driven by efficiencies we are achieving in our cloud infrastructure.

Cost of maintenance and support. The ~~cost of maintenance~~three and nine-month decrease was primarily attributable to a decrease in personnel costs. Maintenance and support ~~remained relatively unchanged~~gross profit percentage for the three and nine months ended September 30, ~~2018. The maintenance~~2019 and ~~support gross profit percentage~~2018 was 82% and 83% for the three months ended September 30, 2018 and 2017, respectively. The maintenance and support gross profit percentage was 82% and 83% for the nine months ended September 30, 2018 and 2017, respectively, due to the decline in maintenance revenue..

Cost of license. Cost of license consists of third-party fees for licensed software and remained relatively consistent ~~for the three and nine months ended September 30, 2018 and 2017.~~year-over-year. License gross profit ~~percentage~~percentages for the three months ended September 30,

2019 and 2018, were 95% and ~~2017 was~~ 94% ~~and 88%~~, respectively. License gross profit ~~percentage~~percentages for the nine months ended September 30, 2019 and 2018, were 96% and ~~2017, was~~ 93% ~~and 95%~~, respectively.

Cost of services. The three and nine-month increase ~~in cost of services~~ was primarily attributable to an increase in personnel ~~cost for~~costs, primarily driven by higher headcount and third party system integrators to support our current customer ~~implementations.~~implementations, related travel expenses and other facility and overhead expenses. Services gross profit percentage for the three months ended September 30, 2019 and 2018, was (14)% and ~~2017, was~~ 4% ~~and 18%~~, respectively. Services gross profit percentage for the nine months ended September 30, 2019 and 2018, was 9% and ~~2017,~~12%, respectively. The decrease in services gross profit percentages was ~~12%.~~primarily attributed to an increase in third party system integrators to support our current customer implementations. Services gross profit percentages 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. We plan on increasing headcount in our professional services organization to support our current and anticipated growth in the number of customers purchasing our subscription services.

Gross profit. The increase in overall gross profit for the three and nine months ended September 30, ~~2018~~2019 was primarily attributable to an increase in total revenue of ~~17%~~31% and ~~18%~~28%, respectively, as compared to the same periods in ~~2017~~2018 mainly due to an increase in our subscription revenue.

Operating expenses:


	Three Months Ended September 30,				Variance					Nine Months Ended September 30,				Variance					Three Months Ended September 30,				Variance				Nine Months Ended September 30,				Variance
(Dollars in thousands)	2018		2017		$			%		2018		2017		$			%		2019		2018		$		%		2019		2018		$		%
Selling and marketing	$	17,513	$	16,980	$	533		3	%	$	53,671	$	50,625	$	3,046		6	%	$	21,600	$	17,513	$	4,087	23	%	$	66,030	$	53,671	$	12,359	23	%
General and administrative	10,179		10,324		(145		)	(1	)%	31,013		30,514		499			2	%	11,553		10,179		1,374		13	%	35,260		31,013		4,247		14	%
Research and development	13,773		14,046		(273		)	(2	)%	41,517		42,429		(912		)	(2	)%	16,878		13,773		3,105		23	%	50,132		41,517		8,615		21	%
Acquisition-related	—		613		(613		)	nm		95		613		(518		)	(85	)%	248		—		248		nm		248		95		153		161	%
Total operating expenses	$	41,465	$	41,963	$	(498	)	(1	)%	$	126,296	$	124,181	$	2,115		2	%	$	50,279	$	41,465	$	8,814	21	%	$	151,670	$	126,296	$	25,374	20	%

Selling and marketing expenses.~~For the~~The three and ~~nine months ended September 30, 2018, selling and marketing expenses increased~~nine-month increase was primarily ~~as a result~~attributable to an increase of ~~a $0.7~~$4.0 million and ~~$2.1~~$10.3 million, respectively, ~~increase~~ in personnel cost primarily driven by higher headcount as we continue ~~our~~to focus on adding new customers and increasing penetration within our existing customer base. In addition, for the three months, there was a decrease in non-personnel cost primarily driven by a decrease of $0.3 million in travel expense and a decrease of $0.2 million in recruiting expense, partially offset by an increase of $0.3 million in sales and marketing initiatives. For the nine months, there was an increase of $0.1 million and $2.1 million, respectively, in expenses for sales and marketing events and sales related travel.

General and administrative expenses. The three and nine-month increase was primarily attributable to an increase in personnel cost of $0.9 million ~~in non-personnel cost, which was mainly driven by~~and $2.2 million, respectively, and an increase of ~~$1.1 million of the intangible amortization related to our acquisition of Vayant and a~~ $0.5 million and $2.0 million, respectively, in professional fees and facility expenses.

Research and development expenses. The three and nine-month increase ~~in sales and marketing initiatives, partially offset by a $0.7 million decrease in travel expenses.~~

~~General and administrative expenses.~~ ~~The three-month decrease in general and administrative expenses~~ was ~~mainly~~primarily attributable to ~~a slight decrease~~an increase of $2.7 million and $6.7 million, respectively, in personnel cost primarily driven by higher headcount. The remaining increase of $0.4 million and $1.9 million was attributable to increases in facility and other overhead expenses.

Acquisition-related expenses. Acquisition-related expenses were $0.2 million for the ~~period, mainly related to a decrease of share-based compensation cost. For the~~three and nine months ended September 30, ~~2018, the increase in general~~2019 and ~~administrative expenses was~~consisted primarily ~~due to a $0.4 million increase associated with the~~of integration costs and professional fees for our acquisition of ~~Vayant and an increase in bad debt expense as compared to the same period in 2017.~~

~~Research and development expenses~~. The three-month decrease in research and development expenses was mainly attributable to an increase in capitalized internal-use software cost of $0.5 million and a decrease of share-based compensation cost of $0.2 million, partially offset by a $0.4 million increase primarily due to higher headcount associated with the Vayant acquisition.

The nine-month decrease in research and development expenses was mainly attributable to an increase in capitalized internal-use software cost of $1.5 million, a decrease of share-based compensation cost of $0.8 million, and a $0.2 million decrease in IT-related and other expenses. The decrease was partially offset by an increase of $1.6 million in personnel cost primarily due to higher headcount associated with the Vayant acquisition.

~~Acquisition-related expenses.~~Travelaer. Acquisition-related expenses were ~~zero and $0.6 million for the three months ended September 30, 2018 and 2017, respectively, and~~ $0.1 ~~million and $0.6~~ million for the nine months ended September 30, 2018 and ~~2017, respectively. Acquisition-related expenses~~ consisted primarily of integration costs, retention bonuses ~~advisory, legal, accounting~~ and professional fees related to our acquisition of ~~Vayant.~~PROS Travel Commerce, Inc. (formerly Vayant Travel Technologies, Inc.).

Other (expense) income, net:


	Three Months Ended September 30,						Variance					Nine Months Ended September 30,						Variance					Three Months Ended September 30,						Variance					Nine Months Ended September 30,						Variance
(Dollars in thousands)	2018			2017			$			%		2018			2017			$			%		2019			2018			$			%		2019			2018			$			%
Convertible debt interest and amortization	$	(4,266	)	$	(4,094	)	$	(172	)	4	%	$	(12,671	)	$	(9,078	)	$	(3,593	)	40	%	$	(3,717	)	$	(4,266	)	$	549		(13	)%	$	(12,347	)	$	(12,671	)	$	324		(3	)%
Other income, net	$	521		$	347		$	174		50	%	$	967		$	315		$	652		207	%
Other (expense) income, net																							$	(1,010	)	$	521		$	(1,531	)	(294	)%	$	(601	)	$	967		$	(1,568	)	(162	)%

Convertible debt interest and amortization. The convertible debt expense for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 related to coupon interest and amortization of debt discount and issuance costs attributable to our Notes. ~~The increase in convertible debt interest is directly related to the 2047 Notes issued in June 2017.~~

Other (expense) income, net.~~Other~~The decrease in other (expense) income, net ~~increased by $0.2 million and $0.7 million, respectively,~~ for the three and nine months ended September 30, ~~2018,~~2019, primarily ~~due~~related to a $5.0 million loss on debt extinguishment related to our 2019 and 2047 Notes recognized during the second and third quarter of 2019. This decrease was partially offset by an increase in interest ~~income partially offset by foreign currency exchange rate fluctuations during the periods.~~income.

Income tax provision ~~(benefit)~~:


	Three Months Ended September 30,						Variance				Nine Months Ended September 30,						Variance				Three Months Ended September 30,						Variance					Nine Months Ended September 30,						Variance
(Dollars in thousands)	2018			2017			$		%		2018			2017			$		%		2019			2018			$			%		2019			2018			$		%
Effective tax rate	(1		)%	1		%	n/a		n/a		—		%	—		%	n/a		n/a		(0.6		)%	(1.1		)%	n/a			n/a		(1.1		)%	(0.3		)%	n/a		n/a
Income tax provision (benefit)	$	175		$	(271	)	$	446	(165	)%	$	176		$	55		$	121	220	%
Income tax provision																					$	108		$	175		$	(67	)	(38	)%	$	566		$	176		$	390	nm

Income tax provision ~~(benefit)~~. The tax provision for the three and nine months ended September 30, ~~2018~~2019 included both foreign income and withholding ~~taxes offset by additional release of the valuation allowance related to the Vayant acquisition.~~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.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the "TCJA"). The TCJA significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% effective January 1, 2018. We continue to monitor tax reform and have reflected the impact of tax reform in our results for the three and nine months ended September 30, 2018.

Our effective tax rate was ~~(1)~~(0.6)% and 0%(1.1)% for the three months ended September 30, 2019 and 2018, respectively. Our effective tax rate was (1.1)% and (0.3)% for the nine months ended September 30, ~~2018, respectively,~~2019 and ~~1% and 0% for the three and nine months ended September 30, 2017,~~2018, respectively. The income tax rate varies from the 21% federal statutory rate primarily due to the valuation allowances on our deferred tax assets and foreign and state taxes not based on income. While our expected tax rate would be 0% due to the full valuation on the deferred tax assets, the ~~(1)~~(0.6)% and 1%(1.1)% tax rate for the three months ended September 30, 2019 and 2018, respectively, and ~~2017,~~the (1.1)% and (0.3)% for the nine months ended September 30, 2019 and 2018, respectively, is due to foreign and state taxes not based on pre-tax income. During the nine months ended September 30, 2018, we finalized the deferred tax liabilities assumed upon the acquisition of Vayant. An additional release of valuation allowance was recorded in that period.

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 September 30, ~~2018,~~2019, we had $~~281.9~~319.2 million of cash and cash equivalents and $~~209.9~~174.5 million of working capital as compared to $~~160.5~~295.5 million of cash and cash equivalents and $~~100.0~~71.4 million of working capital at December 31, ~~2017.~~2018.

Our principal sources of liquidity are our cash and cash equivalents, cash flows generated from operations and potential borrowings under our Revolver. We issued the 2019 Notes in December 2014, the 2047 Notes in June 2017, ~~and~~ the Secondary Offering in August 2018 and the 2024 Notes in May 2019 to supplement our overall liquidity position. Our material drivers or variants of operating cash flow are net income (loss), noncash expenses (principally share-based compensation, intangible amortization and amortization of debt discount and issuance costs) and the timing of periodic invoicing and cash collections related to licenses, subscriptions and support

for our software and related services. Our operating cash flows are also impacted by the timing of payments to our vendors and the payments of our other liabilities. We generally pay our vendors in accordance with the invoice terms and conditions.

We believe our existing cash, cash equivalents, including ~~funds provided by the issuance of our Notes and our Secondary Offering,~~ funds available under our Revolver and our current estimates of future operating cash flows, will provide adequate liquidity and capital resources to meet our operational requirements, anticipated capital expenditures and coupon payments for our Notes for the next twelve months. Our future working capital requirements will depend on many factors, including the operations of our existing business, potential growth of our subscription services, future acquisitions we might undertake, and expansion into complementary businesses. If such need arises, we may raise additional funds through equity or debt financings.

The following table presents key components of our unaudited condensed consolidated statements of cash flows for the nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


	Nine Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2018			2017			2019			2018
Net cash used in operating activities	$	(9,485	)	$	(29,848	)	$	(7,607	)	$	(9,485	)
Net cash used in investing activities	(5,092		)	(21,444		)	(15,121		)	(5,092		)
Net cash provided by financing activities	135,609			91,161			46,806			135,609
Cash and cash equivalents (beginning of period)	160,505			118,039			295,476			160,505
Cash and cash equivalents (end of period)	$	281,889		$	157,359		$	319,162		$	281,889

Operating Activities

Net cash used in operating activities. for the nine months ended September 30, 2019 was $7.6 million. The ~~$20.4~~$1.9 million decrease in ~~net~~ cash used ~~in operating activities~~as compared to 2018 was primarily ~~due~~attributable to ~~the net~~changes in working capital partially offset by increased impact of ~~working capital changes and a $9.5 million improvement in our operating results. The change in the working capital was mainly attributable~~adjustments to ~~higher recurring deferred revenue~~net loss primarily driven by ~~our subscription-based sales.~~loss on debt extinguishment.

Investing Activities

Net cash used in investing activities~~. The $16.4~~ for the nine months ended September 30, 2019 was $15.1 million, ~~decrease in net cash used in investing activities~~which was primarily ~~due~~related to the ~~$34.1 million~~ consideration paid for the acquisition of ~~Vayant in 2017 partially offset by $16.0~~Travelaer of $10.5 million, capital expenditures of $3.4 million, $1.0 million related to ~~maturities of short-term investments in 2017. In addition,~~ capitalized internal-use software development costs on our subscription service solutions and ~~capital expenditures increased~~an investment in equity securities of $0.2 million.

Financing Activities

Net cash provided by ~~$1.7 million and $0.2 million, respectively, in~~financing activities for the nine months ended September 30, ~~2018 as compared~~2019 was $46.8 million, which was attributable to ~~the same period in 2017 as we continue to invest in our solutions to grow our recurring revenue.~~

~~Net cash provided by financing activities~~. The increase of $44.4 million in net cash provided by financing activities primarily consisted of an increase in net proceeds from our Secondary Offering of $142.0 million in August 2018, higher proceeds from employee stock plan of $0.2 million, 2017 payments for debt issuance costs of $2.7 million and $0.2 million, respectively, for the 2047 Notes and the Revolver renewal in 2017, and a decrease of $0.1 million in note payable payments. The increase was partially offset by a decrease of proceeds from the issuance of ~~our 2047~~2024 Notes of ~~$93.5~~$140.2 million, ~~in 2017, a decrease in~~ proceeds from ~~the exercise~~bond hedge termination of ~~stock options of $5.2~~$64.8 million and ~~an increase~~proceeds from employee stock plans of ~~$1.9~~$2.0 million, inpartially offset by a cash convertible debt settlement payment of $76.0 million, $45.2 million paid for termination of warrant, $21.6 million paid for tax withholdings on vesting of employee share-based ~~awards.~~awards, purchase of capped call of $16.4 million, and payment for convertible debt issuance cost of $0.9 million.

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 changes described in Note 1110 above, there have been no material changes to our contractual obligations and commitments disclosed in our Annual Report.

Credit facility

~~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, ~~2018.~~2019. As of September 30, ~~2018,~~2019, we had

~~$0.1~~ $0.1 million of unamortized debt issuance costs related to the Revolver included in prepaids and other current assets and other long-term assets in the unaudited condensed consolidated balance sheets. For the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, we recorded an immaterial amount of amortization of debt issuance cost which is included in other expense, net in the unaudited condensed consolidated statements of comprehensive income (loss).

Recent Accounting Pronouncements

See "Recently adopted accounting pronouncements" in Note 2 above for discussion of recent accounting pronouncements including the respective expected dates of adoption.

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 ofrequired in our estimation process, ~~and~~as well as issues related to the assumptions, risks and uncertainties inherent in determining the ~~application~~nature and timing of satisfaction of performance obligations and determining the ~~percentage-of-completion method~~standalone selling price of ~~accounting could~~performance obligations, affect the amounts of revenue, expenses, unbilled receivables and deferred revenue. Estimates are also used for, but not limited to, receivables, allowance for doubtful accounts, 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 options, 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, except for the ~~revenue recognition~~leases policy which has been updated in result of the adoption of the new ~~revenue~~lease standard under Topic ~~606~~842 and is included herein.

Leases

We ~~believe the critical accounting policy listed below affects significant judgment~~determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, current operating lease liabilities and ~~estimates used~~noncurrent operating lease liabilities in the ~~preparation of our accompanying interim~~ unaudited condensed consolidated ~~financial statements.~~balance sheet.

~~Revenue recognition~~

~~We derive~~ROU assets represent our ~~revenues primarily from subscription services, professional services, the perpetual licensing of our software products and associated software maintenance and support services.~~

~~We determine revenue recognition through the following steps:~~

~~Identification of the contract, or contracts, with a customer~~

~~Identification of the performance obligations in the customer contract(s)~~

~~Determination of the transaction price~~

~~Allocation of the transaction price to each performance obligation in the customer contract(s)~~

~~Recognition of revenue when, or as, we satisfy a performance obligation~~

~~Subscription services revenue~~

Subscription services revenue primarily consists of fees that give customers access to one or more of our cloud applications with routine customer support. Subscription services revenue is generally recognized ratably over the contractual term of the arrangement beginning on the date that our service is made available to the customer. Our subscription contracts do not provide customers with the right to take possession of the software supporting the applications and, as a result, are accounted for as service contracts. Our subscription contracts are generally two to five years in length, billed annually in advance, and are non-cancelable.

~~Maintenance and support revenue~~

Maintenance and support revenue includes post-implementation customer support and the right to unspecified software updates and enhancements. We recognize revenue from maintenance arrangements ratably over the period in which the services are provided. Our maintenance and support contracts are generally one to three years in length, billed annually in advance, and non-cancelable.

~~License revenue~~

~~Licenses for on-premise software provide the customer with a~~ right to use an underlying asset over the ~~software as it exists when made available~~lease term and lease liabilities represent our obligation to make lease payments arising from the ~~customer. License revenue from distinct on-premises licenses is~~lease. ROU assets and lease liabilities are recognized at the ~~point~~lease commencement date based on the estimated present value of lease payments over the lease term. We include any anticipated lease incentives in ~~time when~~ the ~~software~~determination of lease liability.

We use our estimated incremental borrowing rate, which is ~~made~~derived from information available at the lease commencement date, in determining the present value of lease payments. We give consideration to the customer. For customer contracts that contain license and professional services that are not considered distinct, the license and professional services are determined to be a single performance obligation and recognized over time based upon our ~~efforts to satisfy the performance obligation.~~

~~Professional services revenue~~

~~Professional services revenue primarily consists of fees for deployment and configuration services,~~recent debt issuances as well as ~~training. Professional services revenues~~publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.

Our lease terms include options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are ~~generally recognized as~~not recorded on the services are rendered for time and material contracts, or on a proportional performance basis for fixed price contracts. The majority of our professional services contracts are on a time and materials basis. Training revenues are recognized as the services are rendered.unaudited condensed consolidated balance sheet. Our lease agreements do not contain any residual value guarantees.

Significant judgments are required in determining whether professional services that are contained in customer subscription services contracts are considered distinct, including whether the professional services are capable of being distinct and whether they are separately identifiable in the customer contract. Professional services that are deemed to be distinct are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If determined that the professional services are not considered distinct, the professional services and the subscription services are determined to be a single performance obligation and revenue is recognized over the contractual term of the subscription beginning on the date that subscription services are made available to the customer.

~~Customer Contracts with Multiple Performance Obligations~~

A portion of our customer contracts contain multiple performance obligations. Significant judgment is required in determining whether multiple performance obligations contained in customer contracts are capable of being distinct and whether they are separately identifiable in the customer contract. If the obligations are determined to be distinct, each separate performance obligation is recognized when, or as, we satisfy the performance obligation. If the obligations are not determined to be distinct, they are recognized as a single combined performance obligation. The transaction price is allocated to each performance obligation on a relative standalone selling price basis.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

Although our contracts are predominately denominated in U.S. dollars, 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 September 30, ~~2018~~2019 would result in a loss of approximately ~~$0.5~~$0.3 million. We are also exposed to foreign currency risk due to our operating subsidiaries in France, United Kingdom, Canada, Germany, Ireland, Australia, Bulgaria and United Arab Emirates. A hypothetical 10% adverse change in the value of the U.S. dollar in relation to the euro, which is our single most significant foreign currency exposure, would have decreased revenue for the three and nine months ended September 30, ~~2018~~2019 by approximately $0.2 million and $0.7 million, respectively. However, due to the relatively low volume of payments made and received through our foreign subsidiaries, we do not believe that we have significant exposure to foreign currency exchange risks. Fluctuations in foreign currency exchange rates could harm our financial results in the future.

We currently do not use derivative financial instruments to mitigate foreign currency exchange risks. We continue to review this matter and may consider hedging certain foreign exchange risks through the use of currency futures or options in future years.

Interest Rate Risk

We are exposed to market risk for changes in interest rates related to the variable interest rate on borrowings under the Revolver. As of September 30, ~~2018,~~2019, we had no borrowings under the Revolver.

As of September 30, ~~2018,~~2019, we had outstanding principal amounts of $21.6 million, $143.8 million and ~~$106.3~~$24.1 million respectively, of the 2019 Notes, the 2024 Notes and the 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 defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of September 30, ~~2018.~~2019. Based on our evaluation of our disclosure controls and procedures as of September 30, ~~2018,~~2019, 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

~~There~~In August 2019, we acquired Travelaer, in an all-cash transaction. See Note 5, "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 immaterial to the results of operations, cash flows and financial position from the date of the acquisition through September 30, 2019. In accordance with SEC guidance, management plans to exclude Travelaer from management’s assessment of, and report on, internal controls over financial reporting from the date of the acquisition through December 31, 2019. We are in the process of reviewing the operations of Travelaer and evaluating the impact of the acquisition on our internal controls over financial reporting. Excluding this acquisition, there have been no changes in our internal control over financial reporting during the three months ended September 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our ~~revenue~~lease contracts and properly assessed the impact of our adoption of Topic ~~606~~842 on January 1, ~~2018.~~2019. There were no significant changes to our internal control over financial reporting due to the adoption of Topic ~~606.~~842.

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 have been no material changes toin the Company's risk factors ~~as presented~~from those disclosed in Part I, Item 1A, of our Annual ~~Report.~~Report with the exception of the following revised and updated risk factor.

We incurred indebtedness by issuing convertible notes, and our debt repayment obligations may adversely affect our financial condition and cash flows from operations in the future.

In May 2019, we issued $143.8 million principal amount of 1.0% convertible senior notes (“2024 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 September 30, 2019, the entire $143.8 million of aggregate principal amount of 2024 Notes are outstanding.

In June 2017, we issued $106.3 million principal amount of 2.0% convertible senior notes ("2047 Notes") due June 1, 2047, unless earlier redeemed, purchased or converted in accordance with their terms prior to such date. Interest is payable semi-annually in arrears on June 1 and December 1 of each year. In 2019, we issued a notice of redemption and subsequently converted and extinguished a portion of the 2047 Notes. As of September 30, 2019, $24.1 million of aggregate principal amount of 2047 Notes are outstanding.

In December 2014, we issued $143.8 million principal amount of 2.0% convertible senior notes ("2019 Notes") due December 1, 2019, unless earlier purchased or converted. Interest is payable semi-annually in arrears on June 1 and December 1 of each year. We retired a portion of the 2019 Notes in 2019. As of September 30, 2019, $21.6 million of aggregate principal amount of 2019 Notes are outstanding.

Our indebtedness could have important consequences because it may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate or other purposes, and a portion of our cash flows from operations may have to be dedicated to repaying the principal beginning in 2019. 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 make a payment on our debt, we could be in default on such debt. 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 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 board of directors to repurchase up to $15.0 million in shares of our common stock in the open market or through privately negotiated transactions. As of September 30, ~~2018,~~2019, $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 September 30, ~~2018.~~2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURE

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Index to Exhibits
		Provided	Incorporated by Reference
Exhibit No.	Description	Herewith	Form	~~SEC File No.~~	Filing Date


31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).	X

31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/ 15d-14(a).	X

32.1*	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.	X

Exhibit No.	Description
101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.



*	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.
+	Indicates a management contract or compensatory plan or arrangement.

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.



		PROS HOLDINGS, INC.

October ~~25, 2018~~24, 2019	By:	/s/ Andres Reiner
		Andres Reiner
		President and Chief Executive Officer (Principal Executive Officer)

October ~~25, 2018~~24, 2019	By:	/s/ Stefan Schulz
		Stefan Schulz
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)



	September 30, 2018
(in thousands)	As Reported			Adjustments			Balances Under Topic 605
Balance Sheets
Trade and other receivables, net of allowance	$	46,170		$	(352	)	$	45,818
Deferred costs, current	3,413			(192		)	3,221
Long-term deferred costs	11,481			(7,859		)	3,622
Deferred revenue, current	100,504			1,292			101,796
Long-term deferred revenue	14,492			1,677			16,169
Accumulated deficit	$	(279,948	)	$	(11,372	)	$	(291,320	)



	Three Months Ended September 30, 2018
(in thousands, except per share amounts)	As Reported			Adjustments			Balances Under Topic 605
Income Statements
Total revenue	$	49,075		$	(500	)	$	48,575
Total cost of revenue	19,476			216			19,692
Selling and marketing	17,513			379			17,892
General and administrative	10,179			(80		)	10,099
Research and development	13,773			(59		)	13,714
Net loss	(15,786		)	(956		)	(16,742		)
Basic and diluted loss per share	$	(0.44	)	$	(0.03	)	$	(0.47	)



Cash	$	1,822
Other current assets	1,235
Noncurrent assets	86
Intangibles	18,600
Goodwill	17,052
Accounts payable and accrued liabilities	(1,668		)
Deferred revenue	(600		)
Deferred tax liability	(526		)
Noncurrent liabilities	(49		)
Net assets acquired	$	35,952



			Useful Life
	Amount		(years)
Developed technology	$	11,600	7
Customer relationships	7,000		5
Total	$	18,600



	Three Months Ended September 30,			Nine Months Ended September 30,
(in thousands, except earnings per share)	2017			2017
Total revenue	$	42,738		$	127,522
Net loss	(23,150		)	(64,496		)
Earnings per share - basic and diluted	$	(0.73	)	$	(2.05	)



Year Ending December 31,	Amount
Remaining 2018	$	991
2019	3,553
2020	1,666
2021	957
2022	678
2023 and thereafter	43
Total minimum lease payments	$	7,888