UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
___________________________________________________________________________
FORM 10-Q
___________________________________________________________________________
|
| | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20192020
OR
|
| | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-33554
___________________________________________________________________________
PROS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________________________
| | | | | | | | |
Delaware | | 76-0168604 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | | | | | | | | | | |
3200 Kirby Drive, Suite 600 | | | | 77098 |
Houston | TX | | | |
(Address of Principal Executive Offices) | | | | (Zip Code) |
| | |
Delaware(713) | 335-5151 | 76-0168604 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
Registrant's telephone number, including area code) |
| | | | | | |
| | 3100 Main Street, Suite 900 | Houston | TX | | 77002 |
Houston | TX | | | |
(Address of Principal Executive Offices) | | | | (Zip Code) |
| | | (713) | 335-5151 | |
(Registrant's telephone number, including area code)Former address, 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 $0.001 par value per share | | PRO | | New York Stock Exchange |
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
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 | ☐ |
Non-Accelerated Filer | ☐ (do not check if a smaller reporting company) | Smaller Reporting Company | ☐ |
Emerging Growth Company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's Common Stock, $0.001 par value, was 42,076,53543,434,985 as of October 21, 2019.
PROS Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 20192020
Table of Contents
|
| | | | | | | |
| | Page |
| |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | | |
Item 4. | | |
| | |
| |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
| |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Forward-lookingAll statements relate to future events or our future financial performance. Thesein this report other than historical facts are forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecastsassumptions, trends, and projections, andprojections. Statements which include the beliefs and assumptionswords "believes," "seeks," "expects," "may," "should," "intends," "likely," "targets," "plans," "anticipates," "estimates," or the negative version of our management including, without limitation, our expectations regarding the following: our ability to execute on our revenue strategy shift to cloud-first, the license and subscription revenues generated by our software products and services; the impact of our revenue recognition policies; our belief that our current assets, including cash, cash equivalents, short-term investments, and expected cash flows from operating activities, will be sufficient to fund our operations; our belief that we will successfully integrate our acquisitions; our anticipated additions to property, plant and equipment; our belief that our facilities are suitable and adequate to meet our current operating needs; and our belief that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in foreign currency exchange rates or interest rates. Words such as, but not limited to, “we expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “may,” “might,” “could,” “would,” “intend,” and variations of these types ofthose words and similar expressions are intended to identify these forward-looking statements. You should also carefully review the riskNumerous important factors, risks and cautionary statementsuncertainties affect our operating results, including, without limitation, those described in our Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q, and could cause our actual results to differ materially, from the results implied by these or any other forward-looking statements made by us or on our behalf. You should pay particular attention to the important risk factors and cautionary statements described in the section titled “Riskof our Annual Report on Form 10-K entitled "Risk Factors" and the section of this Quarterly Report on Form 10-Q entitled "Risk Factors.” " You should also carefully review the cautionary statements described in the other documents we file with the Securities and Exchange Commission, specifically the Annual Report on Form 10-K, all Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
You should not rely on forward-looking statements as predictions of future events, as we cannot guarantee that future results, levels of activity, performance or achievements will meet expectations. The forward-looking statements made herein are only made as of the date hereof, and we undertake no obligation to publicly update such forward-looking statements for any reason.
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROS Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
Assets: | | | | Assets: | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 319,162 |
| | $ | 295,476 |
| Cash and cash equivalents | $ | 322,352 | | | $ | 306,077 | |
Trade and other receivables, net of allowance of $968 and $978, respectively | 55,986 |
| | 41,822 |
| |
| Trade and other receivables, net of allowance of $4,616 and $214, respectively | | Trade and other receivables, net of allowance of $4,616 and $214, respectively | 67,940 | | | 65,074 | |
Deferred costs, current | 5,415 |
| | 4,089 |
| Deferred costs, current | 5,917 | | | 5,756 | |
Prepaid and other current assets | 8,764 |
| | 4,756 |
| Prepaid and other current assets | 9,010 | | | 9,038 | |
| Total current assets | 389,327 |
| | 346,143 |
| Total current assets | 405,219 | | | 385,945 | |
| Property and equipment, net | 13,972 |
| | 14,676 |
| Property and equipment, net | 35,994 | | | 14,794 | |
Operating lease right-of-use assets | 28,548 |
| | — |
| Operating lease right-of-use assets | 31,030 | | | 26,550 | |
Deferred costs, noncurrent | 15,172 |
| | 13,373 |
| Deferred costs, noncurrent | 12,974 | | | 15,478 | |
Intangibles, net | 16,191 |
| | 19,354 |
| Intangibles, net | 9,869 | | | 14,605 | |
Goodwill | 48,878 |
| | 38,231 |
| Goodwill | 49,560 | | | 49,104 | |
| Other assets, noncurrent | 6,650 |
| | 5,190 |
| Other assets, noncurrent | 6,796 | | | 6,831 | |
Total assets | $ | 518,738 |
| | $ | 436,967 |
| Total assets | $ | 551,442 | | | $ | 513,307 | |
Liabilities and Stockholders' Equity: | | | | Liabilities and Stockholders' Equity: | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable and other liabilities | $ | 7,003 |
| | $ | 6,934 |
| Accounts payable and other liabilities | $ | 14,014 | | | $ | 9,098 | |
Accrued liabilities | 17,433 |
| | 9,506 |
| Accrued liabilities | 11,906 | | | 22,748 | |
Accrued payroll and other employee benefits | 27,420 |
| | 22,519 |
| Accrued payroll and other employee benefits | 22,017 | | | 32,656 | |
Operating lease liabilities, current | 7,222 |
| | — |
| Operating lease liabilities, current | 5,132 | | | 7,173 | |
Deferred revenue, current | 113,430 |
| | 99,262 |
| Deferred revenue, current | 106,547 | | | 124,459 | |
Current portion of convertible debt, net | 42,343 |
| | 136,529 |
| |
| Total current liabilities | 214,851 |
| | 274,750 |
| Total current liabilities | 159,616 | | | 196,134 | |
Deferred revenue, noncurrent | 14,502 |
| | 17,903 |
| Deferred revenue, noncurrent | 11,493 | | | 17,801 | |
Convertible debt, net | 109,024 |
| | 88,661 |
| Convertible debt, net | 214,751 | | | 110,704 | |
Operating lease liabilities, noncurrent | 23,377 |
| | — |
| Operating lease liabilities, noncurrent | 35,218 | | | 22,391 | |
Other liabilities, noncurrent | 1,032 |
| | 754 |
| Other liabilities, noncurrent | 1,330 | | | 1,281 | |
Total liabilities | 362,786 |
| | 382,068 |
| Total liabilities | 422,408 | | | 348,311 | |
Commitments and contingencies (see Note 10) |
| | | Commitments and contingencies (see Note 10) | | | |
Stockholders' equity: | | | | Stockholders' equity: | |
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued | — |
| | — |
| |
Common stock, $0.001 par value, 75,000,000 shares authorized; 46,460,212 and 41,573,491 shares issued, respectively; 42,042,627 and 37,155,906 shares outstanding, respectively | 47 |
| | 42 |
| |
Preferred stock, $0.001 par value, 5,000,000 shares authorized; NaN issued | | Preferred stock, $0.001 par value, 5,000,000 shares authorized; NaN issued | 0 | | | 0 | |
Common stock, $0.001 par value, 75,000,000 shares authorized; 48,030,340 and 47,310,846 shares issued, respectively; 43,349,617 and 42,630,123 shares outstanding, respectively | | Common stock, $0.001 par value, 75,000,000 shares authorized; 48,030,340 and 47,310,846 shares issued, respectively; 43,349,617 and 42,630,123 shares outstanding, respectively | 48 | | | 47 | |
Additional paid-in capital | 518,456 |
| | 364,877 |
| Additional paid-in capital | 583,284 | | | 560,496 | |
Treasury stock, 4,417,585 common shares, at cost | (13,938 | ) | | (13,938 | ) | |
Treasury stock, 4,680,723 common shares, at cost | | Treasury stock, 4,680,723 common shares, at cost | (29,847) | | | (29,847) | |
Accumulated deficit | (344,489 | ) | | (292,708 | ) | Accumulated deficit | (420,589) | | | (361,789) | |
Accumulated other comprehensive loss | (4,124 | ) | | (3,374 | ) | Accumulated other comprehensive loss | (3,862) | | | (3,911) | |
| Total stockholders' equity | 155,952 |
| | 54,899 |
| Total stockholders' equity | 129,034 | | | 164,996 | |
Total liabilities and stockholders' equity | $ | 518,738 |
| | $ | 436,967 |
| Total liabilities and stockholders' equity | $ | 551,442 | | | $ | 513,307 | |
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)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenue: | | | | | | | | Revenue: | | | | | | | |
Subscription | $ | 37,463 |
| | $ | 23,888 |
| | $ | 100,958 |
| | $ | 66,876 |
| Subscription | $ | 42,029 | | | $ | 38,592 | | | $ | 127,576 | | | $ | 104,621 | |
Maintenance and support | 14,405 |
| | 16,238 |
| | 44,772 |
| | 49,037 |
| Maintenance and support | 10,765 | | | 14,405 | | | 35,029 | | | 44,772 | |
Total subscription, maintenance and support | 51,868 |
| | 40,126 |
| | 145,730 |
| | 115,913 |
| Total subscription, maintenance and support | 52,794 | | | 52,997 | | | 162,605 | | | 149,393 | |
License | 1,129 |
| | 1,093 |
| | 3,663 |
| | 2,854 |
| |
| Services | 11,153 |
| | 7,856 |
| | 34,766 |
| | 25,644 |
| Services | 8,714 | | | 11,153 | | | 28,961 | | | 34,766 | |
Total revenue | 64,150 |
| | 49,075 |
| | 184,159 |
| | 144,411 |
| Total revenue | 61,508 | | | 64,150 | | | 191,566 | | | 184,159 | |
Cost of revenue: | | | | | | | | Cost of revenue: | |
Subscription | 11,039 |
| | 9,053 |
| | 30,543 |
| | 26,308 |
| Subscription | 12,897 | | | 11,090 | | | 38,153 | | | 30,695 | |
Maintenance and support | 2,632 |
| | 2,852 |
| | 8,269 |
| | 8,762 |
| Maintenance and support | 2,177 | | | 2,632 | | | 7,577 | | | 8,269 | |
Total cost of subscription, maintenance and support | 13,671 |
| | 11,905 |
| | 38,812 |
| | 35,070 |
| Total cost of subscription, maintenance and support | 15,074 | | | 13,722 | | | 45,730 | | | 38,964 | |
License | 51 |
| | 63 |
| | 152 |
| | 200 |
| |
| Services | 12,661 |
| | 7,508 |
| | 31,792 |
| | 22,451 |
| Services | 9,563 | | | 12,661 | | | 33,584 | | | 31,792 | |
Total cost of revenue | 26,383 |
| | 19,476 |
| | 70,756 |
| | 57,721 |
| Total cost of revenue | 24,637 | | | 26,383 | | | 79,314 | | | 70,756 | |
Gross profit | 37,767 |
| | 29,599 |
| | 113,403 |
| | 86,690 |
| Gross profit | 36,871 | | | 37,767 | | | 112,252 | | | 113,403 | |
Operating expenses: | | | | | | | | Operating expenses: | |
Selling and marketing | 21,600 |
| | 17,513 |
| | 66,030 |
| | 53,671 |
| Selling and marketing | 21,951 | | | 21,600 | | | 67,882 | | | 66,030 | |
General and administrative | 11,553 |
| | 10,179 |
| | 35,260 |
| | 31,013 |
| General and administrative | 11,948 | | | 11,553 | | | 40,356 | | | 35,260 | |
Research and development | 16,878 |
| | 13,773 |
| | 50,132 |
| | 41,517 |
| Research and development | 19,135 | | | 16,878 | | | 56,668 | | | 50,132 | |
Acquisition-related | 248 |
| | — |
| | 248 |
| | 95 |
| Acquisition-related | 0 | | | 248 | | | 0 | | | 248 | |
| Loss from operations | (12,512 | ) | | (11,866 | ) | | (38,267 | ) | | (39,606 | ) | Loss from operations | (16,163) | | | (12,512) | | | (52,654) | | | (38,267) | |
Convertible debt interest and amortization | (3,717 | ) | | (4,266 | ) | | (12,347 | ) | | (12,671 | ) | Convertible debt interest and amortization | (2,498) | | | (3,717) | | | (6,645) | | | (12,347) | |
Other (expense) income, net | (1,010 | ) | | 521 |
| | (601 | ) | | 967 |
| |
Other income (expense), net | | Other income (expense), net | 122 | | | (1,010) | | | 1,099 | | | (601) | |
Loss before income tax provision | (17,239 | ) | | (15,611 | ) | | (51,215 | ) | | (51,310 | ) | Loss before income tax provision | (18,539) | | | (17,239) | | | (58,200) | | | (51,215) | |
Income tax provision | 108 |
| | 175 |
| | 566 |
| | 176 |
| Income tax provision | 318 | | | 108 | | | 600 | | | 566 | |
Net loss | $ | (17,347 | ) | | $ | (15,786 | ) | | $ | (51,781 | ) | | $ | (51,486 | ) | Net loss | $ | (18,857) | | | $ | (17,347) | | | $ | (58,800) | | | $ | (51,781) | |
| | | | | | | | |
| | Net loss per share: | | | | | | | | Net loss per share: | |
Basic and diluted | $ | (0.42 | ) | | $ | (0.44 | ) | | $ | (1.31 | ) | | $ | (1.53 | ) | Basic and diluted | $ | (0.44) | | | $ | (0.42) | | | $ | (1.36) | | | $ | (1.31) | |
| Weighted average number of shares: | | | | | | | | Weighted average number of shares: | |
| Basic and diluted | 41,276 |
| | 35,676 |
| | 39,438 |
| | 33,568 |
| Basic and diluted | 43,347 | | | 41,276 | | | 43,251 | | | 39,438 | |
Other comprehensive income (loss), net of tax: | | | | | | | | Other comprehensive income (loss), net of tax: | |
Foreign currency translation adjustment | $ | (658 | ) | | $ | (88 | ) | | $ | (750 | ) | | $ | (350 | ) | Foreign currency translation adjustment | $ | 133 | | | $ | (658) | | | $ | 49 | | | $ | (750) | |
| Other comprehensive income (loss), net of tax | (658 | ) | | (88 | ) | | (750 | ) | | (350 | ) | Other comprehensive income (loss), net of tax | 133 | | | (658) | | | 49 | | | (750) | |
Comprehensive loss | $ | (18,005 | ) | | $ | (15,874 | ) | | $ | (52,531 | ) | | $ | (51,836 | ) | Comprehensive loss | $ | (18,724) | | | $ | (18,005) | | | $ | (58,751) | | | $ | (52,531) | |
|
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, |
| 2019 | | 2018 |
Operating activities: | | | |
Net loss | $ | (51,781 | ) | | $ | (51,486 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 10,264 |
| | 9,785 |
|
Amortization of debt discount and issuance costs | 9,159 |
| | 8,958 |
|
Share-based compensation | 18,234 |
| | 16,355 |
|
Deferred income tax, net | — |
| | (252 | ) |
Provision for doubtful accounts | — |
| | 215 |
|
Loss on disposal of assets | — |
| | 37 |
|
Loss on debt extinguishment | 5,000 |
| | — |
|
Changes in operating assets and liabilities: | | | |
Accounts and unbilled receivables | (13,888 | ) | | (13,898 | ) |
Deferred costs | (3,124 | ) | | (1,517 | ) |
Prepaid expenses and other assets | (4,582 | ) | | (1,884 | ) |
Accounts payable and other liabilities | (492 | ) | | 2,569 |
|
Accrued liabilities | 9,877 |
| | (533 | ) |
Accrued payroll and other employee benefits | 2,717 |
| | (342 | ) |
Deferred revenue | 11,009 |
| | 22,508 |
|
Net cash used in operating activities | (7,607 | ) | | (9,485 | ) |
Investing activities: | | | |
Purchases of property and equipment | (3,360 | ) | | (1,406 | ) |
Capitalized internal-use software development costs | (1,021 | ) | | (3,686 | ) |
Acquisition of Travelaer, net of cash acquired | (10,510 | ) | | — |
|
Investment in equity securities | (180 | ) | | — |
|
Purchase of intangible assets | (50 | ) | | — |
|
Net cash used in investing activities | (15,121 | ) | | (5,092 | ) |
Financing activities: | | | |
Exercise of stock options | — |
| | 1,142 |
|
Proceeds from employee stock plans | 1,995 |
| | 1,720 |
|
Tax withholding related to net share settlement of stock awards | (21,598 | ) | | (9,153 | ) |
Proceeds from Secondary Offering, net | — |
| | 141,954 |
|
Payments of notes payable | — |
| | (54 | ) |
Proceeds from issuance of convertible debt, net | 140,156 |
| | — |
|
Debt issuance cost related to convertible debt | (860 | ) | | — |
|
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 | 46,806 |
| | 135,609 |
|
Effect of foreign currency rates on cash | (392 | ) | | 352 |
|
Net change in cash and cash equivalents | 23,686 |
| | 121,384 |
|
| | | | | | | | Nine Months Ended September 30, |
| | | 2020 | | 2019 |
Operating activities: | | Operating activities: | | | |
Net loss | | Net loss | $ | (58,800) | | | $ | (51,781) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
Depreciation and amortization | | Depreciation and amortization | 10,584 | | | 10,264 | |
Amortization of debt discount and issuance costs | | Amortization of debt discount and issuance costs | 5,456 | | | 9,159 | |
Share-based compensation | | Share-based compensation | 18,477 | | | 18,234 | |
| Provision for doubtful accounts | | Provision for doubtful accounts | 5,549 | | | 0 | |
| Loss on debt extinguishment | | Loss on debt extinguishment | 0 | | | 5,000 | |
Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Accounts and unbilled receivables | | Accounts and unbilled receivables | (8,584) | | | (13,888) | |
Deferred costs | | Deferred costs | 2,343 | | | (3,124) | |
Prepaid expenses and other assets | | Prepaid expenses and other assets | 131 | | | (4,582) | |
Accounts payable and other liabilities | | Accounts payable and other liabilities | 9,344 | | | (492) | |
Accrued liabilities | | Accrued liabilities | (11,500) | | | 9,877 | |
Accrued payroll and other employee benefits | | Accrued payroll and other employee benefits | (10,601) | | | 2,717 | |
Deferred revenue | | Deferred revenue | (24,240) | | | 11,009 | |
Net cash used in operating activities | | Net cash used in operating activities | (61,841) | | | (7,607) | |
Investing activities: | | Investing activities: | |
Purchases of property and equipment | | Purchases of property and equipment | (23,551) | | | (3,360) | |
| Capitalized internal-use software development costs | | Capitalized internal-use software development costs | (1,265) | | | (1,021) | |
Acquisition of Travelaer, net of cash acquired | | Acquisition of Travelaer, net of cash acquired | 0 | | | (10,510) | |
| Investment in equity securities | | Investment in equity securities | (113) | | | (180) | |
Purchase of intangible assets | | Purchase of intangible assets | 0 | | | (50) | |
| Net cash used in investing activities | | Net cash used in investing activities | (24,929) | | | (15,121) | |
Financing activities: | | Financing activities: | |
| Proceeds from employee stock plans | | Proceeds from employee stock plans | 2,824 | | | 1,995 | |
Tax withholding related to net share settlement of stock awards | | Tax withholding related to net share settlement of stock awards | (20,334) | | | (21,598) | |
| Proceeds from issuance of convertible debt, net | | Proceeds from issuance of convertible debt, net | 146,925 | | | 140,156 | |
Debt issuance cost related to convertible debt | | Debt issuance cost related to convertible debt | (675) | | | (860) | |
Purchase of capped call | | Purchase of capped call | (25,335) | | | (16,445) | |
Settlement of convertible debt | | Settlement of convertible debt | 0 | | | (76,018) | |
Proceeds from termination of bond hedge | | Proceeds from termination of bond hedge | 0 | | | 64,819 | |
Payment for termination of warrant | | Payment for termination of warrant | 0 | | | (45,243) | |
| Net cash provided by financing activities | | Net cash provided by financing activities | 103,405 | | | 46,806 | |
Effect of foreign currency rates on cash | | Effect of foreign currency rates on cash | (360) | | | (392) | |
Net change in cash and cash equivalents | | Net change in cash and cash equivalents | 16,275 | | | 23,686 | |
Cash and cash equivalents: | | | | Cash and cash equivalents: | |
Beginning of period | 295,476 |
| | 160,505 |
| Beginning of period | 306,077 | | | 295,476 | |
End of period | $ | 319,162 |
| | $ | 281,889 |
| End of period | $ | 322,352 | | | $ | 319,162 | |
| | | | |
Supplemental disclosure of cash flow information: | | | | Supplemental disclosure of cash flow information: | |
Noncash investing activities: | | | | Noncash investing activities: | |
Purchase of property and equipment accrued but not paid | $ | 422 |
| | $ | 8 |
| Purchase of property and equipment accrued but not paid | $ | 3,040 | | | $ | 422 | |
| | | | |
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, 2020 |
| 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 |
| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated (Deficit) Retained Earnings | | Accumulated other comprehensive loss | | Total Stockholders’ Equity | | Shares | | Amount | | Shares | | Amount | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | 43,304,461 | | | $ | 48 | | | $ | 553,696 | | | 4,680,723 | | | $ | (29,847) | | | $ | (401,732) | | | $ | (3,995) | | | $ | 118,170 | |
| 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 |
| | 4,417,585 |
| | $ | (13,938 | ) | | |
Stock awards net settlement | 69,764 |
| | — |
| | (2,956 | ) | | — |
| | — |
| | — |
| | — |
| | (2,956 | ) | Stock awards net settlement | 6,473 | | | — | | | (113) | | | — | | | — | | | — | | | — | | | (113) | |
Proceeds from employee stock plans | 39,964 |
| | — |
| | 1,052 |
| | — |
| | — |
| | — |
| | — |
| | 1,052 |
| Proceeds from employee stock plans | 38,683 | | | — | | | 1,460 | | | — | | | — | | | — | | | — | | | 1,460 | |
Retirement of convertible debt | 1,749,176 |
| | 2 |
| | 74,176 |
| | — |
| | — |
| | — |
| | — |
| | 74,178 |
| |
| Equity component of the convertible debt issuance, net | | Equity component of the convertible debt issuance, net | — | | | — | | | 47,215 | | | — | | | — | | | — | | | — | | | 47,215 | |
Purchase of capped call | | Purchase of capped call | — | | | — | | | (25,335) | | | — | | | — | | | — | | | — | | | (25,335) | |
| Noncash share-based compensation | — |
| | — |
| | 6,189 |
| | — |
| | — |
| | — |
| | — |
| | 6,189 |
| Noncash share-based compensation | — | | | — | | | 6,361 | | | — | | | — | | | — | | | — | | | 6,361 | |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (658 | ) | | (658 | ) | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | 133 | | | 133 | |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (17,347 | ) | | — |
| | (17,347 | ) | Net loss | — | | | — | | | — | | | — | | | — | | | (18,857) | | | — | | | (18,857) | |
Balance at September 30, 2019 | 42,042,627 |
| | $ | 47 |
| | $ | 518,456 |
| | 4,417,585 |
| | $ | (13,938 | ) | | $ | (344,489 | ) | | $ | (4,124 | ) | | $ | 155,952 |
| |
Balance at September 30, 2020 | | Balance at September 30, 2020 | 43,349,617 | | | $ | 48 | | | $ | 583,284 | | | 4,680,723 | | | $ | (29,847) | | | $ | (420,589) | | | $ | (3,862) | | | $ | 129,034 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | Shares | | Amount | | |
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 | | | 0 | | | (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 | | | Shares | | Amount | | |
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, 2020 |
| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated (Deficit) Retained Earnings | | Accumulated other comprehensive loss | | Total Stockholders’ Equity |
| Shares | | Amount | | | Shares | | Amount | | |
Balance at December 31, 2019 | 42,630,123 | | | $ | 47 | | | $ | 560,496 | | | 4,680,723 | | | $ | (29,847) | | | $ | (361,789) | | | $ | (3,911) | | | $ | 164,996 | |
| | | | | | | | | | | | | | | |
Stock awards net settlement | 653,874 | | | 1 | | | (20,335) | | | — | | | — | | | — | | | — | | | (20,334) | |
Proceeds from employee stock plans | 65,457 | | | — | | | 2,824 | | | — | | | — | | | — | | | — | | | 2,824 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Equity component of the convertible debt issuance, net | — | | | — | | | 47,215 | | | — | | | — | | | — | | | — | | | 47,215 | |
Purchase of capped call | — | | | — | | | (25,335) | | | — | | | — | | | — | | | — | | | (25,335) | |
Warrant exercise | 163 | | | — | | | — | | | — | | | — | | | — | | | — | | | 0 | |
Noncash share-based compensation | — | | | — | | | 18,419 | | | — | | | — | | | — | | | — | | | 18,419 | |
| | | | | | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | 49 | | | 49 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (58,800) | | | — | | | (58,800) | |
Balance at September 30, 2020 | 43,349,617 | | | $ | 48 | | | $ | 583,284 | | | 4,680,723 | | | $ | (29,847) | | | $ | (420,589) | | | $ | (3,862) | | | $ | 129,034 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | Shares | | Amount | | |
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, 2019 |
| 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 |
| Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Accumulated (Deficit) Retained Earnings | | Accumulated other comprehensive loss | | Total Stockholders’ Equity | | Shares | | Amount | | Shares | | Amount | |
| Shares | | Amount | | Shares | | Amount | | |
Balance at December 31, 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 |
| |
Balance at December 31, 2018 | | 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 | 592,317 |
| | 1 |
| | (9,154 | ) | | — |
| | — |
| | — |
| | — |
| | (9,153 | ) | Stock awards net settlement | 885,740 | | | 1 | | | (21,599) | | | — | | | — | | | — | | | — | | | (21,598) | |
Proceeds from employee stock plans | 75,546 |
| | — |
| | 1,720 |
| | — |
| | — |
| | — |
| | — |
| | 1,720 |
| Proceeds from employee stock plans | 75,304 | | | — | | | 1,995 | | | — | | | — | | | — | | | — | | | 1,995 | |
Proceeds from Secondary Offering, net | 4,370,000 |
| | 4 |
| | 141,950 |
| | — |
| | — |
| | — |
| | — |
| | 141,954 |
| |
Retirement of convertible debt | | Retirement of convertible debt | 3,925,677 | | | 4 | | | 118,985 | | | — | | | — | | | — | | | — | | | 118,989 | |
Termination of bond hedge | | Termination of bond hedge | — | | | — | | | 64,819 | | | — | | | — | | | — | | | — | | | 64,819 | |
Termination of warrant | | Termination of warrant | — | | | — | | | (45,243) | | | — | | | — | | | — | | | — | | | (45,243) | |
Equity component of the convertible debt issuance, net | | Equity component of the convertible debt issuance, net | — | | | — | | | 32,883 | | | — | | | — | | | — | | | — | | | 32,883 | |
Purchase of capped call | | Purchase of capped call | — | | | — | | | (16,445) | | | — | | | — | | | — | | | — | | | (16,445) | |
| Noncash share-based compensation | — |
| | — |
| | 16,440 |
| | — |
| | — |
| | — |
| | — |
| | 16,440 |
| Noncash share-based compensation | — | | | — | | | 18,184 | | | — | | | — | | | — | | | — | | | 18,184 | |
Cumulative effect of adoption of section 606 | — |
| | — |
| | — |
| | — |
| | — |
| | 9,723 |
| | — |
| | 9,723 |
| |
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (350 | ) | | (350 | ) | Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (750) | | | (750) | |
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (51,486 | ) | | — |
| | (51,486 | ) | Net loss | — | | | — | | | — | | | — | | | — | | | (51,781) | | | — | | | (51,781) | |
Balance at September 30, 2018 | 37,139,035 |
| | $ | 42 |
| | $ | 360,021 |
| | 4,417,585 |
| | $ | (13,938 | ) | | $ | (279,948 | ) | | $ | (3,166 | ) | | $ | 63,011 |
| |
Balance at September 30, 2019 | | Balance at September 30, 2019 | 42,042,627 | | | $ | 47 | | | $ | 518,456 | | | 4,417,585 | | | $ | (13,938) | | | $ | (344,489) | | | $ | (4,124) | | | $ | 155,952 | |
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"), provides artificial intelligence ("AI") solutions that power commerce in the digital economy by providing fast, frictionless and personalized buying experiences. PROS solutions enable dynamic buying experiences for both business-to-business ("B2B") and business-to-consumer ("B2C") companies across industry verticals. Companies can use the Company's dynamicselling, pricing, revenue optimization sales effectiveness, revenue management and commerceeCommerce solutions to assess their market environments in real time to deliver customized prices and offers. The Company's solutions enable buyers to move fluidly across its customers’ direct sales, online, mobile and partner channels with personalized experiences regardless of which channel those customersbuyers choose. The Company's decades of data science and AI expertise are infused into its solutions and are designed to reduce time and complexity through actionable intelligence. The Company provides standard configurations of its 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, 2019,2020, the results of operations for the three and nine months ended September 30, 20192020 and 2018,2019, cash flows for the nine months ended September 30, 20192020 and 2018,2019, and stockholders' equity for the three and nine months ended September 30, 20192020 and 2018.2019.
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, 20182019 ("Annual Report") filed with the SEC. The unaudited condensed consolidated balance sheet as of December 31, 20182019 was derived from the Company's audited consolidated financial statements but does not include all disclosures required under GAAP.
Certain prior year amounts have been reclassified for consistency with the current year presentation. This insignificant reclassification had no effect on the reported results of operations. License revenue and license cost of revenue are now combined with subscription revenue and subscription cost of revenue, respectively.
Risks and uncertainties
Coronavirus ("COVID-19") continues to spread throughout the U.S. and the world and compliance with the various containment measures implemented by governmental authorities has impacted the Company's business, as well as the businesses of its customers, suppliers and other counterparties, and this impact could last for an indefinite period of time. There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 as a global pandemic, and as a result, the Company is unable to predict the full impact that COVID-19 will have on its results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures. For a full discussion on the ongoing impact of COVID-19 to the Company's business, please see "We must successfully navigate the demand, supply and operational challenges associated with the ongoing coronavirus (COVID-19) pandemic" under Part II, Item 1A of this Quarterly Report on Form 10-Q.
Changes in accounting policies
The Company has consistently applied these There have been no material changes in the Company’s significant accounting policies and their application as compared to all periods presentedthe significant accounting policies described in these consolidated financial statements,the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, except for the Company's adoption of certain accounting standards described in more detail under "Recently adopted accounting pronouncements" in this Note 2 below.
Basis
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 nature and timing of satisfaction of performance obligations and determining the standalone selling price of performance obligations, affect the amounts of revenue, expenses, unbilled receivables and deferred revenue. Estimates are also used for, but not limited to, receivables, allowance for doubtful 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".Contents
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 primarily include customer access to one or more of the Company's cloud applications and associated customer support. Subscription services revenue is generally recognized ratably over the contractual subscription term, 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 service and, as a result, are accounted for as service contracts. The Company's subscription contracts are generally two to five years in length, billed annually in advance, and non-cancelable.
Maintenance and support revenue
Maintenance and support revenue includes post-implementation customer support for on-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 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 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 fee contracts. The majority of the Company's professional services contracts are on a fixed fee basis. Training revenues are recognized as the services are rendered.
Significant judgment is required in determining whether professional services contained in a customer subscription services contract are capable of being distinct and are separately identifiable in the customer contract. Professional services determined to be distinct are accounted for as a separate performance obligation and revenue is recognized as the services are performed. If the professional services are not determined to be distinct, the professional services and the subscription services are 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 with multiple performance obligations
A portion of the Company's customer contracts contain multiple performance obligations. Significant judgment is required in determining whether multiple performance obligations contained in a single customer contract are capable of being distinct and are separately identifiable. An obligation determined to be distinct is accounted for as a separate performance obligation and revenue for that separate performance obligation is recognized when, or as, the Company satisfies the performance obligation. If obligations are not determined to be distinct, those obligations are accounted for as a single, combined performance obligation. The transaction price is allocated to each performance obligation on a relative standalone selling price basis.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use ("ROU") assets, current operating lease liabilities and noncurrent operating lease liabilities in the Company's unaudited condensed consolidated balance sheet.
ROU assets represent the Company’s right to use an underlying asset over the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company includes any anticipated lease incentives in the determination of lease liability.
The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when determining its incremental borrowing rates.
The Company’s lease terms will include options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recorded on the Company's unaudited condensed consolidated balance sheet. The Company’s lease agreements do not contain any residual value guarantees.
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, 2019 and 2018, the Company capitalized $0.2 million and $1.2 million, respectively, of internal-use software development costs related to cloud-based offerings, and for the nine months ended September 30, 2019 and 2018, the Company capitalized $1.0 million and $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 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. 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 0 impairment charges during the three and nine months ended September 30, 2019 and 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 (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, 2019 and December 31, 2018, respectively, (in thousands):
|
| | | | | | |
Award type | | September 30, 2019 | | December 31, 2018 |
Restricted stock units (time-based) | | 1,876 |
| | 1,969 |
|
Restricted stock units (performance-based) | | 114 |
| | — |
|
Restricted stock units (market-based) | | — |
| | 215 |
|
Stock appreciation rights | | 165 |
| | 287 |
|
Market stock units | | 267 |
| | 419 |
|
Stock options, time-based RSUs and SARs vest ratably between one and 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 MSUs during the three and nine months ended September 30, 2019 or 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.
Earnings per share
The Company computes basic earnings (loss) per share by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by giving effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible notes using the if-converted method. Dilutive potential common shares consist of shares issuable upon the exercise of stock options, shares of unvested restricted stock units and market stock units, and settlement of stock appreciation rights. When the Company incurs a net loss, the effect of the Company's outstanding stock options, stock appreciation rights, restricted stock units, market stock units and convertible notes are not included in the calculation of diluted earnings (loss) per share as the effect would be anti-dilutive. Accordingly, basic and diluted net loss per share are identical.
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 at cost, less impairment and adjusted for subsequent observable price changes obtained from orderly transactions for identical or similar investments issued by the same investee. Adjustments resulting from impairment, fair value, or observable price changes are accounted for in the unaudited condensed consolidated statements of comprehensive income (loss).
As of September 30, 2019 and December 31, 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 at cost, less impairment and adjusted for subsequent observable price changes obtained from orderly transactions for identical or similar investments issued by the same investee. The Company estimates fair value of its 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 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 $289.8$181.3 million and $268.6$273.1 million at September 30, 20192020 and December 31, 2018,2019, 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. TheWhen developing its estimate of expected credit losses on trade and other receivables, the Company estimates its allowance for doubtful accounts for specific trade receivable balances based on historical collection trends,considers the ageavailable information relevant to assessing the collectability of outstanding trade receivables, existing economiccash flows, which includes a combination of both internal and external information relating to past events, current conditions, and any financial security associated withfuture forecasts as well as relevant qualitative and quantitative factors that relate to the receivables.environment in which the Company operates.
Contract assets represent conditional rights to consideration that have been recognized as revenue in advance of billing the customer. Unbilled receivables represent unconditional rights to consideration arising from contingent revenue that have been recognized as revenue in advance of billing the customer.
There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 as a global pandemic. As a result, the impact of COVID-19 is highly uncertain and subject to change. The Company does not yet know the full extent of the impact from COVID-19 to the Company's business operations or the global economy as a whole; however, the impact could have an adverse effect on the Company's customers and inherently the related receivables.
Deferred costs
Sales commissions earned by the Company's sales representatives are considered incremental and recoverable costs of obtaining a customer contract. Sales commissions are deferred and amortized on a straight-line basis over the period of benefit, which the Company has determined to be five to eight years. The Company determined the period of benefit by taking into consideration its customer contracts, expected renewals of those customer contracts (as the Company currently does not pay an
incremental sales commission)commission for renewals), the Company's technology and other factors. The Company also defers amounts earned by employees other than sales representatives who earn incentive payments under compensation plans that are also tied to the value of customer contracts acquired. Deferred costs were $20.6$18.9 million and $17.5$21.2 million as of September 30, 20192020 and December 31, 2018,2019, respectively. Amortization expense for the deferred costs was $1.5 million and $1.3 million and $0.8 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $4.3 million and $3.5 million and $2.1 million for the nine months ended September 30, 2020 and 2019, respectively. Amortization of deferred costs is included in selling and 2018, respectively.marketing expense in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).
Deferred implementation costs
The Company capitalizes certain contract fulfillment costs, including personnel and other costs (such as hosting, employee salaries, benefits and payroll taxes), 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 $4.8 $3.2 million and $3.9$4.4 million as of September 30, 20192020 and December 31, 2018,2019, respectively. Amortization expense for the deferred implementation costs was $0.4$0.4 million and $0.1 million for the three months ended September 30, 2020 and 2019 and 2018, respectively, $1.4 million and $1.0 million and $0.4 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. Deferred implementation costs are included in prepaid and other current assets and other 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
Table of September 30, 2019, the Company had 0 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 assets, noncurrent in the unaudited condensed consolidated balance sheets. For the three and nine months ended September 30, 2019 and 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).Contents
Income taxes
The Company recorded an income tax provision of $0.1 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $0.6 million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively, primarily related to foreign income taxes and withholding taxes. The effective tax rate was (0.6)% and (1.1)% for the three months ended September 30, 2019 and 2018, respectively, and (1.1)% and (0.3)% for the nine months ended September 30, 2019 and 2018, 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. 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
In FebruaryJune 2016, the FASB issued ASU 2016-02, "2016-13, LeasesFinancial Instruments-Credit Losses (Topic 842)"326): Measurement of Credit Losses on Financial Instruments ("Topic 842"326"), whichin order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. Topic 326 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the lesseeincurred loss impairment methodology in current GAAP with a methodology that requires consideration of a broader range of information to recognize most leases on the balance sheet thereby resulting in the recognition of right-of-use ("ROU") assets and lease liabilities for those leases currently classified as operating leases. Lessor accounting remains largely unchanged from current guidance, however, Topic 842 provides improvements that are intended to align lessor accounting with the lessee model and with updated revenue recognition guidance. This standard took effect in the first quarter of 2019, including interim periods within that reporting
period.estimate credit losses. The Company adopted Topic 842326 as of January 1, 20192020 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balances of operating ROU assets and lease liabilities, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic accounting under the prior lease accounting rules in ASC 840, "Leases".
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 periods within those annual periods, beginning after December 15, 2019; early adoption is permitted. The Company early adopted Subtopic 350-40 prospectively effective January 1, 2019 and there was no material impact on the Company's unaudited condensed consolidated financial 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 As of September 30, 2019.2020, the Company has recorded allowance for doubtful accounts related to trade receivables of $4.6 million primarily due to increased credit risk from uncertain economic conditions caused by COVID-19.
Recently issued accounting pronouncements not yet adopted
In January 2017,August 2020, the FASB issued ASU 2017-04, "2020-06, IntangiblesDebt - GoodwillDebt with Conversion and Other (Topic 350): Simplifying the Test for Goodwill ImpairmentOptions ("Subtopic 470-20") and Derivatives and Hedging - Contracts in an Entity's Own Equity ("Subtopic 815-40")" ("Topic 350"), which eliminates step two fromsimplifies the goodwill impairment test. Underaccounting for certain convertible instruments, amends the amendmentsguidance on derivative scope exceptions for contracts in this standard, an entity should recognize an impairment charge forentity's own equity, and modifies the amount by which the carrying amountguidance on diluted earnings per share calculations as a result 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. Thethese changes. This new standard is effective for the Company's interim and annual reporting periods beginning after December 15, 2019;January 1, 2022, and earlier adoption is permitted for goodwill impairment tests performed afteron January 1, 2017.2021. The Company may elect to apply the amendments on a retrospective or modified retrospective basis. The Company is currently assessing the impact of Topic 350the adoption of the standard 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, 2019,2020, 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, 20192020 and 2018,2019, the Company recognized approximately $45.1$45.3 million and $32.4$45.1 million, respectively, and for the nine months ended September 30, 20192020 and 2018,2019, the Company recognized approximately $86.2$107.2 million and $64.4$86.2 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, 2019,2020, the Company expects to recognize approximately $365.2$366.8 million of revenue from remaining performance obligations. The Company expects, based on the terms of the related, underlying contractual arrangements, to recognize revenue on approximately $176.6 $175.4 million of these performance obligations over the next 12 months, with the balance recognized thereafter. However, as a result of uncertain economic conditions caused by COVID-19, the amount of revenue recognized from the Company's contractual remaining performance obligations could vary and be less than what the Company expects as revenue recognized could be delayed or not occur depending on the ongoing impact of COVID-19.
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, 20192020 and 2018.2019. 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, |
| 2020 | | 2019 | | 2020 | | 2019 |
(in thousands) | Revenue | | Percent | | Revenue | | Percent | | Revenue | | Percent | | Revenue | | Percent |
United States of America | $ | 19,960 | | | 32 | % | | $ | 21,631 | | | 34 | % | | $ | 62,475 | | | 33 | % | | $ | 62,273 | | | 34 | % |
Europe | 18,827 | | | 31 | % | | 19,279 | | | 30 | % | | 56,439 | | | 29 | % | | 55,286 | | | 30 | % |
The rest of the world | 22,721 | | | 37 | % | | 23,240 | | | 36 | % | | 72,652 | | | 38 | % | | 66,600 | | | 36 | % |
Total revenue | $ | 61,508 | | | 100 | % | | $ | 64,150 | | | 100 | % | | $ | 191,566 | | | 100 | % | | $ | 184,159 | | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
5. Business Combination
On August 14, 2019, the Company acquired Travelaer SAS ("Travelaer"), a privately held company based near Nice, France, for a total cash consideration, net of cash acquired, of approximately $10.5 million. Travelaer is a digital innovator for the travel industry with a focus on improving the customer experience across all phases of travel, and brings an Internet booking engine and 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, 2019.
The Company accounted for the transaction as a business combination and all of the assets acquired and the liabilities assumed in the transaction have been recognized at their acquisition date fair values. The Company recorded approximately $2 million for developed technology and customer relationships with estimated useful lives of seven7 years and five5 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 Company has operating leases for data centers, computer infrastructure, corporate offices and certain equipment. These leases have remaining lease terms ranging from 1 year to 1413 years. Some of these leases include options to extend for up to 15 years, and some include options to terminate within 1 year.
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 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, 2019,2020, 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 |
|
Supplemental cash flow information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| | | | | 2020 | | 2019 |
Cash paid for operating lease liabilities | | | | | $ | 5,672 | | | $ | 4,349 | |
Right-of-use asset obtained in exchange for operating lease liability (1) | | | | | $ | 11,544 | | | $ | 33,108 | |
|
| | | | | | | |
| 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 |
|
(1) For the nine months ended September 30, 2019, the balance included $26.9 million for operating leases existing on January 1, 2019 upon adoption of ASU 842.
|
| | | |
| | September 30, 2019 |
Weighted average remaining lease term: | | |
Operating leases | | 7.0 years |
|
Weighted average discount rate: | | |
Operating leases | | 7.26 | % |
As of September 30, 2019,2020, maturities of lease liabilities were as follows (in thousands):
| | | | | | | | |
Year Ending December 31, | | Amount |
Remaining 2020 | | $ | 1,607 | |
2021 | | 8,663 | |
2022 | | 10,316 | |
2023 | | 11,323 | |
2024 | | 5,365 | |
2025 | | 4,249 | |
Thereafter | | 31,857 | |
Total operating lease payments | | 73,380 | |
Less: Imputed interest | | (22,804) | |
Less: Anticipated lease incentive | | (10,226) | |
Total operating lease liabilities | | $ | 40,350 | |
|
| | | | |
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 has additional operating leases of approximately $1.5 million that have not yet commenced, as the 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 5 years to 14 years.
As of December 31, 2018, the future minimum lease commitments related to lease agreements under Topic 840, the predecessor of Topic 842, were 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 |
|
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, 20192020 and 2018:2019:
|
| | | | | | | | | | | | | | | |
| 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) | 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | | | | | | | |
Net loss | $ | (18,857) | | | $ | (17,347) | | | $ | (58,800) | | | $ | (51,781) | |
Denominator: | | | | | | | |
Weighted average shares (basic) | 43,347 | | | 41,276 | | | 43,251 | | | 39,438 | |
Dilutive effect of potential common shares | 0 | | | 0 | | | 0 | | | 0 | |
Weighted average shares (diluted) | 43,347 | | | 41,276 | | | 43,251 | | | 39,438 | |
Basic loss per share | $ | (0.44) | | | $ | (0.42) | | | $ | (1.36) | | | $ | (1.31) | |
Diluted loss per share | $ | (0.44) | | | $ | (0.42) | | | $ | (1.36) | | | $ | (1.31) | |
Dilutive potential common shares consist of shares issuable upon the exercise of stock options, settlement of SARs,stock appreciation rights ("SARs"), and the vesting of RSUsrestricted stock units ("RSUs") and MSUs.market stock units ("MSUs"). Potential common shares determined to be antidilutive and excluded from diluted weighted average shares outstanding were approximately 2.11.3 million and 2.22.1 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and 2.11.3 million and 2.1 million for the nine months ended September 30, 2020 and 2019, and 2018, respectively. PotentialIn addition, potential common shares related to the convertible notes determined to be antidilutive and excluded from diluted weighted average shares outstanding were 5.8 million for the three and nine months ended September 30, 2020, and 3.1 million for the three and nine months ended September 30, 2019.2019, respectively.
8. Noncash Share-based Compensation
The Company's 2017 Equity Incentive Plan (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, 2020, 1,912,191 shares remain available for issuance under the 2017 Stock Plan.
The following table presents the number of shares or units outstanding for each award type as of September 30, 2020 and December 31, 2019, respectively, (in thousands):
| | | | | | | | | | | | | | |
Award type | | September 30, 2020 | | December 31, 2019 |
| | | | |
Restricted stock units (time-based) | | 1,611 | | | 1,893 | |
Restricted stock units (performance-based) | | 190 | | | 114 | |
| | | | |
Stock appreciation rights | | 32 | | | 65 | |
Market stock units | | 157 | | | 267 | |
During the three months ended September 30, 2019,2020, the Company granted 19,625 RSUs with a weighted average grant-date fair value of $69.13 per share. The Company granted no MSUs, options or SARs during this period.
During the nine months ended September 30, 2019, the Company granted 759,08422,221 RSUs (time-based) with a weighted average grant-date fair value of $34.16 per$33.75 per share. The Company also granted 113,919no stock options, SARs, performance-based RSUs ("PRSUs") or MSUs during this period.
During the nine months ended September 30, 2020, the Company granted 654,780 RSUs (time-based) with a weighted average grant-date fair value of $33.05$55.89 per share. The Company also granted 76,200 PRSUs with a weighted average grant-date fair value of $54.23 to certain executive employees during the nine months ended September 30, 2019.2020. These PRSUs vest on January 15, 202213, 2023 and the actual number of PRSUs that will be eligible to vest is based upon achievement of certain internal performance metrics, as defined by each award's plan documents or individual award agreements. The maximum number of shares issuable upon vesting is 200% of the PRSUs initially granted. The Company did not grant any stock options, SARs or MSUs during the nine months ended September 30, 2019.2020.
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, 20192020 and 2018:2019:
|
| | | | | | | | | | | | | | | |
| 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, |
| 2020 | | 2019 | | 2020 | | 2019 |
Share-based compensation: | | | | | | | |
Cost of revenue | $ | 519 | | | $ | 503 | | | $ | 1,545 | | | $ | 1,535 | |
Operating expenses: | | | | | | | |
Selling and marketing | 1,727 | | | 1,515 | | | 5,558 | | | 4,329 | |
General and administrative | 2,593 | | | 2,901 | | | 6,960 | | | 8,521 | |
Research and development | 1,539 | | | 1,290 | | | 4,414 | | | 3,849 | |
Total included in operating expenses | 5,859 | | | 5,706 | | | 16,932 | | | 16,699 | |
Total share-based compensation expense | $ | 6,378 | | | $ | 6,209 | | | $ | 18,477 | | | $ | 18,234 | |
The Company's 2017 Equity Incentive Plan (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, 2019, 2,512,077 shares remain available for issuance under the 2017 Stock Plan.
At September 30, 2019,2020, the Company had an estimated $46.7 $50.8 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.of 2.7 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, 2019,2020, the Company issued 39,964 and 75,30438,683 and 65,457 shares, respectively, under the ESPP. As of September 30, 2019, 140,251 2020, 74,794 shares remain authorized and available for issuance under the ESPP. As of September 30, 2019,2020, the Company held approximately $0.8$1.0 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, 20192020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Date of Issuance | | Unpaid Principal Balance | | Net Carrying Amount | | Contractual Interest Rates |
| | | Current | | Noncurrent | |
| | | | | | | | | |
| | | | | | | | | |
1% Convertible Notes due in 2024 ("2024 Notes") | May 2019 | | $ | 143,750 | | | $ | 0 | | | $ | 115,880 | | | 1% |
2.25% Convertible Notes due in 2027 ("2027 Notes") | September 2020 | | $ | 150,000 | | | $ | 0 | | | $ | 98,871 | | | 2.25% |
|
| | | | | | | | | | | | | | | |
| Date of Issuance | | Unpaid Principal Balance | | Net Carrying Amount | | Contractual Interest Rates |
| | | Current | | Noncurrent | |
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 September 2020, the Company issued the 2027 Notes in an aggregate principal amount of $150.0 million and in May 2019, the Company issued the 2024 Notes in an aggregate principal amount of $143.8 million. The interest rate for the 20242027 Notes is fixed at 1%2.25% per annum.year and the effective interest rate related to the amortization of the liability component is 8.5%, Interest is payable semiannually in arrears in cash on March 15 and September 15 of each year, beginning on March 15, 2021. Interest related to the 2024 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, commencing on November 15, 2019. The 2027 Notes mature on September 15, 2027 and the 2024 Notes mature on May 15, 2024, unless redeemed or converted in accordance with their terms prior to such date.
Each $1,000 of principal of the 2027 Notes will initially be convertible into 23.9137 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $41.82 per share. Each $1,000 of principal of the 2024 Notes will initially be convertible into 15.1394 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $66.05 per share. The initial conversion price for the 2027 and the 2024 Notes is subject to adjustment upon the occurrence of certain specified events.
On or after FebruaryJune 15, 20242027 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 20242027 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 20242027 Notes.
Holders may convert their 20242027 Notes at their option at any time prior to the close of business on the business day immediately preceding FebruaryJune 15, 20242027 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 20242027 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,December 31, 2020, if the last reported sale price of the common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; or
•upon the occurrence of specified corporate events.
The 2024 and 2027 Notes, along with the previously issued convertible notes with original due dates in 2019 and 2047 (the "2019 Notes" and "2047 Notes," and together with the 2024 and 2027 Notes, and 2047 Notes (collectively,collectively, the "Notes"), are general unsecured obligations and rank senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with all of the Company's existing and future liabilities that are not so subordinated, are effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries (including trade payables but excluding intercompany obligations owed to the Company or its subsidiaries). The 2019 Notes and 2047 Notes were settled as of December 31, 2019 and no longer remain outstanding.
As of September 30, 2020, the 2027 and 2024 Notes are not yet convertible and their remaining term is approximately 83 months and 43 months, respectively.
As of September 30, 2020 and December 31, 2019, the fair value of the principal amount of the 2027 and 2024 Notes was $276.5 million and $163.2 million, respectively. The estimated fair value was determined based on inputs that are
observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price and interest rates, which represents level 2 in the fair value hierarchy.
In accounting for the transaction costs for each of the Notes issuance, the Company allocated the costs incurred to the liability and equity components in proportion to the allocation of the proceeds from issuance to the liability and equity components. Issuance costs attributable to the liability component, totaling $4.3$2.8 million for the 2019 Notes,and $3.4 million for the 2027 and 2024 Notes, and $2.7 million for the 2047 Notes,respectively, are being amortized to expense over the expected life of eachthe notes using the effective interest method. Issuance costs attributable to the equity component related to the conversion option, totaling $1.2$1.3 million for the 2019 Notes,and $1.1 million for the 2027 and 2024 Notes, and $0.3 million for the 2047 Notes,respectively, were netted with the equity component in stockholders' equity.
In May 2019, the Company used a portion of the 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 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, 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).
As of September 30, 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, 2018, the fair value of the principal amount of the Notes was $231.0 million and $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.
The Notes consist of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
Liability component: | | | |
Principal | $ | 293,750 | | | $ | 143,750 | |
Less: debt discount and issuance cost, net of amortization | (78,999) | | | (33,046) | |
Net carrying amount | $ | 214,751 | | | $ | 110,704 | |
| | | |
Equity component(1) | $ | 80,098 | | | $ | 32,883 | |
|
| | | | | | | |
| 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. |
(1) Recorded within additional paid-in capital in the unaudited condensed consolidated balance sheet. As of September 30, 2020, it included $47.2 million and $32.9 million related to the 2027 and 2024 Notes, respectively, which was net of $1.3 million and $1.1 million issuance cost in equity, respectively. As of December 31, 2019, it included $32.9 million related to the 2024 Notes, which was net of $1.1 million issuance cost in equity.
The following table sets forth total interest expense recognized related to the Notes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Coupon interest | $ | 500 | | | $ | 863 | | | $ | 1,219 | | | $ | 3,219 | |
Amortization of debt issuance costs | 174 | | | 286 | | | 488 | | | 992 | |
Amortization of debt discount | 1,824 | | | 2,568 | | | 4,938 | | | 8,136 | |
Total | $ | 2,498 | | | $ | 3,717 | | | $ | 6,645 | | | $ | 12,347 | |
|
| | | | | | | | | | | | | | | |
| 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 arewere 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 transactionWarrant was $29.4 million. The Company received $17.1 million in cash proceeds from the sale of the Warrant. The Warrant is not part of the 2019 Notes or Note Hedge. Both the Note Hedge and Warrant have been accounted forwere recorded as part of additional paid-in capital.
As of December 31, 2019, the Note Hedge was settled through certain note hedge termination agreements and exercise of any remaining Note Hedge. 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 Agreementswhich terminated certain of the Warrants that were entered into by the Company in connection with the offering of the 2019 Notes. The remaining Warrants expired in August 2020.
Capped Call Transactions
In September 2020 and in May 2019, in connection with the offering of the 2027 and 2024 Notes, respectively, the Company entered into privately negotiated capped call transactions (collectively,(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 strike price that corresponds to the initial conversion price of 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 ofto the Company'sCompany’s common stock and/or offset any cash payments the Company will be required to make in excess of the principal amountamounts upon any conversion of 2024 Notes, and to effectively increase the overall conversion price of the 2027 Notes from $41.82 to $78.90 per share, and for the 2024 Notes from $66.05 to $101.62 per share. As the Capped Call transactions meet certain accounting criteria, they are recorded in stockholders’ equity and are not accounted for as
derivatives. The cost of the Capped Call was $25.3 million and $16.4 million for the 2027 and 2024 Notes, respectively, and was recorded as part of additional paid-in capital.
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 into various purchase commitments for goods and services.
In March 2019, the Company entered ininto a noncancelable agreement with a computing infrastructure vendor that amended the existing agreement dated June 2017. The amended agreement expires in March 2022. The purchase commitment as of September 30, 20192020 was $67.0 $46.9 million forfor the remaining period through the expiration of the agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “we,” “us,” “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 artificial intelligence ("AI")AI solutions that power commerce in the digital economy by providing fast, frictionless and personalized buying experiences. PROS solutions enable dynamic buying experiences for both B2B and B2C companies across industry verticals. Companies can use our dynamicselling, pricing, revenue optimization sales effectiveness, revenue management and commerceeCommerce solutions to assess their market environments in real time to deliver customized prices and offers. Our solutions enable buyers to move fluidly across our customers’ direct sales, online, mobile and partner channels with personalized experiences regardless of which channel those customersbuyers choose. Our decades of data science and AI expertise are infused into our solutions and are designed to reduce time and complexity through actionable intelligence. We provide standard configurations of our software based on the industries we serve and offer professional services to configure these solutions to meet the specific needs of each customer.
COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of the coronavirus ("COVID-19") a pandemic. COVID-19 continues to spread throughout the world and has resulted in governmental authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders and business limitations and shutdowns. Compliance with these measures by us and by our customers has impacted our business, as well as the businesses of our customers, suppliers and other counterparties, and this impact could last for an indefinite period of time. In particular, in the travel industry, our airline customers are managing historic declines in demand for travel globally. If a significant number of our customers are unable to continue as a going concern, seek to avoid their contracts with us as part of filing for bankruptcy protection, or reduce their purchasing volumes following expiration of their current contracts, this would have an adverse impact on our business and financial condition. There are no comparable recent events that provide guidance as to the effect of the spread of COVID-19 as a global pandemic, and as a result, we are unable to predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures. For a full discussion on the ongoing impact of COVID-19 to our business, please see "We must successfully navigate the demand, supply and operational challenges associated with the ongoing coronavirus (COVID-19) pandemic" under Part II, Item 1A of this Quarterly Report on Form 10-Q.
Q3 20192020 Financial Overview
In the third quarter of 2019,2020, subscription revenue increased 57%9% and 51%22%, respectively for the three and nine months ended September 30, 2019,2020 as compared to the same periods in 2018. 2019. 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) as a percentage of 29% and 26%, respectively,total revenue as compared to the first three and nine months of 2018, andit accounted for 81%86% and 79%, respectively,85% of total revenue for the three and nine months ended September 30, 2020, respectively, as compared to 83% and 81% for the three and nine months ended September 30, 2019. Our total revenue decreased 4% for the three months ended September 30, 2020 as compared to the same period in 2019, and increased 4% for the nine months ended September 30, 2020 as compared to 2019. Revenue in fiscal year 2020 has been impacted by slower customer bookings as a result of decreased demand for new subscriptions and services and delays to projects during the COVID-19 pandemic.
Cash used in operating activities was $61.8 million for the nine months ended September 30, 2020, as compared to $7.6 million for the nine months ended September 30, 2019, as compared to $9.5 million for the nine months ended September 30, 2018.2019. The decreaseincrease in net cash used in operating activities was primarily attributabledriven mainly by an increase in headcount and higher annual incentive payment as compared to changes in working capital partially offsetprior year, deferred payment terms for certain customers impacted by increasedthe pandemic, and the impact of adjustments to net loss primarily driven by loss on debt extinguishment.lower customer bookings as a result of the pandemic.
Free cash flow is another key metric to assess the strength of our business. We define free cash flow, a non-GAAP financial measure, as net cash provided by (used in) operating activities minus capital expenditures (excluding expenditures for 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 other users of our financial information in evaluating the amount of cash generated by our business operations. Free cash flow used during the three months ended September 30, 20192020 was $3.0$15.7 million, compared to free cash flow use of $2.6$3.0 million for the three months ended September 30, 2018.2019. Free cash flow used during the nine months ended September 30, 20192020 was $11.8$64.8 million, compared to $14.6$11.8 million for the nine months ended September 30, 2018.2019. This decreaseincrease was primarily attributable to a $1.9$54.2 million decreaseincrease in net cash used in operating activities primarily duedriven mainly by an increase in headcount and higher annual incentive payment as compared to changes in working capital partially offsetprior year, deferred payment terms for certain customers impacted by increasedthe pandemic, and the impact of adjustments to net loss primarily driven by loss on debt extinguishment. lower customer bookings as a result of the pandemic. The following is a reconciliation of free cash flow to the most comparable GAAP measure, net cash used in operating activities (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net cash used in operating activities | $ | (14,886) | | | $ | 4,037 | | | $ | (61,841) | | | $ | (7,607) | |
Purchase of property and equipment (excluding new headquarters) | (384) | | | (876) | | | (1,647) | | | (3,145) | |
Purchase of intangible assets | — | | | — | | | — | | | (50) | |
Capitalized internal-use software development costs | (459) | | | (153) | | | (1,265) | | | (1,021) | |
Free Cash Flow | $ | (15,729) | | | $ | 3,008 | | | $ | (64,753) | | | $ | (11,823) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
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 | — |
| | — |
| | (50 | ) | | — |
|
Capitalized internal-use software development costs | (153 | ) | | (1,202 | ) | | (1,021 | ) | | (3,686 | ) |
Free Cash Flow | $ | 3,008 |
| | $ | (2,596 | ) | | $ | (11,823 | ) | | $ | (14,577 | ) |
Total deferred revenue was $127.9 million as of September 30, 2019, as compared to $117.2 million as of December 31, 2018, an increase of $10.8 million, or 9%, primarily due to an increase in subscription deferred revenue.
Factors Affecting Our Performance
Key factors and trends that have affected, and we believe will continue to affect, our operating results include:
•COVID-19 Global Impact. The global economy has been significantly and negatively impacted by COVID-19, and the scope and duration of the outbreak and timeframe for economic recovery is uncertain. The travel industry, a sector served by our solutions, has been particularly adversely impacted. For example, unprecedented declines in travel demand have forced airlines, including some of our customers, to respond by significantly reducing capacity, grounding flights, reducing personnel, adjusting corporate liquidity and, in certain cases, filing for bankruptcy protection. The global workplace environment has also substantially changed in the wake of COVID-19. To support the health and well-being of our employees, customers, partners and communities, our global workforce has been primarily working remotely since March 16, 2020. In addition, many of our customers are also working primarily remotely, which in some cases has delayed, and may continue to impact the timing of new business and implementations of our solutions. The duration and extent of the impact of COVID-19 continues to be unknown and could continue to impact the pace and timing of adoption and implementation of our solutions, cash flow from operations and customer churn.
| |
• | 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. •COVID-19 Financial Impact. As compared to our expectations prior to COVID-19, the global economic impact of COVID-19 adversely impacted our revenue, bad debt expense and operating cash flow during the three and nine months ended September 30, 2020. We expect customer bookings and the related revenue and cash flows will continue to be lower than anticipated prior to the pandemic as a result of decreased demand for new subscriptions and services and delays to projects during the COVID-19 pandemic. In addition, certain customers have requested, and we expect will continue to request, relief to existing contracts and the impact of those is uncertain. For example, some customers and prospective customers are delaying projects while they address immediate financial difficulties in their operations, renegotiating existing contracts, and in limited cases filing for bankruptcy protection. Based on demand for their own products and services being down due to COVID-19, some of our customers, particularly those in the travel industry, may renew their subscriptions for our solutions at lower capacity levels for a lower annual fee. The impact on our revenue due to such reduced renewals, combined with other customer actions described in this paragraph, is uncertain.
•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 often prefer not to interact with a sales representative as their primary source of research, and increasingly prefer to buy online when they have already decided what to buy, particularly during the current pandemic environment. In response, we believe that businesses are increasingly modernizing their sales process to compete in digital commerce by adopting technologies which provide
fast, frictionless, and personalized buying experiences across sales channels. We believe we are uniquely positioned to help power these buying experiences with our AI-powered solutions that enable buyers to move fluidly across our customers’ direct sales, online, mobile and partner channels and have personalized experiences however they choose to buy.
•Continued Investments. In light of COVID-19, we are continuing to be measured in our investments and focused on cost control efforts across our organization, while continuing to create awareness for our solutions, expand our customer base and grow our recurring revenues. While we incurred losses in the first nine months of 2020, we believe our market is large and underpenetrated and therefore we intend to continue investing in sales, marketing, customer success, cloud support, security, privacy, infrastructure and other long-term initiatives to expand our ability to sell and renew our subscription offerings globally. We also plan to continue investing in product development to enhance our existing technologies, including initiatives to accelerate customer time-to-value and provide out-of-the-box integration with third-party commerce solutions, and develop new applications and technologies. In reaction to the COVID-19 environment, we have slowed our overall rate of hiring while continuing to hire for certain strategic positions and have transferred personnel within the company and redeployed other resources to focus on current priorities.
•Cloud Migrations. Sales of our cloud-based solutions have, and we expect future sales of our cloud-based solutions will continue to reduce our future maintenance and support revenue, as existing customers 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 the professional services are not considered distinct, the professional services and the subscription services are considered to be a single performance obligation and all revenue is recognized over the contractual term of the subscription beginning on the date 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.
|
| |
• | 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 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.
|
Results of Operations
The following table sets forth certain items in our unaudited condensed consolidated statements of comprehensive income (loss) as a percentage of total revenues for the three and nine months ended September 30, 20192020 and 2018:2019:
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenue: | | | | | | | |
Subscription | 58 | % | | 49 | % | | 55 | % | | 46 | % |
Maintenance and support | 22 |
| | 33 |
| | 24 |
| | 34 |
|
Total subscription, maintenance and support | 81 |
| | 82 |
| | 79 |
| | 80 |
|
License | 2 |
| | 2 |
| | 2 |
| | 2 |
|
Services | 17 |
| | 16 |
| | 19 |
| | 18 |
|
Total revenue | 100 |
| | 100 |
| | 100 |
| | 100 |
|
Cost of revenue: | | | | | | | |
Subscription | 17 |
| | 18 |
| | 17 |
| | 18 |
|
Maintenance and support | 4 |
| | 6 |
| | 4 |
| | 6 |
|
Total cost of subscription, maintenance and support | 21 |
| | 24 |
| | 21 |
| | 24 |
|
License | — |
| | — |
| | — |
| | — |
|
Services | 20 |
| | 15 |
| | 17 |
| | 16 |
|
Total cost of revenue | 41 |
| | 40 |
| | 38 |
| | 40 |
|
Gross profit | 59 |
| | 60 |
| | 62 |
| | 60 |
|
Operating Expenses: | | | | | | | |
Selling and marketing | 34 |
| | 36 |
| | 36 |
| | 37 |
|
General and administrative | 18 |
| | 21 |
| | 19 |
| | 21 |
|
Research and development | 26 |
| | 28 |
| | 27 |
| | 29 |
|
Acquisition-related | — |
| | — |
| | — |
| | — |
|
Total operating expenses | 78 |
| | 84 |
| | 82 |
| | 87 |
|
Convertible debt interest and amortization | (6 | ) | | (9 | ) | | (7 | ) | | (9 | ) |
Other income net | (2 | ) | | 1 |
| | — |
| | 1 |
|
Loss before income tax provision | (27 | ) | | (32 | ) | | (28 | ) | | (36 | ) |
Income tax provision | — |
| | — |
| | — |
| | — |
|
Net loss | (27 | )% | | (32 | )% | | (28 | )% | | (36 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenue: | | | | | | | |
Subscription | 68 | % | | 60 | % | | 67 | % | | 57 | % |
Maintenance and support | 18 | | | 22 | | | 18 | | | 24 | |
Total subscription, maintenance and support | 86 | | | 83 | | | 85 | | | 81 | |
| | | | | | | |
Services | 14 | | | 17 | | | 15 | | | 19 | |
Total revenue | 100 | | | 100 | | | 100 | | | 100 | |
Cost of revenue: | | | | | | | |
Subscription | 21 | | | 17 | | | 20 | | | 17 | |
Maintenance and support | 4 | | | 4 | | | 4 | | | 4 | |
Total cost of subscription, maintenance and support | 25 | | | 21 | | | 24 | | | 21 | |
| | | | | | | |
Services | 16 | | | 20 | | | 18 | | | 17 | |
Total cost of revenue | 40 | | | 41 | | | 41 | | | 38 | |
Gross profit | 60 | | | 59 | | | 59 | | | 62 | |
Operating Expenses: | | | | | | | |
Selling and marketing | 36 | | | 34 | | | 35 | | | 36 | |
General and administrative | 19 | | | 18 | | | 21 | | | 19 | |
Research and development | 31 | | | 26 | | | 30 | | | 27 | |
Acquisition-related | — | | | — | | | — | | | — | |
Impairment charge | — | | | — | | | — | | | — | |
Total operating expenses | 86 | | | 78 | | | 86 | | | 82 | |
Convertible debt interest and amortization | (4) | | | (6) | | | (3) | | | (7) | |
Other income net | — | | | (2) | | | 1 | | | — | |
Loss before income tax provision | (30) | | | (27) | | | (30) | | | (28) | |
Income tax provision | 1 | | | — | | | — | | | — | |
Net loss | (31) | % | | (27) | % | | (31) | % | | (28) | % |
| | | | | | | |
| | | | | | | |
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) | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | | $ | | % | (Dollars in thousands) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
Subscription | $ | 37,463 |
| | $ | 23,888 |
| | $ | 13,575 |
| | 57 | % | | $ | 100,958 |
| | $ | 66,876 |
| | $ | 34,082 |
| | 51 | % | Subscription | $ | 42,029 | | | $ | 38,592 | | | $ | 3,437 | | | 9 | % | | $ | 127,576 | | | $ | 104,621 | | | $ | 22,955 | | | 22 | % |
Maintenance and support | 14,405 |
| | 16,238 |
| | (1,833 | ) | | (11 | )% | | 44,772 |
| | 49,037 |
| | (4,265 | ) | | (9 | )% | Maintenance and support | 10,765 | | | 14,405 | | | (3,640) | | | (25) | % | | 35,029 | | | 44,772 | | | (9,743) | | | (22) | % |
Total subscription, maintenance and support | 51,868 |
| | 40,126 |
| | 11,742 |
| | 29 | % | | 145,730 |
| | 115,913 |
| | 29,817 |
| | 26 | % | Total subscription, maintenance and support | 52,794 | | | 52,997 | | | (203) | | | — | % | | 162,605 | | | 149,393 | | | 13,212 | | | 9 | % |
License | 1,129 |
| | 1,093 |
| | 36 |
| | 3 | % | | 3,663 |
| | 2,854 |
| | 809 |
| | 28 | % | |
| Services | 11,153 |
| | 7,856 |
| | 3,297 |
| | 42 | % | | 34,766 |
| | 25,644 |
| | 9,122 |
| | 36 | % | Services | 8,714 | | | 11,153 | | | (2,439) | | | (22) | % | | 28,961 | | | 34,766 | | | (5,805) | | | (17) | % |
Total revenue | $ | 64,150 |
| | $ | 49,075 |
| | $ | 15,075 |
| | 31 | % | | $ | 184,159 |
| | $ | 144,411 |
| | $ | 39,748 |
| | 28 | % | Total revenue | $ | 61,508 | | | $ | 64,150 | | | $ | (2,642) | | | (4) | % | | $ | 191,566 | | | $ | 184,159 | | | $ | 7,407 | | | 4 | % |
Subscription revenue. Subscription revenue forincreased primarily due to an increased number of customer subscription contracts as compared to the prior year. For the three and nine months ended September 30, 2019 and 2018 increased primarily due to2020, our subscription revenue growth was negatively impacted by an increase in the number and size of customer subscriptions as comparedchurn mainly due to the prior year. We continued to invest in customer programs and initiatives which helped keep our customer attrition rates fairly consistent as compared to the prior year.impact of COVID-19. Our ability to maintain consistent customer attrition rates will directly impact our ability to continue to grow our subscription revenue. Due to the uncertain economic conditions caused by COVID-19, we expect subscription revenue to grow at a slower pace.
Maintenance and support revenue.revenue. The decrease in maintenanceMaintenance and support revenue was principally adecreased primarily as result of customer maintenance churn and migrating existing maintenance contractscustomers to our cloud solutions and to a lesser extent customer churn due to the cloud during the three and nine months ended September 30, 2019.impact of COVID-19. 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 migrate existing maintenance customers to our cloud solutions.
License revenue. License revenue remained relatively unchanged during the three months ended September 30, 2019. License revenue increased during the nine months ended September 30, 2019 primarily due to an increase in license revenue with existing customers recognized upon software delivery.
Services revenue. Services revenue increaseddecreased primarily as a result of higher salesperforming implementation services for a reduced number of professional services related to our subscription sales and add-on professional services revenue from existing customers duringthan in the three and nine months ended September 30, 2019, as comparedprior year due to the same periods in 2018.impact of COVID-19. 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. Due to the uncertain economic conditions caused by COVID-19, we expect a decline in services revenue.
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) | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | | $ | | % | (Dollars in thousands) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
Cost of subscription | $ | 11,039 |
| | $ | 9,053 |
| | $ | 1,986 |
| | 22 | % | | $ | 30,543 |
| | $ | 26,308 |
| | $ | 4,235 |
| | 16 | % | Cost of subscription | $ | 12,897 | | | $ | 11,090 | | | $ | 1,807 | | | 16 | % | | $ | 38,153 | | | $ | 30,695 | | | $ | 7,458 | | | 24 | % |
Cost of maintenance and support | 2,632 |
| | 2,852 |
| | (220 | ) | | (8 | )% | | 8,269 |
| | 8,762 |
| | (493 | ) | | (6 | )% | Cost of maintenance and support | 2,177 | | | 2,632 | | | (455) | | | (17) | % | | 7,577 | | | 8,269 | | | (692) | | | (8) | % |
Total cost of subscription, maintenance and support | 13,671 |
| | 11,905 |
| | 1,766 |
| | 15 | % | | 38,812 |
| | 35,070 |
| | 3,742 |
| | 11 | % | Total cost of subscription, maintenance and support | 15,074 | | | 13,722 | | | 1,352 | | | 10 | % | | 45,730 | | | 38,964 | | | 6,766 | | | 17 | % |
Cost of license | 51 |
| | 63 |
| | (12 | ) | | (19 | )% | | 152 |
| | 200 |
| | (48 | ) | | (24 | )% | |
| Cost of services | 12,661 |
| | 7,508 |
| | 5,153 |
| | 69 | % | | 31,792 |
| | 22,451 |
| | 9,341 |
| | 42 | % | Cost of services | 9,563 | | | 12,661 | | | (3,098) | | | (24) | % | | 33,584 | | | 31,792 | | | 1,792 | | | 6 | % |
Total cost of revenue | 26,383 |
| | 19,476 |
| | 6,907 |
| | 35 | % | | 70,756 |
| | 57,721 |
| | 13,035 |
| | 23 | % | Total cost of revenue | 24,637 | | | 26,383 | | | (1,746) | | | (7) | % | | 79,314 | | | 70,756 | | | 8,558 | | | 12 | % |
Gross profit | $ | 37,767 |
| | $ | 29,599 |
| | $ | 8,168 |
| | 28 | % | | $ | 113,403 |
| | $ | 86,690 |
| | $ | 26,713 |
| | 31 | % | Gross profit | $ | 36,871 | | | $ | 37,767 | | | $ | (896) | | | (2) | % | | $ | 112,252 | | | $ | 113,403 | | | $ | (1,151) | | | (1) | % |
Cost of subscription.subscription The three and nine-month increase was. Cost of subscription increased primarily attributabledue to increases inincreased infrastructure costs to support our current subscription customer base increases in personnel cost primarilyand increased employee-related costs driven by higher headcount and increased amortization expense associated with our internal-use software.headcount. Our subscription gross profit percentage waspercentages were 69% and 71% and 62%, respectively, for the three months ended September 30, 2020 and 2019, respectively, and 2018. Our subscription gross profit percentage was 70% and 61%, respectively,71% for the nine months ended September 30, 2020 and 2019, and 2018. The three and nine-month increase in gross profit percentage was primarily attributable to a 57% and 51%, respectively, increase in subscription revenue combined with a smaller increase in cost of subscription driven by efficiencies we are achieving in our cloud infrastructure.respectively.
Cost of maintenance and support. The threeCost of maintenance and nine-month decrease wassupport decreased primarily attributabledue to a decrease in personnel costs. Maintenance and support gross profit percentagepercentages were 80% and 78% for the three and nine months ended September 30, 20192020, respectively, and 2018 was 82%. for the three and nine months ended September 30, 2019.
Cost of license.services. Cost of license consistsservices for the three months ended September 30, 2020 decreased primarily due to the lower utilization of third-party feescontractors and reduced travel expenses due to the COVID-19 pandemic. Cost of services for licensed softwarethe nine months ended September 30, 2020 increased primarily due to increased employee-related costs driven by higher headcount partially offset by the lower utilization of third-party contractors and remained relatively consistent year-over-year. Licensereduced travel expenses due to the COVID-19 pandemic. Services gross profit percentages for the three months ended September 30, 2019 and 2018, were 95% and 94%, respectively. License2020 improved primarily as a result of decreasing the utilization of higher cost third-party contractors. Services gross profit percentages decreased for the nine months ended September 30, 2019 and 2018, were 96% and 93%, respectively.
Cost of services. The three and nine-month increase was2020 primarily attributabledue to an increase in personnel costs, primarily driven by higher headcount and third party system integrators to support our current customer 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 4%, respectively. Services gross profit percentage for the nine months ended September 30, 2019 and 2018, was 9% and 12%, respectively. The decrease in services gross profit percentages was primarily attributed to anrevenues and the increase in third party system integrators to support our current customer implementations.headcount. Services gross profit percentages vary period to period depending on different factors, including the level of professional services required to implement our solutions, our mix of our utilization of employees or third-party contractors, our effective man-day rates, our utilization of third-party system integrators 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 overallOverall gross profit remained relatively consistent for the three and nine months ended September 30, 2019 was primarily attributable to an increase in total revenue2020.
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) | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | | $ | | % | (Dollars in thousands) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
Selling and marketing | $ | 21,600 |
| | $ | 17,513 |
| | $ | 4,087 |
| | 23 | % | | $ | 66,030 |
| | $ | 53,671 |
| | $ | 12,359 |
| | 23 | % | Selling and marketing | $ | 21,951 | | | $ | 21,600 | | | $ | 351 | | | 2 | % | | $ | 67,882 | | | $ | 66,030 | | | $ | 1,852 | | | 3 | % |
General and administrative | 11,553 |
| | 10,179 |
| | 1,374 |
| | 13 | % | | 35,260 |
| | 31,013 |
| | 4,247 |
| | 14 | % | General and administrative | 11,948 | | | 11,553 | | | 395 | | | 3 | % | | 40,356 | | | 35,260 | | | 5,096 | | | 14 | % |
Research and development | 16,878 |
| | 13,773 |
| | 3,105 |
| | 23 | % | | 50,132 |
| | 41,517 |
| | 8,615 |
| | 21 | % | Research and development | 19,135 | | | 16,878 | | | 2,257 | | | 13 | % | | 56,668 | | | 50,132 | | | 6,536 | | | 13 | % |
Acquisition-related | 248 |
| | — |
| | 248 |
| | nm |
| | 248 |
| | 95 |
| | 153 |
| | 161 | % | Acquisition-related | — | | | 248 | | | (248) | | | (100) | % | | — | | | 248 | | | (248) | | | (100) | % |
| Total operating expenses | $ | 50,279 |
| | $ | 41,465 |
| | $ | 8,814 |
| | 21 | % | | $ | 151,670 |
| | $ | 126,296 |
| | $ | 25,374 |
| | 20 | % | Total operating expenses | $ | 53,034 | | | $ | 50,279 | | | $ | 2,755 | | | 5 | % | | $ | 164,906 | | | $ | 151,670 | | | $ | 13,236 | | | 9 | % |
Selling and marketing expenses. Selling and marketing expense increased for the three months ended September 30, 2020 as compared to the same period in 2019 primarily due to a $1.8 million increase in employee-related expenses driven by higher headcount and $0.6 million higher digital marketing expenses, partially offset by reduced travel expenses of $2.0 million due to the COVID-19 pandemic. The three and nine-month increase was primarily attributabledue to an increase of $4.0$5.9 million and $10.3 million, respectively, in personnel cost primarilyemployee-related costs driven by higher headcount as we continue to focus on adding new customers and increasing penetration within our existing customer base. In addition, therebase, and a $0.4 million increase in overhead and other non-personnel costs. The increase was an increasepartially offset by reduced travel expenses of $0.1$4.4 million and $2.1 million, respectively, in expenses for sales and marketing events and sales related travel.due to the COVID-19 pandemic.
General and administrative expenses. The three and nine-month increase in general and administrative expenses was primarily attributabledue to an increase in personnel cost of $0.9$0.3 million and $2.2 million, respectively, and an increase of $0.5 million and $2.0$5.5 million, respectively, in professional fees bad debt expense recognized as a result of increased credit risk from uncertain economic conditions caused by COVID-19and facility expenses.the bankruptcy of several customers.
Research and development expensesexpenses.. The three and nine-month increase in research and development expenses was primarily attributabledue to an increase of $2.7$2.2 million and $6.7$6.3 million, respectively, in personnel cost primarilyemployee-related costs driven by higher headcount. The remainingheadcount and a slight 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 three and nine months ended September 30, 2019 and consisted primarily of integration costs and professional fees for our acquisition of Travelaer. Acquisition-related expenses were $0.1 million for the nine months ended September 30, 2018 and consisted primarily of integration costs, retention bonuses and professional fees related to our acquisition of PROS Travel Commerce, Inc. (formerly Vayant Travel Technologies, Inc.).
Other income (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) | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | | $ | | % | (Dollars in thousands) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
Convertible debt interest and amortization | $ | (3,717 | ) | | $ | (4,266 | ) | | $ | 549 |
| | (13 | )% | | $ | (12,347 | ) | | $ | (12,671 | ) | | $ | 324 |
| | (3 | )% | Convertible debt interest and amortization | $ | (2,498) | | | $ | (3,717) | | | $ | 1,219 | | | (33) | % | | $ | (6,645) | | | $ | (12,347) | | | $ | 5,702 | | | (46) | % |
Other (expense) income, net | $ | (1,010 | ) | | $ | 521 |
| | $ | (1,531 | ) | | (294 | )% | | $ | (601 | ) | | $ | 967 |
| | $ | (1,568 | ) | | (162 | )% | |
Other income (expense), net | | Other income (expense), net | $ | 122 | | | $ | (1,010) | | | $ | 1,132 | | | (112) | % | | $ | 1,099 | | | $ | (601) | | | $ | 1,700 | | | (283) | % |
Convertible debt interest and amortization. The convertibleConvertible debt expense for the three and nine months ended September 30, 20192020 and 20182019 related to coupon interest and amortization of debt discount and issuance costs attributable to our Notes. Convertible debt interest and amortization decreased primarily as a result of our settlement of the 2019 Notes and 2047 Notes during 2019.
Other income (expense) income,, net. The decreasechange in other income (expense) income,, net for the three and nine months ended September 30, 2019,2020, primarily related to a $2.7 million and $5.0 million, respectively, loss on debt extinguishment recognized in the respective periods of 2019 related to our 2019 and 2047 Notes, recognized during the second and third quarter of 2019. This decreasewhich was partially offset by an increasea decrease in interest income.income during the periods.
Income tax provision:
| | | 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) | 2019 | | 2018 | | $ | | % | | 2019 | | 2018 | | $ | | % | (Dollars in thousands) | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
Effective tax rate | (0.6 | )% | | (1.1 | )% | | n/a |
| | n/a |
| | (1.1 | )% | | (0.3 | )% | | n/a |
| | n/a | Effective tax rate | (1.7) | % | | (0.6) | % | | n/a | | n/a | | (1.0) | % | | (1.1) | % | | n/a | | n/a |
Income tax provision | $ | 108 |
| | $ | 175 |
| | $ | (67 | ) | | (38 | )% | | $ | 566 |
| | $ | 176 |
| | $ | 390 |
| | nm | Income tax provision | $ | 318 | | | $ | 108 | | | $ | 210 | | | 194 | % | | $ | 600 | | | $ | 566 | | | $ | 34 | | | 6 | % |
Income tax provision. The tax provision for the three and nine months ended September 30, 20192020 included both foreign income and withholding taxes. No tax benefit was recognized on jurisdictions with a projected loss for the year due to the valuation allowances on our deferred tax assets.
Our effective tax rate was (1.7)% and (1.0)% for the three and nine months ended September 30, 2020, respectively, and (0.6)% and (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, 2019, and 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.assets. While our expected tax rate would be 0% due to the full valuation on the deferred tax assets, the (1.7)% and (1.0)% for the three and nine months ended September 30, 2020, respectively, and (0.6)% and (1.1)% tax rate for the three months ended September 30, 2019 and 2018, respectively, and the (1.1)% and (0.3)% for the nine months ended September 30, 2019, and 2018, respectively, is due to foreign income taxes and state taxes not based on pre-tax income.
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.
We continue to monitor for tax developments and new legislation and regulation in each of the jurisdictions we operate in. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in the United States on March 27, 2020. The CARES Act did not have a material impact on our provision for income taxes for the three and nine months ended September 30, 2020.
Liquidity and Capital Resources
At September 30, 2019,2020, we had $319.2$322.4 million of cash and cash equivalents and $174.5$245.6 million of working capital as compared to $295.5$306.1 million of cash and cash equivalents and $71.4$189.8 million of working capital at December 31, 2018.2019.
Our principal sources of liquidity are our cash and cash equivalents, cash flows generated from operations and potential borrowings under our Revolver$50 million secured Credit Agreement ("Revolver") with the lenders party thereto and Wells Fargo Bank, National Association as agent for the lenders party thereto.The facility expires in July 2022. We issued the 20192027 Notes in December 2014, the 2047 Notes in June 2017, the Secondary Offering in August 2018September 2020 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.liabilities and customer concessions. We generally pay our vendors and service providers in accordance with the invoice terms and conditions.
We believe our existing cash, cash equivalents, including 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 interest payments for our Notes for the next twelve months. Our future working capital requirements will depend on many factors, including the operations of our existing business, potential growth of our subscription services, future acquisitions we might undertake, and expansion into complementary businesses.businesses, and the impact of COVID-19, including the pace and timing of adoption and implementation of our solutions, relief to existing contracts and customer churn. If such need arises, we may raise additional funds through equity or debt financings. However, the recent COVID-19 pandemic caused some disruption in the capital markets and further disruption could make financing more difficult and/or expensive and we may not be able to obtain such financing on terms acceptable to us or at all. During the period of uncertainty and volatility related to COVID-19, we will continue to monitor our liquidity.
The following table presents key components of our unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(Dollars in thousands) | 2020 | | 2019 |
Net cash used in operating activities | $ | (61,841) | | | $ | (7,607) | |
Net cash used in investing activities | (24,929) | | | (15,121) | |
Net cash provided by financing activities | 103,405 | | | 46,806 | |
Cash and cash equivalents (beginning of period) | 306,077 | | | 295,476 | |
Cash and cash equivalents (end of period) | $ | 322,352 | | | $ | 319,162 | |
|
| | | | | | | |
| Nine Months Ended September 30, |
(Dollars in thousands) | 2019 | | 2018 |
Net cash used in operating activities | $ | (7,607 | ) | | $ | (9,485 | ) |
Net cash used in investing activities | (15,121 | ) | | (5,092 | ) |
Net cash provided by financing activities | 46,806 |
| | 135,609 |
|
Cash and cash equivalents (beginning of period) | 295,476 |
| | 160,505 |
|
Cash and cash equivalents (end of period) | $ | 319,162 |
| | $ | 281,889 |
|
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 20192020 was $7.6$61.8 million. The $1.9$54.2 million decreaseincrease in cash used as compared to 20182019 was primarily attributable to changeshigher cash operating expenses driven mainly by an increase in working capital partially offset by increasedheadcount and higher annual incentive payment as compared to prior year, customer requests to defer payments to the fourth quarter of fiscal year 2020 and early 2021 and the impact of adjustments to net loss primarily driven by loss on debt extinguishment.lower customer bookings as a result of the pandemic.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 20192020 was $15.1$24.9 million, which was primarily related to the consideration paid for the acquisition of Travelaer of $10.5 million, capital expenditures of $3.4$23.6 million $1.0mainly attributable to the build out of our new headquarters which was committed prior to the pandemic, $1.3 million related to capitalized internal-use software development costs on our subscription service solutions and an$0.1 million investment in equity securities of $0.2 million.securities.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 20192020 was $46.8$103.4 million, which was attributable to proceeds from the issuance of 2024the 2027 Notes of $140.2 million, proceeds from bond hedge termination of $64.8$146.9 million and proceeds from employee stock plans of $2.0$2.8 million, partially offset by the purchase of a cash convertible debt settlement paymentcapped call of $76.0$25.3 million, $45.2 million paid for termination of warrant, $21.6$20.3 million paid for tax withholdings on vesting of employee share-based awards purchase of capped call of $16.4 million, and payment for convertible debt issuance cost of $0.9$0.7 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 10 above, there have been no material changes to our contractual obligations and commitments disclosed in our Annual Report.
Credit facility
There were no outstanding borrowings under the Revolver as of September 30, 2019.2020. As of September 30, 2019,2020, we had $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, 20192020 and 2018,2019, 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 required in our estimation process, as well as issues related to the assumptions, risks and uncertainties inherent in determining the nature and timing of satisfaction of performance obligations and determining the standalone selling price of performance obligations, affect the amounts of revenue, expenses, unbilled receivables and deferred revenue. Estimates are also used for, but not limited to, receivables, allowance for 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 leases policy which has been updated in resultoperations.
Leases
We 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 noncurrent operating lease liabilities in the unaudited condensed consolidated balance sheet.
ROU assets represent our right to use an underlying asset over the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We include any anticipated lease incentives in the determination of lease liability.
We use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We give consideration to our recent debt issuances as well as 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 not recorded on the unaudited condensed consolidated balance sheet. Our lease agreements do not contain any residual value guarantees.
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, 20192020 would result in a loss of approximately $0.3 $0.5 million. WeWe 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, 20192020 by approximately $0.2$0.4 million and $0.7$1.2 million, respectively. However,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 optionsderivatives 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, 2019,2020, we had no borrowings under the Revolver.
As of September 30, 2019,2020, we had outstanding principal amounts of $21.6$150.0 million and $143.8 million and $24.1 million respectively, of the 2019 Notes,2027 and the 2024 Notes, and the 2047 Notesrespectively, 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, 2019.2020. Based on our evaluation of our disclosure controls and procedures as of September 30, 2019,2020, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
In August 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 There have been no changes in our internal control over financial reporting during the three months ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that our employees are working remotely due to COVID-19. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
We implemented internal controls to ensure we adequately evaluated our lease contracts and properly assessedprovisions for credit losses in light of the impact of our adoption of Topic 842326 on January 1, 2019.2020. There were no significant changes to our internal control over financial reporting due to the adoption of Topic 842.326.
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 in the Company's risk factors from those disclosed in Part I, Item 1A, of our Annual Report with the exception of the following revisedrisk factors:
We must successfully navigate the demand, supply and updated risk factor.operational challenges associated with the ongoing coronavirus (COVID-19) pandemic.
The ongoing global COVID-19 pandemic has adversely impacted, and may continue to adversely impact, many aspects of our business. As COVID-19 has continued to spread throughout the world, a number of governmental authorities have implemented or reinstated numerous severe measures in an attempt to contain the spread of COVID-19, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. Compliance with these measures by us and by our prospects and customers has impacted our business, as well as the businesses of our customers, prospects, suppliers and other counterparties, and this impact could last for an indefinite period of time. For example, in the travel industry, our airline customers are experiencing unprecedented declines in demand for travel globally, airline travel demand may remain suppressed until a widely accepted treatment and/or vaccine for COVID-19 is available, and recovery in airline travel demand from COVID-19 may not follow a linear path. The economic impact of COVID-19 has also adversely impacted a number of our prospects and customers, who have experienced, and may continue to experience, downturns or uncertainty in their own businesses. In response, some prospects and customers, particularly those in the travel industry, have decreased, and may continue to decrease, spending on technology initiatives, as well as stalled or halted implementation projects while they address their immediate financial difficulties, including in limited cases through filing for bankruptcy protection. In addition, certain customers have requested, and we expect will continue to request, concessions from existing contracts, and the extent and impact of future requests is uncertain. If a significant number of our customers are unable to make their contractually obligated payments to us, elect to file for bankruptcy protection, or otherwise choose to renew their current contracts for our solutions at lower usage levels, this would have an adverse impact on our business and financial condition.The impact on our revenue due to such reduced renewals, combined with other customer actions described in this paragraph, is uncertain.
As compared to our expectations prior to COVID-19, the global economic impact of COVID-19 adversely impacted our revenue, bad debt expense and operating cash flow during the three and nine months ended September 30, 2020. We expect that customer bookings and the related revenue and cash flows will continue to be lower than anticipated prior to the pandemic as a result of decreased demand for new subscriptions and services and delays to projects during the pandemic. In particular, new demand for our airline solutions has been limited during COVID-19, and we expect that new demand for our airline solutions will continue to be limited in the near term. In response, we have postponed or canceled, and may continue to postpone or cancel, planned investments in our business, which may impact our product development and rate of innovation, either of which could seriously harm our business. However, as there are no comparable recent events that provide guidance as to the effect of the spread of COVID-19, the resultant personal, economic and governmental reactions, or the extent and duration of the pandemic and containment measures, we are unable to forecast the full impact that COVID-19 will have on our bookings, revenue, results from operations, financial condition, liquidity and cash flows, and may have to take additional actions in the future that could further harm our business and financial performance. Although we expect that current cash and cash equivalent balances and cash flows that are generated from operations will be sufficient to meet our working capital needs and other capital and liquidity requirements for at least the next 12 months, if our access to capital is restricted or our borrowing costs increase, our operations and financial condition could be adversely impacted.
To support the health and well-being of our employees, customers, partners and communities, we implemented and expect to continue a work-from-home policy for substantially all our employees and materially limited business travel, and we may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests. While almost all of our operations have been performed remotely since March 2020, and we have not experienced any material interruptions to our operations to date, there is no guarantee that we will continue to be as effective while working remotely. The disruptions caused by COVID-19, including the limitations on meeting in-person with existing and potential customers and amongst our teams because our team is dispersed, may result in inefficiencies, delays and additional costs in our product development, sales, marketing, product implementations and customer service efforts that we
cannot fully mitigate through remote work arrangements. Many employees have additional personal needs to attend to (such as looking after children as a result of school closures or delays to school calendars or family who becomes sick), and employees may continue to become sick themselves and be unable to work. If one or more of our executives or senior leaders were to become sick and/or hospitalized with COVID-19, it could have a significant impact on our operations. In addition, work-from-home and related business practice modifications could present challenges to maintaining our corporate culture, including employee engagement, development and productivity, both during the ongoing pandemic and as we make additional adjustments to transition from it. As local regulations permit, we expect to provide limited access to our offices for our employees, and when appropriate, we anticipate that we will fully reopen our offices. Planning for the re-opening of our offices has required and will likely continue to require non-trivial investments to manage additional risks and operational challenges, including in the design, implementation and enforcement of new workplace safety protocols. These efforts may divert management attention, and the protocols may create logistical challenges for our employees which could adversely impact employee productivity and morale. Even if we follow what we believe to be best practices, there can be no assurance that our measures will prevent the transmission of COVID-19 between employees. Any incidents of actual or perceived transmission may expose us to liability from employee claims, adversely impact employee productivity and morale, and even result in negative publicity and reputational harm.
The impacts of COVID-19 on our business, customers, partners, employees, markets and financial results and condition continue to be uncertain, evolving, dynamic and dependent on numerous unpredictable factors outside of our control, including:
•the spread, duration and severity of COVID-19 as a public health matter and its impact on governments, businesses and society generally and our clients, partners and our business;
•the mitigation, treatment and other related measures being taken by governments, businesses and society in response to COVID-19 and the effectiveness of those measures;
•the scope and effectiveness of fiscal and monetary stimulus programs and other legislative and regulatory measures being implemented by federal, state and local governments in response to COVID-19;
•the duration and impact of the numerous measures implemented by governmental authorities throughout the United States and internationally to contain COVID-19, including travel bans and restrictions, quarantines, shelter-in-place orders and business limitations and shutdowns;
•the impact of COVID-19 on overall long-term demand for air travel, including the impact on overall demand for business travel as a result of increased usage of teleconferencing and other technologies;
•the impact of COVID-19 on the financial health and operations of our current and prospective customers and partners, including the increase in business failures among our customers and other businesses;
•the pace and extent to which our customers and other businesses reduce their number of employees and other compensated individuals;
•the possibility of failure of our operating facilities, computer systems or communication systems during a catastrophic event, including COVID-19;
•the willingness of current and prospective clients to invest in our products and services;
•the willingness of current and prospective clients to buy and install products and services remotely; and
•the satisfaction of customers with product and service remote delivery and support.
If we are not able to respond to and manage the impact of such events effectively, our results of operations, financial performance, and overall business will be harmed.
More generally, COVID-19 is causing an extended global economic downturn and has caused volatility in financial markets, which has affected, and likely will continue to affect, demand for our products and services and has impacted our results and financial condition. The impact of COVID-19 will likely continue even after the pandemic is contained, vaccines or other widely accepted treatments become available and the containment measures are lifted. For example, airline travel demand may remain suppressed until a widely accepted treatment and/or vaccine for COVID-19 is available, and recovery in airline
travel demand from COVID-19 may not follow a linear path. In addition, we may be unable to collect receivables from or renew subscription agreements with those customers significantly impacted by COVID-19. Similarly, a decrease in bookings in a given period could negatively affect our revenues in future periods, particularly if experienced on a sustained basis, because our subscription revenue is recognized over time. COVID-19 may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K, including risks associated with our customers and supply chain. We will continue to evaluate the nature and extent of the impact of COVID-19 to our business.
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 September 2020, we issued $150.0 million principal amount of 2.25% convertible senior notes (“2027 Notes”) due September 15, 2027, unless earlier redeemed, purchased or converted in accordance with their terms prior to such date. Interest is payable semi-annually in arrears on March 15 and September 15 of each year. As of September 30, 2020, the entire $150.0 million of aggregate principal amount of 2027 Notes are outstanding.
In May 2019, we issued $143.8 million principal amount of 1.0% convertible senior notes (“2024 Notes”) 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, 2019,2020, 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.purposes. Our ability to meet our debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We cannot control many of these factors. Our future operations may not generate sufficient cash to enable us to repay our debt. If we fail to comply with any covenants contained in the agreements governing any of our debt, or make a payment on any of our debt when due, we could be in default on such debt.debt, which could, in turn, result in such debt and our other indebtedness becoming immediately payable in full. If we are at any time unable to pay our indebtedness when due, we may be required to renegotiate the terms of the indebtedness, seek to refinance all or a portion of the indebtedness, and/or obtain additional financing. There can be no assurance that, in the future, we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have an ongoing authorization from our 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, 2019,2020, $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, 2019.2020.
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 | | Filing Date |
| | | | | | | | |
| | | | | | | | |
Index to Exhibits4.1 | | | | | | 8-K | | 9/16/2020 |
| | | | Provided | | Incorporated by Reference | | |
4.2 | | Form of Global Note, between Registrant and Wilmington Trust, National Association, as trustee (included in Exhibit No.4.1). | | Description | | Herewith8-K | | Form | | Filing Date9/16/2020 |
| | | | | | | | |
10.1 | | | | | | 8-K | | 9/16/2020 |
31.1 | | | | | | | | |
31.1 | | | | X | | | | |
| | | | | | | | |
31.2 | | | | X | | | | |
| | | | | | | | |
32.1* | | | | 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 29, 2020 | By: | | PROS HOLDINGS, INC. |
| | | |
October 24, 2019 | By: | | /s/ Andres Reiner |
| | | Andres Reiner |
| | | President and Chief Executive Officer (Principal Executive Officer)
|
| | | |
October 24, 201929, 2020 | By: | | /s/ Stefan Schulz |
| | | Stefan Schulz |
| | | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
|