UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)

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

For the quarterly period ended September 30, 2018March 31, 2019

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: 001-38498

PLURALSIGHT, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware 82-3605465
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)

182 North Union Avenue
Farmington, Utah 84025
(Address of principle executive offices, including zip code)

(801) 784-9007
(Registrant's telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐   Accelerated filer  ☐
Non-accelerated filer ý   Smaller reporting company  ☐
      Emerging growth company  ý
 
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 ý

As of OctoberApril 19, 2018,2019, the registrant had 135,070,910138,471,395 shares of common stock outstanding, consisting of 62,310,27095,279,403 shares of Class A common stock, 58,562.32929,029,681 shares of Class B common stock, and 14,198,31114,162,311 shares of Class C common stock.

   



PLURALSIGHT, INC.
TABLE OF CONTENTS
 
   
  Page
   
PART I. FINANCIAL INFORMATION
   
Item 1.
Financial Statements (unaudited)
 
 
Condensed Consolidated Balance Sheets as of September 30, 2018March 31, 2019 and December 31, 20172018
2
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30,March 31, 2019 and 2018 and 2017
3
 
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30,March 31, 2019 and 2018 and 2017
4
 
Condensed Consolidated Statements of Redeemable Convertible Preferred Units, Members’ Deficit, and Stockholders' Equity for the NineThree Months Ended September 30,March 31, 2019 and 2018
5
 
Condensed Consolidated Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2019 and 2018 and 2017
6
 
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
2526
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
36
Item 4.
Controls and Procedures
36
   
PART II. OTHER INFORMATION
   
Item 1.
Legal Proceedings
38
Item 1A.
Risk Factors
38
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
3840
Item 6.
Exhibits
3941
   
Signatures
4042



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
As used in this Quarterly Report on Form 10-Q, unless expressly indicated or the context otherwise requires, references to “Pluralsight,” “we,” “us,” “our,” “the Company,” and similar references refer to Pluralsight, Inc. and its consolidated subsidiaries, including Pluralsight Holdings, LLC, or Pluralsight Holdings.
This Quarterly Report on Form 10-Q, including the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements, which are subject to a number of risks, uncertainties, and assumptions, generally relate to future events or our future financial or operating performance. In some cases, you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect,” “could,” “plan,” “potential,” “predict,” “seek,” “should,” “would,” “target,” “project,” “contemplate,” or the negative version of these words and other comparable terminology that concern our expectations, strategy, plans, intentions, or projections. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: 
our ability to attract new customers and retain and expand our relationships with existing customers;
our ability to expand our course library and develop new platform features;
our future financial performance, including trends in billings, revenue, costs of revenue, gross margin, operating expenses, and free cash flow;
the demand for, and market acceptance of, our platform or for cloud-based technology learning solutions in general;
our ability to compete successfully in competitive markets;
our ability to respond to rapid technological changes;
our expectations and management of future growth;
our ability to enter new markets and manage our expansion efforts, particularly internationally;
our ability to attract and retain key employees and qualified technical and sales personnel;
our ability to effectively and efficiently protect our brand;
our ability to timely scale and adapt our infrastructure;
our ability to maintain, protect, and enhance our intellectual property and not infringe upon others’ intellectual property;
our ability to successfully identify, acquire, and integrate companies and assets; and
the amount and timing of any payments we make under the fourth amended and restated limited liability company agreement of Pluralsight Holdings, or the Fourth LLC Agreement, and our Tax Receivable Agreement, or TRA, with the members of Pluralsight Holdings.Holdings;
our use of net proceeds from our convertible note offering in March 2019; and
our ability to satisfy our obligations under the convertible senior notes.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” in our prospectus dated May 16, 2018 (File No. 333-224301)Annual Report on Form 10-K as filed with the Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) under the Securities Act of 1933, or the Prospectus.Exchange Act. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements and you should not place undue reliance on our forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.
You should read this Quarterly Report on Form 10-Q in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2017,2018 included in the Prospectus.our Annual Report on Form 10-K.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)
PLURALSIGHT, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 March 31, 2019 December 31, 2018
 September 30, 2018 December 31, 2017    
Assets        
Current assets:        
Cash and cash equivalents $208,626
 $28,267
 $736,566
 $194,306
Accounts receivable, net of allowances of $2,332 and $1,552 as of September 30, 2018 and December 31, 2017, respectively 47,801
 38,229
Accounts receivable, net of allowances of $2,713 and $2,501 as of March 31, 2019 and December 31, 2018, respectively 51,865
 63,436
Deferred contract acquisition costs, net 16,863
 —
Prepaid expenses and other current assets 8,037
 5,125
 10,238
 8,323
Total current assets 264,464
 71,621
 815,532
 266,065
Restricted cash 27,849
 16,765
Property and equipment, net 22,503
 22,457
 36,552
 31,641
Content library, net 7,547
 13,441
 6,858
 7,050
Intangible assets, net 1,935
 2,854
 1,582
 1,759
Goodwill 123,119
 123,119
 123,119
 123,119
Deferred contract acquisition costs, noncurrent, net 3,333
 —
Other assets 2,080
 2,928
 1,085
 1,064
Total assets $421,648
 $236,420
 $1,015,910
 $447,463
Liabilities, redeemable convertible preferred units, and stockholders' equity/members’ deficit    
Liabilities and stockholders' equity    
Current liabilities:        
Accounts payable $6,834
 $6,029
 $8,605
 $7,160
Accrued expenses 31,415
 26,514
 27,644
 32,047
Accrued author fees 9,331
 7,879
 10,737
 10,002
Deferred revenue 130,555
 103,107
 167,956
 157,695
Total current liabilities 178,135
 143,529
 214,942
 206,904
Deferred revenue, net of current portion 8,649
 8,194
Long-term debt —
 116,037
Facility financing obligation 7,500
 7,513
Deferred revenue, noncurrent 12,339
 14,886
Convertible senior notes, net 481,167
 —
Facility financing obligations 20,070
 15,777
Other liabilities 1,090
 458
 1,514
 1,303
Total liabilities 195,374
 275,731
 730,032
 238,870
Commitments and contingencies (Note 8) 
 
Redeemable convertible preferred units:    
Redeemable convertible preferred units, no par value; 48,447,880 units authorized, issued and outstanding as of December 31, 2017 —
 405,766
Stockholders' equity/members’ deficit:    
Preferred stock, $0.0001 par value per share, 100,000,000 shares authorized, no shares issued and outstanding as of September 30, 2018 —
 —
Class A common stock, $0.0001 par value per share, 1,000,000,000 shares authorized, 62,310,270 shares issued and outstanding as of September 30, 2018; 1,000 shares authorized, issued and outstanding as of December 31, 2017 6
 —
Class B common stock, $0.0001 par value per share, 200,000,000 shares authorized, 58,566,789 shares issued and outstanding as of September 30, 2018 6
 —
Class C common stock, $0.0001 par value per share, 50,000,000 shares authorized, 14,198,311 shares issued and outstanding as of September 30, 2018 1
 —
Commitments and contingencies (Note 9) 
 
Stockholders' equity:    
Preferred stock, $0.0001 par value per share, 100,000,000 shares authorized, no shares issued and outstanding as of March 31, 2019 and December 31, 2018 —
 —
Class A common stock, $0.0001 par value per share, 1,000,000,000 shares authorized, 95,096,979 shares issued and outstanding as of March 31, 2019; 65,191,907 shares issued and outstanding as of December 31, 2018 10
 7
Class B common stock, $0.0001 par value per share, 200,000,000 shares authorized, 29,071,789 shares issued and outstanding as of March 31, 2019; 57,490,881 shares issued and outstanding as of December 31, 2018 3
 6
Class C common stock, $0.0001 par value per share, 50,000,000 shares authorized, 14,162,311 shares issued and outstanding as of March 31, 2019; 14,586,173 shares issued and outstanding as of December 31, 2018 1
 1
Additional paid-in capital 443,182
 —
 560,493
 452,576
Members’ capital —
 —
Accumulated other comprehensive (loss) income (34) 25
Accumulated other comprehensive loss (31) (41)
Accumulated deficit (335,863) (445,102) (359,973) (351,123)
Total stockholders' equity attributable to Pluralsight, Inc./members' deficit 107,298
 (445,077)
Total stockholders’ equity attributable to Pluralsight, Inc. 200,503
 101,426
Non-controlling interests 118,976
 —
 85,375
 107,167
Total stockholders' equity/members' deficit 226,274
 (445,077)
Total liabilities, redeemable convertible preferred units, and stockholders' equity/members’ deficit $421,648
 $236,420
Total stockholders’ equity 285,878
 208,593
Total liabilities and stockholders' equity $1,015,910
 $447,463

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


PLURALSIGHT, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended March 31,
 Three Months Ended September 30, Nine Months Ended September 30, 2019 2018
 2018 2017 2018 2017    
Revenue $61,553
 $43,286
 $164,769
 $119,416
 $69,617
 $49,644
Cost of revenue 15,331
 12,582
 46,107
 35,678
 16,705
 14,886
Gross profit 46,222
 30,704
 118,662
 83,738
 52,912
 34,758
Operating expenses:            
Sales and marketing 41,392
 29,410
 109,792
 70,254
 44,050
 29,467
Technology and content 17,227
 12,448
 47,045
 33,979
 20,032
 13,325
General and administrative 17,398
 19,094
 48,138
 34,773
 21,809
 11,292
Total operating expenses 76,017
 60,952
 204,975
 139,006
 85,891
 54,084
Loss from operations (29,795) (30,248) (86,313) (55,268) (32,979) (19,326)
Other (expense) income:            
Interest expense (342) (3,252) (6,476) (8,376) (2,024) (3,710)
Loss on debt extinguishment —
 —
 (4,085) (1,882)
Other income, net 654
 55
 689
 124
Other income (expense), net 1,614
 (13)
Loss before income taxes (29,483) (33,445) (96,185) (65,402) (33,389) (23,049)
Provision for income taxes (254) (90) (506) (216) (154) (109)
Net loss $(29,737) $(33,535) $(96,691) $(65,618) $(33,543) $(23,158)
Less: Net loss attributable to non-controlling interests (15,578) —
 (28,284) —
 (14,660) —
Net loss attributable to Pluralsight, Inc. $(14,159) $(33,535) $(68,407) $(65,618) $(18,883) $(23,158)
Less: Accretion of Series A redeemable convertible preferred units —
 (34,375) (176,275) (57,200) —
 (19,525)
Net loss attributable to common shares $(14,159) $(67,910) $(244,682) $(122,818) $(18,883) $(42,683)
Net loss per share, basic and diluted(1)
 $(0.23) 

 $(0.41) 

 $(0.25)  
Weighted-average common shares used in computing basic and diluted net loss per share(1)
 62,472
 

 62,400
 

 75,927
  
        
(1) Represents net loss per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the periods following the Reorganization Transactions (as defined below) and Pluralsight, Inc.'s initial public offering described in Note 1—Organization and Description of Business. See Note 13—Net Loss Per Share for additional details.
________________________
(1)Represents net loss per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the periods following the Reorganization Transactions (as defined below) and Pluralsight, Inc.'s initial public offering described in Note 1—Organization and Description of Business. See Note 14—Net Loss Per Share for additional details.


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


PLURALSIGHT, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 Three Months Ended March 31,
 Three Months Ended September 30, Nine Months Ended September 30, 2019 2018
 2018 2017 2018 2017    
Net loss $(29,737) $(33,535) $(96,691) $(65,618) $(33,543) $(23,158)
Other comprehensive (loss) income:            
Foreign currency translation (losses) gains, net (39) 5
 (97) 23
Foreign currency translation gains, net 18
 5
Comprehensive loss $(29,776) $(33,530) $(96,788) $(65,595) $(33,525) $(23,153)
Less: Comprehensive loss attributable to non-controlling interests (15,599) —
 (28,326) —
 (14,652) —
Comprehensive loss attributable to Pluralsight, Inc. $(14,177) $(33,530) $(68,462) $(65,595) $(18,873) $(23,153)

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


PLURALSIGHT, INC.
Condensed Consolidated Statements of Redeemable Convertible Preferred Units, Members’ Deficit, and Stockholders' Equity
(in thousands, except share/unit amounts)
(unaudited)

Three Months Ended March 31, 2019:
  
Redeemable
Convertible
Preferred Units
  Members’ Capital Class A Common Stock Class B Common Stock Class C Common Stock 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive
Income (Loss)
 
Accumulated
Deficit
 Non-Controlling Interests Total
  Units Amount  Units Amount Shares Amount Shares Amount Shares Amount  
Balance at December 31, 2017 48,447,880
 $405,766
  48,407,645
 $—
 —
 $—
 —
 $—
 —
 $—
 $—
 $25
 $(445,102) $—
 $(445,077)
Activity prior to the Reorganization Transactions:                               
Issuance of warrants to purchase shares of Class A common units —
 —
  —
 984
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 984
Equity-based compensation —
 —
  —
 13,155
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 13,155
Accretion of Series A redeemable convertible preferred units —
 176,275
  —
 (14,139) —
 —
 —
 —
 —
 —
 —
 —
 (162,136) —
 (176,275)
Foreign currency translation losses, net —
 —
  —
 —
 —
 —
 —
 —
 —
 —
 —
 (18) —
 —
 (18)
Net loss —
 —
  —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 (42,660) —
 (42,660)
Effect of the Reorganization Transactions and initial public offering:                               
Effect of the Reorganization Transactions (48,447,880) (582,041)  (48,407,645) —
 39,110,660
 4
 58,111,572
 6
 14,048,138
 1
 581,952
 —
 —
 —
 581,963
Initial public offering, net of offering costs —
 —
  —
 —
 23,805,000
 2
 —
 —
 —
 —
 324,704
 —
 —
 —
 324,706
Allocation of equity to non-controlling interests —
 —
  —
 —
 —
 —
 —
 —
 —
 —
 (474,007) (4) 339,782
 134,229
 —
Activity subsequent to the Reorganization Transactions and initial public offering:                               
Effect of the rescission transactions —
 —
  —
 —
 (605,390) —
 455,217
 —
 150,173
 —
 —
 —
 —
 —
 —
Settlement of equity appreciation rights —
 —
  —
 —
 —
 —
 —
 —
 —
 —
 (325) —
 —
 —
 (325)
Equity-based compensation —
 —
  —
 —
 —
 —
 —
 —
 —
 —
 23,931
 —
 —
 —
 23,931
Adjustments to non-controlling interests —
 —
  —
 —
 —
 —
 —
 —
 —
 —
 (13,073) —
 —
 13,073
 —
Foreign currency translation losses, net —
 —
  —
 —
 —
 —
 —
 —
 —
 —
 —
 (37) —
 (42) (79)
Net loss —
 —
    —
 —
 —
 —
 —
 —
 —
 —
 —
 (25,747) (28,284) (54,031)
Balance at September 30, 2018 —
 $—
  —
 $—
 62,310,270
 $6
 58,566,789
 $6
 14,198,311
 $1
 $443,182
 $(34) $(335,863) $118,976
 $226,274
 Redeemable
Convertible
Preferred Units		  Members’ Capital Class A Common Stock Class B Common Stock Class C Common Stock 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive
Income (Loss)
 
Accumulated
Deficit
 Non-Controlling Interests Total
 Units Amount  Units Amount Shares Amount Shares Amount Shares Amount 
                               
Balance at December 31, 2018—
 $—
  —
 $—
 65,191,907
 $7
 57,490,881
 $6
 14,586,173
 $1
 $452,576
 $(41) $(351,123) $107,167
 $208,593
Impact of the adoption of ASC 606—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 10,033
 10,601
 20,634
Effect of exchanges of LLC Units—
 —
  —
 —
 28,949,710
 3
 (28,419,092) (3) (530,618) —
 49,495
 —
 —
 (49,495) —
Vesting of restricted stock units—
 —
  —
 —
 787,982
 —
 —
 —
 106,756
 —
 —
 —
 —
 —
 —
Exercise of common stock options—
 —
  —
 —
 167,380
 —
 —
 —
 —
 —
 2,621
 —
 —
 —
 2,621
Equity component of convertible senior notes, net of issuance costs—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 137,033
 —
 —
 —
 137,033
Purchase of capped calls related to issuance of convertible senior notes—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 (69,432) —
 —
 —
 (69,432)
Equity-based compensation—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 19,954
 —
 —
 —
 19,954
Adjustments to non-controlling interests—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 (31,754) —
 —
 31,754
 —
Foreign currency translation gains—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 —
 10
 —
 8
 18
Net loss—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 (18,883) (14,660) (33,543)
Balance at March 31, 2019—
 $—
  —
 $—
 95,096,979
 $10
 29,071,789
 $3
 14,162,311
 $1
 $560,493
 $(31) $(359,973) $85,375
 $285,878

Three Months Ended March 31, 2018:
 Redeemable
Convertible
Preferred Units		  Members’ Capital Class A Common Stock Class B Common Stock Class C Common Stock Additional
Paid-In
Capital		 
Accumulated Other
Comprehensive Income (Loss)
 Accumulated
Deficit		 Non-Controlling Interests Total
 Units Amount  Units Amount Shares Amount Shares Amount Shares Amount 
                               
Balance at December 31, 201748,447,880
 $405,766
  48,407,645
 $—
 —
 $—
 —
 $—
 —
 $—
 $—
 $25
 $(445,102) $—
 $(445,077)
Issuance of warrants to purchase shares of Class A common stock—
 —
  —
 984
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 984
Equity-based compensation—
 —
  —
 3,373
 —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 3,373
Accretion of Series A redeemable convertible preferred units—
 19,525
  —
 (4,357) —
 —
 —
 —
 —
 —
 —
 —
 (15,168) —
 (19,525)
Foreign currency translation gains—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 —
 5
 —
 —
 5
Net loss—
 —
  —
 —
 —
 —
 —
 —
 —
 —
 —
 —
 (23,158) —
 (23,158)
Balance at March 31, 201848,447,880
 $425,291
  48,407,645
 $—
 —
 $—
 —
 $—
 —
 $—
 $—
 $30
 $(483,428) $—
 $(483,398)
The accompanying notes are an integral part of these condensed consolidated financial statements.


PLURALSIGHT, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Three Months Ended March 31,
 Nine Months Ended September 30, 2019 2018
 2018 2017    
Operating activities        
Net loss $(96,691) $(65,618) $(33,543) $(23,158)
Adjustments to reconcile net loss to net cash used in operating activities:    
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation of property and equipment 6,331
 4,367
 2,056
 2,191
Amortization of acquired intangible assets 7,721
 6,018
 702
 3,333
Amortization of course creation costs 1,437
 1,050
 579
 447
Equity-based compensation 36,972
 18,988
 19,606
 3,373
Amortization of deferred contract acquisition costs 5,867
 —
Amortization of debt discount and issuance costs 1,545
 876
Provision for doubtful accounts 493
 360
 27
 222
Amortization of debt discount and debt issuance costs 1,215
 1,074
Debt extinguishment costs 4,197
 931
Deferred tax benefit (98) —
 (27) —
Other 25
 —
Changes in assets and liabilities:        
Accounts receivable (10,352) (2,720) 11,392
 6,802
Deferred contract acquisition costs (5,851) —
Prepaid expenses and other assets (2,990) (3,204) (1,917) (1,966)
Accounts payable 928
 2,388
 1,035
 2,063
Accrued expenses and other liabilities 6,912
 8,721
 (4,979) (10,203)
Accrued author fees 1,452
 1,328
 735
 (179)
Deferred revenue 28,190
 15,501
 8,288
 5,775
Net cash used in operating activities (14,283) (10,816)
Net cash provided by (used in) operating activities 5,540
 (10,424)
Investing activities        
Purchases of property and equipment (6,576) (4,459) (2,133) (1,868)
Purchases of content library (2,345) (1,769) (937) (769)
Net cash used in investing activities (8,921) (6,228) (3,070) (2,637)
Financing activities        
Proceeds from initial public offering, net of underwriting discounts and commissions 332,080
 —
Proceeds from issuance of convertible senior notes, net of discount and issuance costs 617,663
 —
Purchase of capped calls related to issuance of convertible senior notes (69,432) —
Proceeds from issuance of common stock from employee equity plans 2,621
 —
Borrowings of long-term debt —
 20,000
Payments of costs related to initial public offering (7,083) (175) —
 (1,899)
Borrowings of long-term debt 20,000
 115,000
Repayments of long-term debt (137,710) (85,000)
Payments of debt extinguishment costs (2,179) —
Payments of debt issuance costs (450) (837) —
 (450)
Payments to settle equity appreciation rights (325) —
Taxes paid related to net share settlement (78) —
Proceeds from the issuance of common units —
 3,136
Redemption of incentive units —
 (2,801)
Payments of facility financing obligation (13) (12)
Other (4) (4)
Net cash provided by financing activities 204,242
 29,311
 550,848
 17,647
Effect of exchange rate change on cash, cash equivalents, and restricted cash (136) 38
Effect of exchange rate changes on cash, cash equivalents, and restricted cash 26
 9
Net increase in cash, cash equivalents, and restricted cash 180,902
 12,305
 553,344
 4,595
Cash, cash equivalents, and restricted cash, beginning of period 28,477
 19,397
 211,071
 28,477
Cash, cash equivalents, and restricted cash, end of period $209,379
 $31,702
 $764,415
 $33,072
Supplemental cash flow disclosure:        
Cash paid for interest $4,271
 $4,702
 $—
 $2,472
Cash paid for income taxes, net $338
 $284
 $116
 $84
Supplemental disclosure of non-cash investing and financing activities:        
Conversion of redeemable convertible preferred units $582,041
 $—
Property acquired under build-to-suit agreements $4,297
 $—
Debt and equity issuance costs, accrued but not yet paid $1,008
 $1,506
Unpaid capital expenditures $870
 $433
Equity-based compensation capitalized as internal-use software $348
 $—
Redeemable convertible preferred unit accretion $176,275
 $57,200
 $—
 $19,525
Unpaid capital expenditures $252
 $84
Offering costs, accrued but not yet paid $607
 $113
Equity-based compensation capitalized as internal-use software $114
 $—
Issuance of warrants to purchase shares of Class A common stock $984
 $—
 $—
 $984
Reconciliation of cash, cash equivalents, and restricted cash:    
Reconciliation of cash, cash equivalents and restricted cash as shown in the statement of cash flows:    
Cash and cash equivalents $208,626
 $31,492
 $736,566
 $32,359
Restricted cash included in other assets 753
 210
Restricted cash 27,849
 713
Total cash, cash equivalents, and restricted cash $209,379
 $31,702
 $764,415
 $33,072

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


PLURALSIGHT, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Description of Business
Pluralsight, Inc. was incorporated as a Delaware corporation on December 4, 2017 as a holding company for the purpose of facilitating an initial public offering (“IPO”) and other related transactions in order to carry on the business of Pluralsight Holdings, LLC (“Pluralsight Holdings”) and its subsidiaries (together with Pluralsight, Inc., the “Company” or “Pluralsight”). Pluralsight Holdings is a limited liability company (“LLC”) and was organized on August 29, 2014 in the state of Delaware and is the parent company of Pluralsight, LLC, and its directly and indirectly wholly-owned subsidiaries. Pluralsight, LLC was organized on June 17, 2004 in the state of Nevada. Pluralsight operates a cloud-based technology learning platform that provides a broad range of tools for businesses and individuals, including skill assessments, a curated library of courses, learning paths, and business analytics. As the sole managing member of Pluralsight Holdings, Pluralsight, Inc. operates and controls all of the business operations and affairs of Pluralsight.
Initial Public Offering
In May 2018, Pluralsight, Inc. completed an IPO, in which it sold 23,805,000 shares of Class A common stock at a public offering price of $15.00 per share for net proceeds of $332.1 million, after deducting underwriters' discounts and commissions, which Pluralsight, Inc. used to purchase newly issued common limited liability company units (“LLC Units") from Pluralsight Holdings. As of September 30, 2018,In connection with the IPO, the Company has reclassified $7.4 million of offering costs into stockholders’ equity as a reduction of the net proceeds received from the IPO.
Reorganization Transactions
In connection with the IPO, the Company completed the following transactions (“Reorganization Transactions”):
The amended and restated limited liability company agreement of Pluralsight Holdings (“LLC Agreement”) was amended and restated to, among other things: (i) appoint Pluralsight, Inc. as its sole managing member and (ii) effectuate the conversion of all outstanding redeemable convertible preferred limited liability company units, incentive units, and Class B incentive units of Pluralsight Holdings into a single class of common units. See Note 9—10—Stockholders' Equity for additional details.
Certain members of Pluralsight Holdings that were corporations merged with and into Pluralsight, Inc. and certain members of Pluralsight Holdings contributed certain of their LLC Units to Pluralsight, Inc., in each case in exchange for shares of Class A common stock.
The certificate of incorporation of Pluralsight, Inc. was amended and restated to authorize three classes of common stock, Class A common stock, Class B common stock, Class C common stock, and one class of preferred stock. Class B and Class C common stock were issued on a one-for-one basis to the members of Pluralsight Holdings who retained LLC Units (“Continuing Members”). Class B and Class C common stock have voting rights but no economic rights. See Note 9—10—Stockholders' Equity for additional details.
As the sole managing member of Pluralsight Holdings, Pluralsight, Inc. has the sole voting interest in Pluralsight Holdings and controls all of the business operations, affairs, and management of Pluralsight Holdings. Accordingly, Pluralsight, Inc. consolidates the financial results of Pluralsight Holdings and reports the non-controlling interests of the Continuing Members' LLC Units on its consolidated financial statements. As of September 30, 2018,March 31, 2019, Pluralsight, Inc. owned 47.4%70.1% of Pluralsight Holdings and the Continuing Members owned the remaining 52.6%29.9% of Pluralsight Holdings.
As the Reorganization Transactions are considered transactions between entities under common control, the financial statements for periods prior to the IPO and Reorganization Transactions have been adjusted to combine the previously separate entities for presentation purposes. Prior to the Reorganization Transactions, Pluralsight, Inc. had no operations.
Secondary Offering
In March 2019, the Company completed a secondary offering, in which certain stockholders sold 15,592,234 shares of Class A common stock at a public offering price of $29.25 per share. Pluralsight did not receive any proceeds from the sale of shares by selling stockholders. A total of $0.9 million in costs were incurred by Pluralsight in connection with this offering.
Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the applicable regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in annual


financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 20172018 included in the prospectus dated May 16, 2018 (File No. 333-224301),Pluralsight, Inc.'s Annual Report on Form 10-K, as filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (“Prospectus”on February 21, 2019 ("Annual Report").


These unaudited condensed consolidated financial statements include the accounts of Pluralsight, Inc. and its directly and indirectly wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
As discussed in Note 1—Organization and Description of Business, Pluralsight, Inc. consolidates the financial results of Pluralsight Holdings as a Variable Interest Entity (“VIE”). The Company periodically evaluates entities for consolidation either through ownership of a majority voting interest, or through means other than a voting interest, in accordance with the VIE accounting model. A VIE is an entity in which the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity's economic performance or the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support.
Interim Unaudited Condensed Consolidated Financial Statements
The accompanying interim condensed consolidated balance sheet as of September 30, 2018,March 31, 2019, and the interim condensed consolidated statements of operations, for the three and nine months ended September 30, 2018 and 2017, the interim condensed consolidated statements ofcomprehensive loss, redeemable convertible preferred units, members' deficit, and stockholders' equity, for the nine months ended September 30, 2018, and the interim condensed consolidated statements of cash flows for the ninethree months ended September 30,March 31, 2019 and 2018 and 2017 are unaudited. The condensed consolidated balance sheet as of December 31, 20172018 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The interim unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company's financial position, its operations and cash flows for the periods presented. The historical results are not necessarily indicative of future results, and the results of operations for the three and nine months ended September 30, 2018March 31, 2019 are not necessarily indicative of the results to be expected for the full year or any other period.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to the determination of the fair value of equity awards, the fair value of warrants to purchase Class A common stock,the liability and equity components of the convertible senior notes, the valuation of build-to-suit leases, useful lives of property and equipment, content library and intangible assets, the period of benefit for deferred contract acquisition costs, provisions for doubtful accounts receivable and deferred revenue, impairment of long-lived and intangible assets, including goodwill, and certain accrued expenses, including author fees. These estimates and assumptions are based on the Company’s historical results and management’s future expectations. Actual results could differ from those estimates.
Significant Accounting Policies
The Company’s significant accounting policies are discussed in “Note 1—Description of Business and Summary of Significant Accounting Policies” in the Prospectus.Annual Report. There have been no significant changes to these policies that have had a material impact on the Company's unaudited condensed consolidated financial statements and related notes during the three and nine months ended September 30, 2018,March 31, 2019, except as noted below.
LeasesRevenue Recognition (ASC 606)
For build-to-suit lease arrangements,The Company derives substantially all of its revenue from subscription services (which include support services) from providing customers access to its platform.
The Company implemented the provisions of Accounting Standards Update ("ASU") 2014-09 (referred to collectively as "ASC 606") effective January 1, 2019 using the modified retrospective transition method as discussed below under the section "Recent Accounting Pronouncements".
Following the adoption of ASC 606, the Company evaluatesrecognizes revenue when control of these services is transferred to its customers, in an amount that reflects the extentconsideration the Company expects to be entitled to in exchange for the services. Sales and other taxes collected from customers to be remitted to government authorities are excluded from revenue. The Company accounts for revenue contracts with customers by applying the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in a contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, performance obligations are satisfied


The Company’s subscription arrangements do not provide customers with the right to take possession of the software supporting the platform and, as a result, are accounted for as service arrangements. Access to the Company's platform represents a series of distinct services as the Company continually provides access to, and fulfills its financialobligation to, the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the fixed consideration related to subscription revenue is generally recognized on a straight-line basis over the contract term, beginning on the date that the service is made available to the customer. The Company's subscription contracts typically vary from one month to three years. The Company’s arrangements are generally noncancellable and operational involvement duringnonrefundable.
A small portion of the constructionCompany’s revenue is derived from providing professional services, which generally consist of content creation or other consulting services. These services are distinct from subscription revenue services. Revenue from professional services is generally recognized upon completion, because the customer consumes the intended benefit and assumes control upon final completion of the service.
Some contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately, if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines standalone selling prices considering market conditions and based on overall pricing objectives such as observable standalone selling prices, and other factors, including the value of contracts, types of services sold, customer demographics, and the number and types of users within such contracts.
Deferred Revenue
The Company records contract liabilities to deferred revenue when cash payments are received or billings are due in advance of revenue recognition from subscription services described above, including amounts billed to customers in accordance with the terms of the underlying contracts where the service period has not yet commenced but will commence in the near future. Deferred revenue is recognized as revenue as the revenue recognition criteria are met. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue, current; the remaining portion is recorded as non-current deferred revenue.
Accounts Receivable
Accounts receivable represent amounts owed to the Company for subscriptions to the Company’s platform. Accounts receivable balances are recorded at the invoiced amount and are non-interest-bearing. The Company records a contract asset when revenue is recognized in advance of invoicing. Contract assets that represent a right to consideration that is unconditional are presented within accounts receivable on the condensed consolidated balance sheets.
The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables, by assessing the collectability of the accounts by taking into consideration the aging of trade receivables, historical experience, and management judgment. The Company writes off trade receivables against the allowance when management determines a balance is uncollectible and no longer intends to actively pursue collection of the receivable. 
Deferred Contract Acquisition Costs
The Company capitalizes sales commissions, and associated fringe costs, such as payroll taxes, paid to direct sales personnel and other incremental costs of obtaining contracts with customers, provided the Company expects to recover those costs. These costs are recorded as deferred contract acquisition costs on the condensed consolidated balance sheets. The Company determines whether costs should be deferred based on its sales compensation plans, if the commissions are in fact incremental and would not have occurred absent the customer contract.
Sales commissions for renewal of a subscription contract are not considered commensurate with the commissions paid for the acquisition of the initial subscription contract given the substantive difference in commission rates between new and renewal contracts. Commissions paid upon the initial acquisition of a contract are amortized over an estimated period of benefit of four years while commissions paid related to renewal contracts are amortized over an estimated period of benefit of 18 months. Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition.
The period of benefit for commissions paid for the acquisition of initial subscription contracts is determined by taking into consideration the initial estimated customer life and the technological life of the Company's platform and related significant features. The Company determines the period of benefit for renewal subscription contracts by considering the average contractual term for renewal contracts. Amortization of deferred contract acquisition costs is included within sales and marketing expense in the condensed consolidated statements of operations.
The Company periodically reviews these deferred costs to determine whether it is consideredevents or changes in circumstances have occurred that could impact the ownerperiod of the construction project for accounting purposes. When the Company is considered the ownerbenefit of a project under lease accounting guidance, the Company records the fair value of the building as the building is constructed with a corresponding build-to-suit facility financing obligation. Improvements to the facilitythese deferred contract acquisition costs. There were no material impairment losses recorded during the construction project are capitalized. Lessor-afforded incentives are classified as deemed landlord financing proceeds and are included in the facility financing obligation. During the construction period, the Company estimates and records ground rent expense based on the estimated fair value of the land and an estimated incremental borrowing rate. At the end of the construction period, the Company evaluates whether it remains the owner of the building based on its ongoing involvement in the leased property. If deemed the owner of the facility following construction completion, the Company allocates rent payments to ground rent expense, reductions of the facility financing obligation, and interest expense recognized on the outstanding obligation. To the extent gross future payments do not equal the recorded liability, the liability is settled upon return of the facility to the lessor.periods presented.


Advertising Costs
Advertising costs are expensed as incurred. The Company recorded advertising costs of $3.0$3.6 million and $3.9$2.7 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and $8.7 million and $10.8 million for the nine months ended September 30, 2018 and 2017, respectively.


Equity-Based Compensation
In connection with the IPO, the Company granted Class A common stock options to certain employees. Equity-based compensation expense for Class A common stock options granted to employees is recognized based on the fair value of the awards granted, determined using the Black-Scholes option pricing model. Equity-based compensation expense is recognized as expense on a straight-line basis over the requisite service period.
Equity-based compensation expense related to purchase rights issued under the 2018 Employee Stock Purchase Plan (“ESPP”) is based on the Black-Scholes option pricing model fair value of the estimated number of awards as of the beginning of the offering period. Equity-based compensation expense is recognized following the straight-line attribution method over the offering period.
The Black-Scholes option pricing model is affected by the share price and a number of assumptions, including the award’s expected life, risk-free interest rate, the expected volatility of the underlying stock, and expected dividends. The assumptions used in the Black Scholes pricing model are estimated as follows:
Fair Value of Common Stock: Prior to the IPO, the fair value of the common units underlying equity awards was determined considering numerous objective and subjective factors and required judgment to determine the fair value as of each grant date. Subsequent to the IPO, the Company determines the fair value of common stock as of each grant date using the market closing price of Pluralsight, Inc.'s Class A common stock on the date of grant.
Risk-free Interest Rate: The risk-free interest rate is derived from the implied yield available on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options.
Expected Term: The expected term is estimated using the simplified method due to a lack of historical exercise activity for the Company. The simplified method calculates the expected term as the mid-point between the vesting date and the contractual expiration date of the award. For the ESPP, the Company uses the period from the beginning of the offering period to the end of each purchase period.
Volatility: The price volatility factor is based on the historical volatilities of comparable companies as the Company does not have sufficient trading history for its common stock. To determine comparable companies, the Company considers public enterprise cloud-based application providers and selects those that are similar in size, stage of life cycle, and financial leverage. The Company will continue to use this process until a sufficient amount of historical information regarding volatility becomes available, or until circumstances change such that the identified companies are no longer relevant, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
Dividend Yield: The Company has not and does not expect to pay dividends for the foreseeable future.
Non-Controlling Interests
The non-controlling interests balance represents the economic interests of LLC Units of Pluralsight Holdings held by Continuing Members, based on the portion of LLC Units owned by Continuing Members. Income or loss is attributed to the non-controlling interests based on the weighted-average LLC Units outstanding during the period, excluding LLC Units that are subject to time-based vesting requirements. As of September 30, 2018, the non-controlling interests owned 52.6% of the vested LLC Units outstanding. The non-controlling interests' ownership percentage can fluctuate over time as LLC Units vest and as Continuing Members elect to exchange LLC Units for Class A common stock of Pluralsight, Inc.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss attributable to Pluralsight, Inc. for the periods following the Reorganization Transactions by the weighted-average number of shares of Class A common shares outstanding during the same periods after giving effect to weighted-average shares of Class A common stock that remain subject to time-based vesting requirements.
Diluted net loss per share is computed giving effect to all potential weighted-average dilutive shares for the periods following the Reorganization Transactions including LLC Units held by Continuing Members that are convertible into Class A common stock, stock options, restricted stock units (“RSUs”), warrants to purchase Class A common stock, and shares issuable under the ESPP for the periods after the Reorganization Transactions. The dilutive effect of outstanding awards, if any, is reflected in diluted earnings per share by application of the treasury stock method or if-converted method, as applicable.
Recent Accounting Pronouncements
Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company meets the definition of an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective


dates for public and private companies until the Company is no longer an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period. As a result, the Company’s financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Recently Adopted Accounting Pronouncements
In August 2016,May 2014, the Financial Accounting Standards Board (“FASB”)FASB issued ASU 2016-15,2014-09, StatementRevenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40), which supersedes nearly all existing revenue recognition guidance. The core principle behind ASC 606 is that an entity should recognize revenue to depict the transfer of Cash Flows (Topic 230): Classification of Certain Cash Receiptspromised goods and Cash Payments. This update clarifies how certain cash flows shouldservices to customers in an amount that reflects the consideration to which the entity expects to be classifiedentitled in exchange for delivering those goods and services. To achieve this core principle, the guidance provides a model, which involves a five-step process that includes identifying the contract with the objectivecustomer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction prices to the performance obligations in the contract, and recognizing revenue when (or as) the entity satisfies the performance obligations. The standard also provides guidance on the recognition of reducing the existing diversity in practice. This update is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The amendments in this ASU should be applied using a retrospective transition methodcosts related to each period presented. Among other provisions, the ASU requires that cash payments for certain debt prepayment or debt extinguishment costs be classified as cash outflows for financing activities. obtaining customer contracts.
The Company early adopted the standard duringas of January 1, 2019 using the second quartermodified retrospective adoption method applied to those contracts that were not completed as of 2018. Asthat date. Upon adoption, the Company recognized the cumulative effect of adopting the standard as an adjustment to the opening balance of stockholders' equity. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company updated its accounting policies, processes, internal controls and information systems to conform to the new revenue standard's reporting and disclosure requirements.
Prior to adoption, the Company limited revenue recognition for delivered elements to the amount that is not contingent on the delivery of future services. The adoption of ASC 606 resulted in an acceleration in timing of the Company's revenue for certain sales contracts due to the removal of this limitation. In addition, as a result of the adoption,new standard, the Company recorded $2.2 millioncapitalizes sales commissions and other incremental costs of obtaining contracts with customers. Such costs are amortized over the expected period of benefit, which for initial contracts is an estimated period of four years, while renewal contracts are amortized over an estimated period of benefit of 18 months.
The following table summarizes the adjustments made to the Company's condensed consolidated balance sheet as of January 1, 2019 as a result of applying the modified retrospective method to adopt ASC 606 (in thousands):
  As Reported Adjustments As Adjusted
  December 31, 2018 Revenue Recognition Incremental Costs of Obtaining a Contract January 1, 2019
         
Accounts receivable, net $63,436
 $33
 $—
 $63,469
Deferred contract acquisition costs, net —
 —
 16,461
 16,461
Deferred contract acquisition costs, noncurrent, net —
 —
 3,751
 3,751
Deferred revenue 157,695
 (389) —
 157,306
Deferred revenue, noncurrent 14,886
 —
 —
 14,886
Accumulated deficit (351,123) 205
 9,828
 (341,090)
Non-controlling interests 107,167
 217
 10,384
 117,768
The decrease of deferred revenue and increase to deferred contract acquisition costs as of January 1, 2019 resulted in paymentsadditional deferred tax liabilities that reduced the Company's net deferred tax asset position. The net deferred tax assets in the jurisdictions impacted by the adoption of debt extinguishmentASC 606 were fully reserved and, accordingly, this impact was offset by a corresponding reduction to the valuation allowance with no resulting net impact to net assets or accumulated deficit.


In addition, the adoption of ASC 606 resulted in changes to the Company's accounting estimates and policies for revenue recognition, deferred contract acquisition costs, within financing activitiesdeferred revenue, and accounts receivable. See the section titled "Significant Accounting Policies" for a discussion of the Company's updated policies.
Refer to Note 3—Revenue for the ongoing impacts of adopting ASC 606 on the condensed consolidated statements of cash flows for the nine months ended September 30, 2018. The retrospective adoption had no material effect on any prior periods.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update clarifies that transfers between cash and restricted cash are not part of the entity’s operating, investing, and financing activities, and details of those transfers are not reported as cash flow activities in the statements of cash flows. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, this update is effective for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption for all entities is permitted. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company early adopted this standard during the year ended December 31, 2017, and retroactively adjusted the consolidated statements of cash flows for all periods presented. The retrospective adoption had no material effect on any prior periods.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. For public business entities that are SEC filers, the ASU is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. For public business entities that are not SEC filers, the ASU is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. For all other entities, the ASU is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. The Company early adopted this ASU for its annual goodwill impairment test as of October 1, 2018. The adoption had no material effect on the unaudited condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in the ASU. The ASU is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. During the first quarter of 2018, the Company adopted the ASU prospectively. The adoption of the ASU had no material effect on the unaudited condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
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, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. The new guidance is effective for public business entities for annual periods beginning after December 15, 2019, including interim periods within those periods. For all other entities, the ASU is effective for annual periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted for all entities. The Company is currently in the process of evaluating the impact of new guidancethis standard on its consolidated financial statements.
In January 2017,June 2016, the FASB issued ASU 2017-01,No. 2016-13, Business CombinationsFinancial Instruments-Credit Losses (Topic 805)326): ClarifyingMeasurement of Credit Losses on Financial Instruments. This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities to require that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down. The measurement of credit losses for newly recognized financial assets and subsequent changes in the Definitionallowance for credit losses are recorded in the statements of a Business, which clarifiesoperations. For public business entities that meet the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidancean SEC filer, it is effective for public business entities for annual periodsfiscal years beginning after December 15, 2017,2019, including interim periods within those periods.fiscal years. For all other entities, the ASUit is effective for annual periodsfiscal years beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.2020. The Company is currently evaluating the potential impact to the Company’sof this standard on its consolidated financial statements will depend on the facts and circumstances of any specific future transactions.statements.


In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. For public business entities, the ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. As theThe Company has elected to use the extended transition period available to emerging growth companies, the Company does not anticipateanticipates adopting the standard untilduring the fiscal year ended December 31, 2020.2020, unless it loses its status as an emerging growth company prior to the year of adoption. The Company is currently evaluating the potential changes from this ASU to its future financial reporting and disclosures.disclosures from this ASU. As part of its preliminary assessment, the Company expects to record right-of-use assets and lease liabilities for its operating leases as a result of adopting thethis standard. While the Company continues to assess all potential impacts under the new standard, including the areas described above, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the adoption of the new standard on its consolidated financial statements at this time.
In May 2014, the FASB issued ASU 2014-09,
Note 3. Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40), which will supersede nearly all existing revenue recognition guidance.
Effect of Adopting ASC 606
The core principle behind ASU 2014-09 is that an entity should recognize revenue to depict the transferadoption of promised goods and services to customersASC 606 resulted in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering those goods and services. To achieve this core principle, the ASU provides a model, which involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction priceschanges to the performance obligations in the contract,Company's condensed consolidated balance sheet as of March 31, 2019 and recognizing revenue when (or as) the entity satisfies the performance obligations. The standard also provides guidance on the recognitionits statement of costs related to obtaining customer contracts.
The ASU permits adoption either by using a full retrospective approach, in which all comparative periods are presented in accordance with the new standard, or a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. For public business entities, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For all other entities, the standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for annual periods beginning after December 15, 2016. As the Company has elected to use the extend transition period available to emerging growth companies, the Company anticipates adopting the standardoperations for the fiscal year ending Decemberthree months ended March 31, 2019. The Company anticipates adopting the standard using the modified retrospective adoption method described above.
The Company is continuing2019 due to evaluate the impact of the adoption of the new standard on its accounting policies, processes, and system requirements. The Company has assigned internal resources to assist in the evaluation. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While the Company continues to assess all potential impacts under the new standard, there is potential the standard could have an impact on the timing of recognition of revenue and contract acquisition costs. Under the current revenue recognition guidance, the Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the delivery of future services. Under the new standard, the concept of contingent revenue no longer exists. As a result, the Company expects the timing of revenue recognition on multi-year subscription agreements with tiered pricing could accelerate underand the new standard. Additionally, for certain contracts, the Company sells licenses that can be redeemed for subscriptions to the Company’s platform at a future date. The Company earns revenue as licenses are redeemed, and subscription services are subsequently rendered. A portion of the consideration from these contracts is allocated to licenses that are ultimately not redeemed, or breakage revenue. Under current accounting literature, the Company recognizes breakage revenue when it is legally released from its obligation to provide services. Under the new standard, breakage revenue will be estimated and recognized as services are performed. As a result of the Company’s evaluation, the timing of when revenue is recognized could accelerate for contracts with breakage revenue. The Company currently anticipates that impact of adopting the standard on its revenues will not be material; however, the Company's evaluation will depend on its complete analysis of existing contracts at the time of adoption.
As part of its evaluation, the Company has also considered the impact of the standard’s requirements with respect to the capitalization and amortization of incremental costs of obtaining a contract. Undercontracts. In addition, there were offsetting shifts in the Company’s current accounting policy, incremental costsstatement of obtaining a contract are expensed as incurred. The new standard requires the capitalization of all incremental costs that are incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained, provided the Company expects to recover those costs. As a result of this standard, the Company expects to capitalize incremental contract costs. The period overcash flows through net loss and various changes in operating assets and liabilities, which these costs are expected to be recognized is still being evaluated by the Company. The Company expects theresulted in no impact of adopting the standard on its sales and marketing expenses could be material; however, such evaluation will depend on the Company's full evaluationtotal cash provided by operating activities. Refer to Note 2—Summary of contract costs atSignificant Accounting Policies and Recent Accounting Pronouncements for a description of the timeprimary impacts resulting from the adoption of adoption.
In addition, the standard will require additional financial statement disclosures, including additional disclosures for the disaggregation of revenue, contract balances, and performance obligations. The Company expects the additional disclosure requirements could be material to its consolidated financial statements.ASC 606.


WhileThe following tables present the Company continues to assess all potential impacts under the new standard, including the areas described above, and anticipates this standard could have a material impact on its consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the adoption of the new standard on its unauditedamount by which each condensed consolidated financial statementsstatement line item is affected as of and for the three months ended March 31, 2019 by ASC 606 (in thousands, except per share data):
Condensed Consolidated Balance Sheet:
  March 31, 2019
  As Reported 
Balance without Adoption of
ASC 606
 Effect of Adoption Increase/(Decrease)
       
Accounts receivable, net $51,865
 $51,855
 $10
Deferred contract acquisition costs, net 16,863
 —
 16,863
Deferred contract acquisition costs, noncurrent, net 3,333
 —
 3,333
Deferred revenue 167,956
 168,649
 (693)
Deferred revenue, noncurrent 12,339
 12,339
 —
Accumulated deficit (359,973) (380,872) 20,899
Condensed Consolidated Statement of Operations:
  Three Month Ended March 31, 2019
  As Reported 
Balance without Adoption of
ASC 606
 Effect of Adoption Increase/(Decrease)
       
Revenue $69,617
 $69,336
 $281
Operating expenses:      
Sales and marketing 44,050
 44,034
 16
Loss from operations (32,979) (33,244) 265
Net loss (33,543) (33,808) 265
Less: Net loss attributable to non-controlling interests (14,660) (14,776) 116
Net loss attributable to Pluralsight, Inc. (18,883) (19,032) 149
Net loss per share, basic and diluted $(0.25) $(0.25) $—
Weighted-average common shares used in computing basic and diluted net loss per share 75,927
 75,927
 —
Condensed Consolidated Statement of Cash Flows:
  Three Months Ended March 31, 2019
  As Reported 
Balance without Adoption of
ASC 606
 Effect of Adoption Increase/(Decrease)
       
Net loss $(33,543) $(33,808) $265
Adjustments to reconcile net loss to net cash provided by operating activities:      
Amortization of deferred contract acquisition costs 5,867
 —
 5,867
Changes in assets and liabilities:      
Accounts receivable 11,392
 11,369
 23
Deferred contract acquisition costs (5,851) —
 (5,851)
Deferred revenue 8,288
 8,592
 (304)
Cash provided by operating activities 5,540
 5,540
 —


Disaggregation of Revenue
Subscription revenue accounted for approximately 99% of the Company's revenue for the three months ended March 31, 2019.
Revenue by geographic region, based on the physical location of the customer, was as follows (dollars in thousands):
  Three Months Ended March 31,
  2019 2018
  Amount % Amount %
         
United States $43,581
 63% $31,578
 64%
Europe, Middle East and Africa(1)
 18,986
 27% 13,525
 27%
Other foreign locations 7,050
 10% 4,541
 9%
Total revenue $69,617
 100% $49,644
 100%
(1)Revenue from the United Kingdom represented 11% of revenue for the three months ended March 31, 2019 and 2018. No other foreign country accounted for 10% or more of revenue during the three months ended March 31, 2019 and 2018.
Revenue by type of customer, was as follows (dollars in thousands):
  Three Months Ended March 31,
  2019 2018
     
Business customers $58,567
 $38,878
Individual customers 11,050
 10,766
Total revenue $69,617
 $49,644
Contract Balances
For the three months ended March 31, 2019, the Company recognized revenue of $58.6 million that was included in the corresponding deferred revenue balance at this time.the beginning of the period. Contract assets, which are presented within accounts receivable were less than $0.1 million as of March 31, 2019.
Remaining Performance Obligations
As of March 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $241.9 million. The Company expects to recognize 75% of the transaction price over the next 12 months.
Costs to Obtain and Fulfill a Contract
The following table summarizes the activity of the deferred contract acquisition costs:
Balance as of January 1, 2019$20,212
Capitalization of contract acquisition costs5,851
Amortization of deferred contract acquisition costs(5,867)
Balance as of March 31, 2019$20,196
Note 3.4. Fair Value Measurements
The Company measures and records certain financial assets at fair value on a recurring basis. Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Company’s financial instruments that are measured at fair value on a recurring basis consist of money market funds. The following three levels of inputs are used to measure the fair value of financial instruments:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair value of the Company’s financial instruments were as follows (in thousands):

  September 30, 2018
  Level 1 Level 2 Level 3 Total
Cash and cash equivalents:        
Money market funds $201,264
 $—
 $—
 $201,264

 As of March 31, 2019
 December 31, 2017 Level 1 Level 2 Level 3 Total
 Level 1 Level 2 Level 3 Total        
Cash and cash equivalents:                
Money market funds $25,146
 $—
 $—
 $25,146
 $726,399
 $—
 $—
 $726,399
  As of December 31, 2018
  Level 1 Level 2 Level 3 Total
         
Cash and cash equivalents:        
Money market funds $185,405
 $—
 $—
 $185,405
Convertible Senior Notes
As of March 31, 2019, the estimated fair value of the convertible senior notes was $676.7 million. The Company estimates the fair value based on quoted market prices in an inactive market on the last trading day of the reporting period (Level 2). These convertible senior notes are recorded at face value less unamortized debt discount and transaction costs on the Company's condensed consolidated balance sheet. Refer to Note 8—Convertible Senior Notes and Other Long-Term Debt for further information.
Fair Value of Other Financial Instruments
The carrying amounts of the Company’s accounts receivable, accounts payable, accrued expenses, and other liabilities approximate their fair values due to the short maturities of these assets and liabilities.
Note 4.5. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
 March 31, 2019 December 31, 2018
 September 30, 2018 December 31, 2017    
Prepaid expenses $7,503
 $4,586
 $9,921
 $7,931
Other current assets 534
 539
 317
 392
Prepaid expenses and other current assets $8,037
 $5,125
 $10,238
 $8,323
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
 March 31, 2019 December 31, 2018
 September 30, 2018 December 31, 2017    
Accrued compensation $22,545
 $18,568
 $14,959
 $22,285
Accrued income and other taxes payable 4,891
 3,492
 5,487
 5,408
Accrued other current liabilities 3,979
 4,454
 7,198
 4,354
Accrued expenses $31,415
 $26,514
 $27,644
 $32,047


Note 5.6. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 March 31, 2019 December 31, 2018
 September 30, 2018 December 31, 2017    
Computer equipment $8,951
 $7,482
 $9,720
 $9,369
Software 2,026
 1,982
 2,031
 2,031
Capitalized internal-use software costs 12,370
 8,631
 16,043
 13,880
Furniture and fixtures 5,364
 5,234
 5,574
 5,478
Buildings 11,251
 11,251
 11,251
 11,251
Leasehold improvements 1,481
 1,324
 1,490
 1,490
Construction in progress 882
 587
 1,731
 1,671
Build-to-suit lease asset under construction 12,578
 8,281
Total property and equipment 42,325
 36,491
 60,418
 53,451
Less: Accumulated depreciation (19,822) (14,034) (23,866) (21,810)
Property and equipment, net $22,503
 $22,457
 $36,552
 $31,641
Depreciation expense totaled $2.0$2.1 million and $1.7$2.2 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and $6.3 million and $4.4 million for the nine months ended September 30, 2018 and 2017, respectively.
Note 6.7. Intangible Assets
Intangible assets, net are summarized as follows (in thousands):
 As of March 31, 2019
 September 30, 2018 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
      
Content library:            
Acquired content library $32,835
 $31,446
 $1,389
 $32,835
 $32,754
 $81
Course creation costs 12,986
 6,828
 6,158
 14,303
 7,526
 6,777
Total $45,821
 $38,274
 $7,547
 $47,138
 $40,280
 $6,858
Intangible assets:            
Technology $4,500
 $2,610
 $1,890
 $4,500
 $2,963
 $1,537
Trademarks 162
 162
 —
 162
 162
 —
Noncompetition agreements 390
 390
 —
 390
 390
 —
Customer relationships 2,750
 2,750
 —
 2,750
 2,750
 —
Database 40
 40
 —
 40
 40
 —
Domain names 45
 —
 45
 45
 —
 45
Total $7,887
 $5,952
 $1,935
 $7,887
 $6,305
 $1,582


 As of December 31, 2018
 December 31, 2017 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
      
Content library:            
Acquired content library $32,835
 $24,643
 $8,192
 $32,835
 $32,229
 $606
Course creation costs 10,640
 5,391
 5,249
 13,552
 7,108
 6,444
Total $43,475
 $30,034
 $13,441
 $46,387
 $39,337
 $7,050
Intangible assets:            
Technology $4,500
 $2,080
 $2,420
 $4,500
 $2,786
 $1,714
Trademarks 1,162
 773
 389
 162
 162
 —
Noncompetition agreements 390
 390
 —
 390
 390
 —
Customer relationships 2,750
 2,750
 —
 2,750
 2,750
 —
Database 40
 40
 —
 40
 40
 —
Domain names 45
 —
 45
 45
 —
 45
Total $8,887
 $6,033
 $2,854
 $7,887
 $6,128
 $1,759
Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of acquired intangible assets was $1.1$0.7 million and $2.0$3.3 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and $7.7 million and $6.0 million for the nine months ended September 30, 2018 and 2017, respectively. Amortization expense of course creation costs was $0.5$0.6 million and $0.4 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and $1.4 million and $1.1 million for the nine months ended September 30, 2018 and 2017, respectively.
In December 2017, the Company committed to a plan to retire the website of an acquired subsidiary in order to provide a more unified user experience on the Pluralsight platform. Accordingly, the estimated useful lives of certain content library and trademark assets were adjusted. The revised useful lives resulted in a decrease in amortization expense of $0.6 million and an increase of $2.3 million during the three and nine months ended September 30, 2018, respectively. The fully-amortized assets were disposed of in June 2018.
Note 7. Credit Facilities8. Convertible Senior Notes and Other Long-Term Debt
Silicon Valley Bank Credit AgreementConvertible Senior Notes
On November 17, 2014,In March 2019, Pluralsight, Inc. issued $633.5 million aggregate principal amount of 0.375% convertible senior notes due in 2024 (the "Notes"), which includes the initial purchasers’ exercise in full of their option to purchase an additional $83.5 million principal amount of the Notes, in a private placement to qualified institutional buyers exempt from registration under the Securities Act. The net proceeds from the issuance of the Notes were $616.7 million after deducting the initial purchasers’ discounts and estimated issuance costs.
The Notes are governed by an indenture (the “Indenture”) between the Company, entered intoas the amendedissuer, and restated credit agreement (“Second AmendedU.S. Bank National Association, as trustee. The Notes are Pluralsight, Inc.'s senior unsecured obligations and Restated Credit Agreement”) with a lending syndicate, which was led by Silicon Valley Bank. The agreement provided for a total term loanrank senior in right of $100.0 million and a revolving linepayment to any of creditits indebtedness that is expressly subordinated in right of uppayment to $10.0 million, which was usedthe Notes; equal in right of payment to finance the acquisitions of Code School LLC and Smarterer, Inc.
Under the termsany of the Second AmendedCompany's unsecured indebtedness then existing and Restated Credit Agreement,future liabilities that are not so subordinated; effectively junior in right of payment to any of the Company was requiredCompany's secured indebtedness, to maintain compliance with certain negativethe extent of the value of the assets securing such indebtedness; and affirmative covenants, includingstructurally junior to all indebtedness and other liabilities (including trade payables) of its subsidiaries. The Indenture does not contain any financial covenants and covenants relating toor restrictions on the payments of dividends, the incurrence of other indebtedness, or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Notes mature on March 1, 2024 unless earlier repurchased or converted. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019.
The Notes have an initial conversion rate of 25.8023 shares of the Company's Class A common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $38.76 per share of its Class A common stock and is subject to adjustment if certain events occur. Following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event. Additionally, upon the occurrence of a material adverse change,corporate event that constitutes a “fundamental change” per the maintenanceIndenture, holders of depository accounts, the dispositionNotes may require the Company to repurchase for cash all or a portion of assets, mergers, acquisitions, investments,their Notes at a purchase price equal to 100% of the grantingprincipal amount of liens,the Notes plus accrued and unpaid interest.
Holders of the Notes may convert all or any portion of their Notes at any time prior to the close of business on December 1, 2023, in integral multiples of $1,000 principal amount, only under the following circumstances:
During any calendar quarter commencing after the calendar quarter ending on June 30, 2019 (and only during such calendar quarter), if the last reported sale price of the Company's Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;


During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price as defined in the Indenture per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's Class A common stock and the paymentconversion rate on each such trading day; or
Upon the occurrence of dividends. specified corporate events described in the Indenture.

On Marchor after December 1, 2017,2023, until the Company entered into a waiver and amendment toclose of business on the Second Amended and Restated Credit Agreement with its lenders, which provided a waiver on certain eventssecond scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of default that occurred in fiscal quarter ended September 30, 2016, for failure to comply withtheir Notes at the consolidated total leverage ratio covenant. The Second Amended and Restated Credit Agreement was secured with a lien against substantially allconversion rate at any time irrespective of the assetsforegoing conditions. Upon conversion, holders will receive cash, shares of the Company.
The outstanding borrowings under the Second AmendedCompany's Class A common stock or a combination of cash and Restated Credit Agreement of $82.5 million were repaid in full in June 2017. The repayment of the borrowings resulted in a loss on extinguishment of $1.9 million.
Guggenheim Credit Agreement
In June 2017, the Company entered into a long-term debt facility with Guggenheim Corporate Funding, LLC pursuant to a credit agreement (“Guggenheim Credit Agreement”), consisting of a term loan facility of $115.0 million and a revolving credit facility of $5.0 million from Guggenheim Corporate Funding, LLC. Upon signing the Guggenheim Credit Agreement, the Company borrowed the $115.0 million term loan capacity available and used the majority of the proceeds to repay the full outstanding borrowings of $82.5 million under the Second Amended and Restated Credit Agreement with Silicon Valley Bank and a lending syndicate.
In February 2018, the Company amended the Guggenheim Credit Agreement and increased its term loan facility and its borrowings thereunder by an additional $20.0 million. In connection with the amendment, the Company issued warrants to the lenders to purchase 424,242 shares of Class A common stock, at an exercise pricethe Company's election.
During the three months ended March 31, 2019, the conditions allowing holders of $8.25 per share. See Note 9—Stockholders'the Notes to convert were not met. The Notes are therefore not convertible during the three months ended March 31, 2019 and are classified as long-term debt.


EquityThe Company accounts for additional details.the Notes as separate liability and equity components. The warrants were measured atCompany determined the carrying amount of the liability component as the present value of its cash flows using a discount rate of approximately 5.5% based on comparable debt transactions for similar companies. The estimated interest rate was applied to the Notes, which resulted in a fair value of the liability component of $492.7 million upon issuance, calculated as the present value of future contractual payments based on the $633.5 million aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense over the term of the Notes using the effective interest method. The $140.8 million difference between the gross proceeds received from issuance of the Notes of $633.5 million and the estimated fair value of $1.0the liability component represents the equity component, or the conversion option, of the Notes and was recorded in additional paid-in capital. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
The Company allocates issuance costs related to the issuance of the Notes to the liability and equity components using the same proportions as the initial carrying value of the Notes. Issuance costs attributable to the liability component were $13.1 million and are being amortized to interest expense using the effective interest method over the term of the Notes. Issuance costs attributable to the equity components were $3.7 million and are netted with the equity component of the Notes in stockholders’ equity on the datecondensed consolidated balance sheets.
The net carrying value of issuancethe liability component of the Notes was as follows (in thousands):
  March 31, 2019
Principal $633,500
Less: Unamortized debt discount (139,362)
Less: Unamortized issuance costs (12,971)
Net carrying amount $481,167
The net carrying value of the equity component of the Notes was as follows (in thousands):
  March 31, 2019
Proceeds allocated to the conversion option (debt discount) $140,776
Less: Issuance costs (3,743)
Net carrying amount $137,033
The interest expense recognized related to the Notes was as follows (in thousands):
  Three Months Ended March 31, 2019
Contractual interest expense $132
Amortization of debt issuance costs and discount 1,545
Total $1,677


Capped Calls
In connection with the offering of the Notes, the Company entered into privately-negotiated capped call transactions ("Capped Calls") with certain counterparties. The Capped Calls each have an initial strike price of approximately $38.76 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $58.50 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, 16,345,757 shares of the Company's Class A common stock. The Capped Calls are generally intended to reduce or offset the potential dilution from shares of Class A common stock issued upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. As the Capped Call transactions are considered indexed to the Company's own stock and wereare considered equity classified, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $69.4 million incurred in connection with the Capped Calls was recorded as debta reduction to additional paid-in capital on the condensed consolidated balance sheets.
Convertible Promissory Note with Pluralsight Holdings
In connection with the issuance costs.
Under the terms of the Guggenheim Credit Agreement, the Company was required to maintain complianceNotes, Pluralsight, Inc. entered into a convertible promissory note with certain negative and affirmative covenants, including financial covenants and covenants relating to the incurrence of other indebtedness, the occurrence of a material adverse change, the disposition of assets, mergers, acquisitions and investments, the granting of liens, and the payment of dividends. In addition, on a quarterly basis, the Company was required to maintain a maximum ratio of indebtedness to total recurring revenue for the most recent trailing twelve-month period ranging from 0.55 to 1 to 0.65 to 1. The Company was also required to maintain $10.0 million in liquidity, including amounts available under revolving loan commitments as of the last day of any calendar month. The Guggenheim Credit Agreement was secured with a lien against substantially all of the assets of the Company.
Interest accrued under the credit agreement at an adjusted LIBOR rate plus 8.50%. Adjusted LIBOR was defined as the greater LIBOR rate in effect for each interest period divided by 1 minus the Statutory Reserves (if any) for such Eurodollar borrowing for such interest period, and with respect to the term loan only, a minimum LIBOR floor of 1.00%. Under these borrowings, the Company elected to pay 2.50% of the interest due on each interest payment date in-kind rather than in cash.
A portion ofPluralsight Holdings, whereby Pluralsight, Inc. provided the net proceeds from the IPO were usedissuance of the Notes to repayPluralsight Holdings. The terms of the outstanding principal balanceconvertible promissory note mirror the terms of $137.7 million and extinguish the Guggenheim CreditNotes issued by Pluralsight, Inc. The intent of the convertible promissory note is to maintain the parity of shares of Class A common stock with LLC Units as required by the LLC Agreement in May 2018. The Company incurred a loss on debt extinguishment of $4.1 million in connection withorder to preserve the repayment.
The Company’s debt consisted of the following (in thousands):
 December 31, 2017
Principal borrowings outstanding$116,620
Less: Debt issuance costs, net of amortization(583)
Net carrying amount$116,037
Company's legal structure.
Note 8.9. Commitments and Contingencies
Letters of Credit
As of September 30, 2018March 31, 2019 and December 31, 2017,2018, the Company had a total of $0.8$0.7 million and $0.2 million, respectively, in letters of credit outstanding.outstanding with a financial institution. These outstanding letters of credit were issued for purposes of securing certain of the Company’s obligations under facility leases. The letters of credit arewere collateralized by a portion$0.7 million of the Company’s cash, which is reflected as restricted cash and classified within other assets on the condensed consolidated balance sheets.sheets as of March 31, 2019 and December 31, 2018, respectively.
Lease Commitments
The Company is committed under certain operating leases with third parties for office space. These leases expire at various times through 2035. The Company recognizes rent expense on a straight-line basis over the lease period. Payments made under the Company’s lease for its corporate headquarters in Farmington, Utah are not recorded as rent expense in the condensed consolidated statements of operations. These payments are effectively recorded as repayments of the financing obligation and interest expense in the condensed consolidated statements of operations as the Company did not qualify for sale-leaseback accounting upon completion of the facilities build out and is considered to be the owner of the buildings for accounting purposes.
In August 2018, the Company entered into a new non-cancellable operating lease agreement to rent office space for the Company's future headquarters to be constructed in Draper, Utah for a period of 15 years beginning on the earlier to occur of the date that the Company opens for business in the leased premises or the commencement date of June 24, 2020 (which date may be extended by construction delays). The Company will pay basic annual rent in monthly installments beginning on the rent commencement date, which are reflected in the table of future minimum lease payments below. The annual rent amount will be determined based on the cost of construction of the premises. Based on the current estimate of the cost of construction, the basic rent amount for the first year is expected to be $7.9 million, and the annual rent amount will increase by two percent each year following the rent commencement date. In the event the costs incurred by the landlord exceed the agreed upon cost of construction of $90.0 million, the landlord may elect to pay such amounts and add such amounts to the cost of construction and increase the basic rent amount or require the Company to pay such amounts. The landlord has agreed to an abatement of basic rent payments at the commencement of the initial lease term of up to approximately $3.2 million.
Based on the Company's involvement in the design and construction of its future headquarters, the lease qualifiesbuilding, the Company is deemed the owner of the construction project for build-to-suit accounting.accounting purposes during the construction period. As a result, the Company will record the fair valuerecorded a construction in progress asset of the building$12.6 million and a corresponding build-to-suit facility financing obligation as of March 31, 2019.
In connection with the building is constructed. Additionally,lease agreement, the Company will record ground rent expense duringis required to maintain a deposit of $16.0 million with a financial institution for the construction periodbenefit of the landlord to secure the Company’s obligations under the lease. The deposit is recorded within restricted cash on the condensed consolidated balance sheet. The lease agreement provides for both a partial and full release of the deposit funds to the Company, provided the Company meets certain liquidity and other financial conditions. Additionally, as of March 31, 2019, the Company has recorded a deposit into restricted cash on the condensed consolidated balance sheet of $11.0 million for use in tenant improvements in connection with the Draper headquarters.


based on its estimate of the fair value of the land. As of September 30, 2018, the construction period for the future headquarters had not yet commenced.Future Minimum Lease Payments
At September 30, 2018,March 31, 2019, future minimum lease payments, including lease payments for the Company’s facilities in Farmington, Utah, and lease payments for the Company'sCompany’s future headquarters in Draper, Utah were as follows (in thousands):
Years Ending December 31, 
2018 (remaining three months)$1,668
20195,804
Year Ended December 31,  
  
2019 (remaining nine months)2019 (remaining nine months)4,128
20207,466
20207,489
20219,879
20219,881
20229,871
20229,871
202320239,861
Thereafter109,185
Thereafter99,324
Less: Sublease rental incomeLess: Sublease rental income(173)
Total future minimum lease payments$143,873
Total future minimum lease payments$140,381
Rent expense under operating leases was $1.3$1.5 million and $0.4$1.0 million for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and $3.4 million and $1.2 million for the nine months ended September 30, 2018 and 2017, respectively.
Other Commitments
The Company has also entered into certain non-cancellable agreements primarily related to cloud infrastructure and software subscriptions in the ordinary course of business. There have been no material changes in the Company's commitments and contingencies, as disclosed in the Prospectus.Annual Report.
Legal Proceedings
The Company is involved in legal proceedings from time to time arising in the normal course of business. Management believes that the outcome of these proceedings will not have a material impact on the Company’s financial position, results of operations, or liquidity.
Warranties and Indemnification
The performance of the Company’s cloud-based technology learning platform is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable. The Company’s contractual arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any material liabilities related to such obligations in the accompanying consolidated condensed financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines, and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
Note 9.10. Stockholders' Equity
Amendment and Restatement of Certificate of Incorporation
In connection with the Reorganization Transactions, the certificate of incorporation of Pluralsight, Inc. was amended and restated to, among other things, provide for the (i) authorization of 1,000,000,000 shares of Class A common stock with a par value of $0.0001 per share; (ii) authorization of 200,000,000 shares of Class B common stock with a par value of $0.0001 per share; (iii) authorization of 50,000,000 shares of Class C common stock with a par value of $0.0001 per share; (iv) authorization of 100,000,000 shares of undesignated preferred stock that may be issued from time to time; and (v) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.
Holders of Class A and Class B common stock are entitled to one vote per share and holders of Class C common stock are entitled to ten votes per share. Except as otherwise required by applicable law, holders of Class A common stock, Class B common stock, and Class C common stock vote together as a single class on all matters on which stockholders generally are entitled to


vote. Holders of Class B and Class C common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B and Class C common stock may only be issued to the extent necessary to maintain the one-to-one ratio between the number of LLC Units held by the Continuing


Members and the number of Class B or Class C common shares held by the Continuing Members. Shares of Class B and Class C common stock are transferable only together with an equal number of LLC Units. Subject to certain limitations and exceptions, Continuing Members may exchange or redeem LLC Units and shares of Class B or Class C common stock, as applicable, for, at the option of Pluralsight, Inc., cash or shares of Class A common stock, on a one-for-one basis.
Pluralsight, Inc. must at all times maintain a ratio of one LLC Unit for each share of Class A common stock issued, and Pluralsight Holdings must at all times maintain a one-to-one ratio between the number of shares of Class B or Class C common stock owned by the Continuing Members and the number of LLC Units owned by the Continuing Members.
Recapitalization of Pluralsight Holdings
In connection with the Reorganization Transactions and the amendment and restatement of the LLC Agreement, all membership interests in Pluralsight Holdings were converted into a single-class of common LLC Units and certain holders of LLC Units elected to exchange LLC Units for Class A common stock of Pluralsight, Inc. The following is a summary of the shares converted or exchanged in connection with the Reorganization Transactions:
48,407,645 common units of Pluralsight Holdings outstanding prior to the Reorganization Transactions were converted on a one-for-one basis into LLC Units.
48,447,880 redeemable convertible preferred units of Pluralsight Holdings outstanding prior to the Reorganization Transactions were converted on a one-for-one basis into LLC Units.
15,783,689 incentive units of Pluralsight Holdings outstanding prior to the Reorganization Transactions were converted into 12,667,778 LLC Units after giving effect to the threshold price and catch-up price per unit.
3,000,000 Class B incentive units of Pluralsight Holdings outstanding prior to the Reorganization Transactions were converted into 1,747,067 LLC Units after giving effect to the threshold price and catch-up price per unit.
In connection with the recapitalization, a total of 39,110,660 LLC Units were exchanged for shares of Class A common stock of Pluralsight, Inc. In addition, the Company issued 58,111,572 shares of Class B common stock and 14,048,138 shares of Class C common stock to the Continuing Members on a one-for-one basis to the corresponding LLC Units held by the Continuing Members.
The amended and restated LLC Agreement requires that Pluralsight Holdings at all times maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock of Pluralsight, Inc. and the number of LLC Units and (ii) a one-to-one ratio between the number of shares of Class B or Class C common stock owned by the Continuing Members and the number of LLC Units held by the Continuing Members.
Rescission Transactions
In September 2018, the Company entered into agreements of rescission (“Rescission Transactions”) with certain stockholders of the Company (the “Rescinding Holders”) holding an aggregate of 605,390 shares of Class A common stock, pursuant to which the Company agreed to rescind the individuals' prior exchange of unvested LLC Units of Pluralsight Holdings for unvested shares of Class A common stock in connection with the Reorganization Transactions. As a result of the Rescission Transactions, a total of 605,390 LLC Units of Pluralsight Holdings and a corresponding 455,217 shares of Class B common stock and 150,173 shares of Class C common stock were issued to Rescinding Holders. In addition, the issuance of 605,390 shares of Class A common stock was rescinded. The LLC Units and corresponding shares of Class B and Class C common stock, where applicable, are subject to the same vesting conditions that existed prior to the Rescission Transactions, and the Rescinding Holders are eligible to participate in the TRA. All Rescinding Holders are employees of the Company, including employees and officers who are related parties to the Company.
Redeemable Convertible Preferred Units Conversion
As described in Note 1—Organization and Description of Business, in connection with the Reorganization Transactions, the LLC Agreement of Pluralsight Holdings was amended and restated to, among other things, effectuate the conversion of 48,447,880 redeemable convertible preferred units into LLC Units of Pluralsight Holdings. Prior to the Reorganization Transactions, Series A redeemable convertible preferred units were redeemable at the option of the holder at an amount equal to the greater of the original issuance price or the aggregate fair value of the Series A redeemable convertible preferred units. Accordingly, prior to the Reorganization Transactions, the Series A redeemable convertible preferred units were accreted to the fair value on the date of conversion of the IPO price of $15.00 per share, or $412.5 million.
As the redeemable convertible preferred units were converted into common LLC Units of Pluralsight Holdings, and are no longer redeemable at the option of the holder, the Company reclassified the carrying value of the redeemable convertible preferred units of $582.0 million on the date of the Reorganization Transactions to stockholders' equity.




Initial Public Offering
As described in Note 1—Organization and Description of Business, in May 2018, Pluralsight, Inc. completed an IPO of 23,805,000 shares of Class A common stock at a public offering price of $15.00 per share. Pluralsight, Inc. received proceeds of $332.1 million, net of underwriting discounts and commissions, which Pluralsight, Inc. used to purchase newly-issued LLC Units of Pluralsight Holdings at a price per unit equal to the IPO price per share.
Warrants to Purchase SharesExchanges of LLC Units
During the three months ended March 31, 2019, certain Continuing Members exchanged 28,949,710 LLC Units of Pluralsight Holdings along with their corresponding shares of Class A Common Stock
In connection with the first amendmentB and Class C common stock for an equal number of the Guggenheim Credit Agreement, the Company issued warrants to the lenders to purchase 424,242 shares of Class A common stock of Pluralsight, Inc. at an exercise price of $8.25 per share. See Note 7—Credit Facilities for additional details. The warrants are fully vestedstock. Simultaneously, and exercisable, in whole or in part, prior to their expiration. The warrants will expire at the earlier of (i) the acquisition ofconnection with these exchanges, the Company by another entity or (ii) six months aftercancelled the effectiveness of the IPO. The warrants were measured at the fair value on the date of issuance, which was determined to be $1.0 million using a Black-Scholes option pricing model and a probability-weighted expected return methodology. As the warrants are exercisable forexchanged shares of the Company’s Class AB and Class C common stock, the Company recorded the warrants within stockholders’ equity.stock.
Note 10.11. Non-Controlling Interests
In connection with the Reorganization Transactions, Pluralsight, Inc. became the sole managing member of Pluralsight Holdings and as a result consolidates the results of operations of Pluralsight Holdings. The non-controlling interests balance represents the LLC Units held by Continuing Members, based on the portion of LLC Units owned by Continuing Members. FollowingDuring the Reorganization Transactions,three months ended March 31, 2019, the total adjustments to the non-controlling interests were $13.1$31.8 million and were primarily related to equity-based compensation, and the settlement of equity-based awards.awards, and the issuance of the convertible promissory note with Pluralsight Holdings in connection with the convertible senior notes as discussed in Note 8—Convertible Senior Notes and Other Long-Term Debt. Income or loss is attributed to the non-controlling interests based on the weighted-average ownership percentages of LLC Units outstanding during the period, excluding LLC Units that are subject to time-based vesting requirements.


As of September 30, 2018,March 31, 2019, the non-controlling interests of Pluralsight Holdings owned 52.6%29.9% of the outstanding LLC Units, with the remaining 47.4%70.1% owned by Pluralsight, Inc. The ownership of the LLC Units is summarized as follows:
 September 30, 2018 As of March 31, 2019 As of December 31, 2018
 Units Ownership % Units Ownership % Units Ownership %
Pluralsight, Inc.'s ownership of LLC Units 62,310,270
 47.4% 95,096,979
 70.1% 65,191,907
 48.6%
LLC Units owned by the Continuing Members(1)
 69,092,179
 52.6% 40,492,749
 29.9% 68,881,732
 51.4%
 131,402,449
 100.0% 135,589,728
 100.0% 134,073,639
 100.0%
(1) Excludes 3,672,9212,741,351 and 3,195,322 LLC Units still subject to time-based vesting requirements.requirements as of March 31, 2019 and December 31, 2018, respectively
Note 11.12. Equity-Based Compensation
Incentive Unit Plan
Certain employees and directors were granted incentive units in Pluralsight Holdings, pursuant to the Incentive Unit Plan (“2013 Plan”). In connection with the Reorganization Transactions, all outstanding incentive units were converted into LLC Units of Pluralsight Holdings and certain holders of incentive units elected to exchange LLC Units for shares of Class A common stock of Pluralsight, Inc. Shares of Class A common stock and LLC Units issued as a result of the exchange or conversion of unvested incentive units remain subject to the same time-based vesting requirements that existed prior to the Reorganization Transactions. In connection with the IPO, the 2013 Plan was terminated.
As discussed in Note 9—Stockholders' Equity, in September 2018, the Company entered into the Rescission Transactions with the Rescinding Holders. In connection with the Rescission Transactions, the Company issued LLC Units and corresponding shares of Class B or Class C common stock, as applicable, to the Rescinding Holders in exchange for the rescission of an equivalent number of shares of Class A common stock. The LLC Units and corresponding shares of Class B and Class C common stock are subject to the same time-based vesting requirements that existed prior to the Rescission Transactions.


The unvested shares of Class A common stock following the exchange of unvested incentive units are summarized as follows:
  Unvested Shares 
Weighted-
Average
Grant Date
Fair Value
Unvested Class A common shares outstanding following the Reorganization Transactions 605,390
 $6.55
Vested (237,530) 8.40
Effect of the Rescission Transactions (367,860) 5.35
Unvested Class A common shares outstanding—September 30, 2018 —
 $—
The unvested LLC Units following the conversion of unvested incentive units are summarized as follows:
  Unvested Units 
Weighted-
Average
Grant Date
Fair Value
Unvested LLC Units outstanding following the Reorganization Transactions 3,942,674
 $7.73
Vested (637,613) 7.74
Effect of the Rescission Transactions 367,860
 5.35
Unvested LLC Units outstanding—September 30, 2018 3,672,921
 $7.49
  Unvested Units 
Weighted-
Average
Grant Date
Fair Value
Unvested LLC Units outstanding—December 31, 2018 3,195,322
 $7.63
Vested (453,971) 6.75
Unvested LLC Units outstanding—March 31, 2019 2,741,351
 $7.77
The Company evaluated the conversion and exchange of incentive units as part of the Reorganization Transactions and the effect of the Rescission Transactions, and concluded the transactions were not a modification of the equity awards. Accordingly, the Company will continue to recognize equity-based compensation using the grant date fair value as measured on the original grant date of the incentive units. As of September 30, 2018,March 31, 2019, total unrecognized equity-based compensation related to all unvested Class A common shares and unvested LLC Units was $25.1$19.1 million, which is expected to be recognized over a weighted-average period of 2.42.0 years. The total fair value of Class A common shares and LLC Units vested during the period from the date of the Reorganization Transactions to September 30, 2018March 31, 2019 was $22.0$12.4 million. If a forfeiture of an unvested LLC Unit occurs, the associated shares of Class B common stock or Class C common stock, as applicable, are also forfeited.
Equity Incentive Plans
In June 2017, Pluralsight Holdings adopted the 2017 Equity Incentive Plan (“2017 Plan”) and issued RSUsrestricted stock units ("RSUs") to employees. In May 2018, Pluralsight, Inc. adopted the 2018 Equity Incentive Plan (“2018 Plan”). The 2018 Plan provides for the grant of nonstatutory stock options, restricted stock, RSUs, stock appreciation rights, performance units, and performance shares to employees, directors, and consultants of the Company. A total of 22,149,995 shares of Class A common stock were reserved for issuance under the 2018 Plan. The number of shares available for issuance under the 2018 Plan also includes an annual increase on the first day of each fiscal year beginning in 2019, equal to the lesser of: (i) 14,900,000 shares, (ii) 5.0% of the outstanding shares of capital stock as of the last day of the immediately preceding fiscal year, or (iii) a lower number of shares determined by the 2018 Plan's administrator.
In connection with the IPO and the adoption of the 2018 Plan, the 2017 Plan was terminated. At the time the 2017 Plan was terminated, a total of 4,508,835 RSUs granted under the 2017 Plan remained outstanding. With the establishment of the 2018 Plan, the Company no longer grants equity-based awards under the 2017 Plan and any shares that expire, terminate, are forfeited or repurchased by the Company, or are withheld by the Company to cover tax withholding obligations, under the 2017 Plan, up to 4,508,835 shares, will automatically be transferred to the 2018 Plan.
Stock Options
In connection with the IPO, the Company granted to employees stock options under the 2018 Plan to purchase shares of Class A common stock at an exercise price equal to the IPO price of $15.00 per share. The stock options will vest ratably in equal six-month periods over a period of two years from the IPO date.


The following table summarizes the stock option activity for the ninethree months ended September 30, 2018:March 31, 2019:
  Stock Options Outstanding 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
(in millions)
Balance as of December 31, 2017 —
 $—
    
Granted 5,236,155
 15.00
    
Forfeited or cancelled (3,979) 15.00
    
Balance as of September 30, 2018 5,232,176
 $15.00
 9.6 $88.9
  Stock Options Outstanding 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining Contractual Term
(in years)
 
Aggregate Intrinsic Value
(in millions)
Balance as of December 31, 2018 5,143,712
 $15.00
    
Exercised (174,753) 15.00
    
Forfeited or cancelled (39,249) 15.00
    
Outstanding as of March 31, 2019 4,929,710
 $15.00
 9.1 $82.5
Vested and exercisable—March 31, 2019 1,049,810
 $15.00
 9.1 $17.6
AsDuring the three months ended March 31, 2019, the total intrinsic value of September 30, 2018, no options were vested or exercisable.exercised was $2.6 million. The total unrecognized equity-based compensation related to the stock options was $33.8$23.1 million, which is expected to be recognized over a weighted-average period of 1.61.1 years.
The grant date fair value of the stock options was determined using the Black-Scholes model with the following assumptions:
Dividend yieldNone
Volatility55.0%
Risk-free interest rate2.97%
Expected term (years)5.63

RSUs
The Company has granted RSUs to employees under the 2018 Plan and previously under the 2017 Plan. RSUs represent the right to receive shares of Pluralsight, Inc.’s Class A common stock at a specified future date. Restricted share units of Pluralsight Holdings under the 2017 Plan are generally subject to both a service condition and a liquidity condition. RSUs under the 2018 Plan are generally subject to a service condition. The service condition is generally satisfied over four years, whereby 25% of the share units satisfy this condition on the first anniversary of the grant date and then ratably on a quarterly basis thereafter through the end of the vesting period. The liquidity condition is satisfied upon the occurrence of a qualifying event, which is defined as a change of control transaction orwas satisfied upon expiration of athe lock-up period following the IPO. Prior to the IPO, the Company had not recorded any equity-based compensation expense associated with the RSUs as the liquidity condition was not deemed probable. Following the completion of the IPO, the Company recorded a cumulative adjustment to equity-based compensation expense totaling $7.8 million. The remaining unrecognized equity-based compensation expense related to RSUs will be recognized over the remaining requisite service period, using the straight-line attribution method.
Under the 2017 Plan, all restricted share units granted were initially restricted share units of Pluralsight Holdings. In connection with the IPO, all restricted share units were converted into RSUs of Pluralsight, Inc., except for Class B restricted share units of Pluralsight Holdings, which remain restricted share units of Pluralsight Holdings, and represent the right to receive LLC Units and corresponding shares of Class C common stock of Pluralsight, Inc. upon vesting.
The activity for RSUs for the ninethree months ended September 30, 2018March 31, 2019 was as follows:
 Number of RSUs or Units 
Weighted-Average
Grant Date Fair
Value
 Number of RSUs or Units 
Weighted-Average
Grant Date Fair
Value
RSUs of Pluralsight, Inc.        
Balance at December 31, 2017 2,178,450
 $7.06
Balance at December 31, 2018 4,801,536
 $11.11
Granted 3,464,817
 11.93
 4,102,071
 31.87
Forfeited or cancelled (244,500) 7.62
 (237,882) 14.34
Balance at September 30, 2018 5,398,767
 $10.16
Vested (699,865) 9.83
Balance at March 31, 2019 7,965,860
 $21.82
Restricted Share Units of Pluralsight Holdings:        
Balance at December 31, 2017 and September 30, 2018 3,000,000
 $8.24
Balance at December 31, 2018 2,062,500
 $8.24
Vested (187,500) 8.24
Balance at March 31, 2019 1,875,000
 $8.24
As of September 30, 2018,March 31, 2019, unrecognized compensation cost related to the RSUs, including restricted share units of Pluralsight Holdings, was $63.3$52.2 million, which is expected to be recognized over a weighted-average period of 3.12.7 years.


Employee Stock Purchase Plan
In May 2018, Pluralsight, Inc.'s board of directors adopted the ESPP. A total of 2,970,000 shares of Class A common stock were initially reserved for issuance under the ESPP. The number of shares of Class A common stock available for issuance under the ESPP will be increased on the first day of each fiscal year beginning in 2019 equal to the lesser of: (i) 2,970,000 shares of Class A common stock, (ii) 1.5% of the outstanding shares of all classes of common stock of the Company on the last day of the immediately preceding fiscal year, or (iii) an amount determined by the plan administrator.
Employee Stock Purchase Plan ("ESPP"). The ESPP generally provides for consecutive overlapping 24-month offering periods comprised of four six-month purchase periods. The offering periods are scheduled to start on the first trading day on or after May 31 and November 30 of each year. The first offering period commenced on the IPO date and is scheduled to end on the first trading day on or after May 31, 2020.
The ESPP permits participants to elect to purchase shares of Class A common stock through fixed contributions from eligible compensation paid during each purchase period during an offering period, provided that this fixed contribution amount will not exceed 75.0% of the eligible compensation a participant receives during a purchase period, or $12,500 (increased to $25,000 for purposes of the first purchase period under the ESPP). A participant may purchase a maximum of 5,000 shares during each purchase period. Amounts deducted and accumulated by the participant will be used to purchase shares of Class A common stock at the end of each purchase period. The purchase price of the shares will be 85% of the lower of the fair market value of Class A common stock on the first trading day of each offering period or on the purchase date, except for the first offering period, during which the purchase price of the shares will be 85% of the lower of (i) the IPO price or (ii) the fair market value of common stock on the purchase date. If the fair market value of the common stock on any purchase date within an offering period is lower than the stock price as of the beginning of the offering period, the offering period will immediately reset after the purchase of shares on such purchase date and participants will automatically be re-enrolled in a new offering period. Participants may end their participation at any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of common stock. Participation ends automatically upon termination of employment.
The initial offering period began onESPP employee payroll contributions accrued at March 31, 2019 and December 31, 2018, totaled $5.6 million and $1.5 million, and are included within accrued expenses in the IPO date. As of September 30, 2018, a total of 2,823,657condensed consolidated balance sheets. Employee payroll contributions ultimately used to purchase shares were issuable to employees based on contribution elections made under the ESPP and no shares had yet been purchased.will be reclassified to stockholders' equity at the end of the purchase period. As of  September 30, 2018,March 31, 2019, total unrecognized equity-based compensation for purchase rights committed under the ESPP was $13.3$10.9 million, which is expected to be recognized over a weighted-average period of 1.71.2 years.
The fair value of the purchase right for the ESPP is estimated on the date of grant using the Black-Scholes model with the following assumptions:
Dividend yieldNone
Volatility55.0%
Risk-free interest rate2.05%—2.50%
Expected term (years)0.5—2.0
Equity Appreciation Rights
In connection with the IPO, the Company elected to settle all vested equity appreciation rights (“EARs”) for a cash payment of $0.3 million. The EARs vest upon satisfaction of both time and a liquidity condition, which was satisfied upon completion of the IPO. The remaining unvested EARs were cancelled on the date of the IPO. Prior to the IPO, the vesting of EARs was not probable and no equity-based compensation related to the EARs had been recognized. The Company recognized $0.1 million in compensation cost on the date of the IPO measured using the grant date fair value of the award using a Black-Scholes model.
Equity-Based Compensation Expense
Equity-based compensation expense was classified as follows in the accompanying condensed consolidated statements of operations (in thousands):
 Three Months Ended March 31,
 Three Months Ended September 30, Nine Months Ended September 30, 2019 2018
 2018 2017 2018 2017    
Cost of revenue $40
 $5
 $86
 $15
 $79
 $—
Sales and marketing 4,372
 631
 9,343
 2,010
 6,195
 539
Technology and content 2,790
 499
 5,839
 1,489
 3,498
 381
General and administrative 8,842
 11,762
 21,704
 15,474
 9,834
 2,453
Total equity-based compensation $16,044
 $12,897
 $36,972
 $18,988
 $19,606
 $3,373
Equity-based compensation capitalized as internal-use software was $0.1$0.3 million for the three and nine months ended September 30, 2018.March 31, 2019.
Note 12.13. Income Taxes
As a result of the Reorganization Transactions, Pluralsight, Inc. became the sole managing member of Pluralsight Holdings, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Pluralsight Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Pluralsight Holdings is passed through to and included in the taxable income or loss of its members, including Pluralsight, Inc. following the Reorganization Transactions, on a pro rata basis. Pluralsight, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income of Pluralsight Holdings following the Reorganization Transactions. The Company is also subject to taxes in foreign jurisdictions.
The tax provision for interim periods is determined using an estimate of the Company's annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of its annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period. The quarterly tax provision, and estimate of the Company's annual effective tax rate, are subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how the Company conducts business, and tax law developments.
For the three months ended September 30,March 31, 2019 and 2018 and 2017 the Company's estimated effective tax rate was (1.8)% and (0.3)%, respectively. For the nine months ended September 30, 2018 and 2017, the Company's estimated effective tax rate was (0.8)% and (0.3)(0.5)%, respectively. The variations between the Company's estimated effective tax rate and the U.S. statutory rate are primarily due to


the portion of the Company's earnings (or loss) attributable to non-controlling interests following the Reorganization Transactions and the full domestic valuation allowance.
The Company is subject to income tax in the U.S. as well as other tax jurisdictions in which the Company operates. The provision for income taxes consists primarily of income taxes and withholding taxes in foreign jurisdictions in which the Company conducts business. The Company's U.S. operations have resulted in losses, and as such, the Company maintains a full valuation allowance against its U.S. deferred tax assets, including the deferred tax assets acquired in connection with the Reorganization Transactions as described below.assets. While the Company believes its current valuation allowance is appropriate, the Company assesses the need for an adjustment to the valuation allowance on a quarterly basis. The assessment is based on estimates of future sources of taxable income for the jurisdictions in which the Company operates and the periods over which deferred tax assets will be realizable. In the event the Company determines that it will be able to realize all or part of its net deferred tax assets in the future, all or part of the valuation allowance will be reversedreleased in the period in which the Company makes such determination. The release of all or part of the valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is reversed.released.
Tax Receivable Agreement and Reorganization Transactions
In connection with the Reorganization Transactions, certain members of Pluralsight Holdings (“Former Members”) exchanged LLC Units for shares of Class A common stock of Pluralsight, Inc. As a result of this exchange, the Company acquired certain tax attributes held by the Former Members. Additionally, the Company could obtain future increases in its tax basis of the assets of Pluralsight Holdings when LLC Units are redeemed or exchanged by the Continuing Members. This increase in tax basis may have the effect of reducing the amounts paid in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On the date of the IPO, the Company entered into a Tax Receivable Agreement (“TRA”) with Continuing Members that provides for a payment to the Continuing Members of 85% of the amount of tax benefits, if any, that Pluralsight, Inc. realizes, or is deemed to realize as a result of redemptions or exchanges of LLC Units.
The Company maintains a full valuation allowance against deferred tax assets related toDuring the tax attributes generated as a result of redemptions ofthree months ended March 31, 2019, Continuing Members exchanged 28,949,710 LLC Units or exchanges described above until it is determined that the benefits are more-likely-than-not to be realized. As of September 30, 2018, no members of the TRA had exchanged LLC Units for Class A common shares and therefore the Company had not recorded any liabilities under the TRA.
As discussed in Note 9—Stockholders' Equity, the Company entered into the Rescission Transactions in September 2018, whereby the Rescinding Holders rescinded their exchange of LLC Units of Pluralsight Holdings for shares of Class A common stock. As a result of the Rescission Transactions, the Rescinding Holders are eligible to participate in the TRA. The TRA liability, if any,Company has concluded that, may be owed to new TRA members as a result of the Rescission Transactionsbased on applicable accounting standards, it is not expected to be recorded until the tax benefits derived from future exchanges are more-likely-than-not to be realized.


Tax Reform Legislation
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted in the United States resulting in a reduction of the corporate income tax rate to 21%. In addition, the Tax Act limits the deductibility of interest expense, implements a modified territorial tax system, and imposes a one-time repatriation tax on deemed repatriated untaxed earnings and profits of U.S.-owned foreign subsidiaries (“Toll Charge”).
In the fourth quarter of 2017, the Company recorded a provisional Toll Charge and remeasuredthat its deferred tax assets and liabilities to reflect the lower corporate income tax rate. The amounts were computed based on information availablesubject to the Company; however, there is still uncertainty as to the application of the Tax Act. As of September 30, 2018, the Company hadTRA will not yet completed its analysis of the effects of the Tax Act, including the Toll Charge computation. The analysis is expected to be completed within one year of the enactment date of the Tax Act. Becauserealized; therefore, the Company has not recorded a full valuation allowance in the United States, changesTRA liability related to the reported impacttax savings it may realize from the utilization of deferred tax assets arising from the Tax Act based on additional guidance or further analysis are not expected to materially affect the effective tax rate in future periods. No adjustments to the provisional amounts recorded in the fourth quarter of 2017 had been madeexchanges that have occurred through March 31, 2019. The total unrecorded TRA liability as of September 30, 2018.March 31, 2019 is approximately $226.5 million.
As a result of the Toll Charge, all previously unremitted earnings have now been subject to federal tax in the United States; however, the Company plans to, and has the ability to, indefinitely reinvest such earnings in their respective foreign jurisdictions; therefore, no additional tax liability such as state or withholding tax has been provided for on such earnings.
The Company continues to analyze the effects of new taxes due on certain foreign income, such as GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income) and limitations on interest expense deductions (if certain conditions apply) that became effective starting January 1, 2018, and other provisions of the Tax Act. The Company has delayed finalizing its GILTI policy election under SAB 118 until it has the necessary information available to analyze and make an informed policy decision. Because the Company is still evaluating the GILTI provisions and the future taxable income that is subject to GILTI, the Company has included GILTI related to current-year operations only in its estimated annual effective tax rate for the three and nine months ended September 30, 2018 and has not provided additional GILTI on deferred items.
Note 13.14. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share for the periods following the Reorganization Transactions (in thousands, except per share amounts):
 Three Months Ended September 30, 2018 May 16, 2018 through September 30, 2018 Three Months Ended March 31, 2019
  
Numerator:      
Net loss $(29,737) $(54,031) $(33,543)
Less: Net loss attributable to non-controlling interests (15,578) (28,284) (14,660)
Net loss attributable to Pluralsight, Inc. $(14,159) $(25,747) $(18,883)
Denominator:      
Weighted-average common shares outstanding 62,876
 62,867
Less: Weighted-average common shares subject to time-based vesting (404) (467)
Weighted-average common shares outstanding, basic and diluted 62,472
 62,400
 75,927
Net loss per share:  
Net loss per share, basic and diluted $(0.23) $(0.41) $(0.25)
During the three months ended September 30, 2018, and the period from May 16, 2018 through September 30, 2018,March 31, 2019, the Company incurred net losses and, therefore, the effect of the Company’s potentially dilutive securities were not included in the calculation of diluted loss per share as the effect would be anti-dilutive.


The following table contains share/unit totals with a potentially dilutive impact (in thousands):
  As of September 30, 2018March 31, 2019
LLC Units held by Continuing Members 72,76543,234
Stock options 5,2324,930
RSUs of Pluralsight, Inc. 5,3997,966
Restricted Share Units of Pluralsight Holdings 3,0001,875
Shares issuablePurchase rights committed under the ESPP 2,824
Warrants to purchase Class A common shares4241,949
Total 89,64459,954
The Notes will not have an impact on the Company's diluted earnings per share until the average market share price of Class A common stock exceeds the conversion price of $58.50 per share, as the Company intends and has the ability to settle the principal


amount of the Notes in cash upon conversion. The Company is required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Notes for periods it reports net income. However, upon conversion, until the average market price of the Company's common stock exceeds the cap price of $58.50 per share, exercise of the Capped Calls will mitigate dilution from the Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.
Note 14. Segment and Geographic Information15. Related Party Transactions
The Company operates in a single operating segment. Operating segments are defined as components ofutilizes an enterprise for which separate financial information is regularly evaluatedaircraft owned by the chief operating decision makers, who in the Company’s case areChief Executive Officer on an as-needed basis. The Company has agreed to reimburse the Chief Executive Officer and Chief Financial Officer, in deciding how to allocate resources and assess performance. The chief operating decision makers evaluate the Company’s financial information and resources and assess the performance of these resources on a consolidated basis. Since the Company operates in one operating segment, all required financial segment information can be found in the unaudited condensed consolidated financial statements.
Revenue by geographic region, based on the physical locationfor use of the customer,private aircraft for business purposes at an hourly rate per flight hour. The reimbursement rate was as follows (dollars in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017
United States$39,368
 $28,543
 $104,901
 $77,263
United Kingdom6,375
 4,570
 17,463
 13,023
Other foreign locations15,810
 10,173
 42,405
 29,130
Total revenue$61,553
 $43,286
 $164,769
 $119,416
Percentage of revenue generated outside of the United States36% 34% 36% 35%
Withapproved by the exceptionCompany's Board of the United Kingdom, no other foreign country accounted for 10% or moreDirectors based upon a review of revenuecomparable chartered aircraft rates. The Company accrued approximately $0.1 million during the three months ended September 30, 2018 and 2017, andMarch 31, 2019 included within accrued expenses on the ninecondensed consolidated balance sheets. A total of $0.5 million has been paid under the arrangement during the three months ended SeptemberMarch 31, 2019.
Tax Receivable Agreement
On the date of the IPO, the Company entered into a TRA with Continuing Members that provides for a payment to the Continuing Members of 85% of the amount of tax benefits, if any, that Pluralsight, Inc. realizes, or is deemed to realize as a result of redemptions or exchanges of LLC Units. As discussed in Note 13—Income Taxes, no amounts were paid or payable to Continuing Members under the TRA as it is more-likely-than-not that the Company’s tax benefits obtained from exchanges subject to the TRA will not be realized.
Note 16. Subsequent Events
On April 30, 20182019, the Company entered into a definitive merger agreement to acquire GitPrime, Inc. (“GitPrime”), a leading developer productivity platform, in exchange for cash consideration that is expected to be approximately $170.0 million, subject to customary working capital adjustments. The acquisition is expected to close during the three months ended June 30, 2019. Upon completion of the acquisition, the Company will record the fair value of assets and 2017.liabilities acquired from GitPrime, and will record goodwill for any excess consideration transferred. The Company cannot reasonably estimate all of the effects of the acquisition on its consolidated financial statements at this time.
In April 2019, the Company invested a total of $450.0 million of its cash and cash equivalents in various money market funds, commercial paper, certificates of deposit, U.S. treasury and agency bonds, and corporate bonds. The Company expects to record these investments at fair value with unrealized gains and losses reflected in other comprehensive income (loss) on the consolidated financial statements.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Management's Discussion and Analysis of Financial Condition and Results of Operations and financial statements included in the Prospectus.our Annual Report. As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” in the Prospectus.our Annual Report.
Overview
We are a leading provider of technology skill development solutions for businesses and individuals. We enable businesses to innovate in an era of rapid technological change and digital transformation by equipping their employees with the latest technology skills. We provide businesses with visibility into the technical strengths of their workforce, allowing them to better align resources, provide targeted skill development in line with company goals, and advance the skills of individuals and teams.
We started operations in 2004 and focused initially on in-person instructor-led training. Anticipating the increasing demand for online solutions, we began offering online courses in 2008 and shifted entirely to an online delivery model in 2011. Since 2011, we have extended our offering to include new content areas and additional features that have enabled us to expand our addressable market, attract new users, and deepen our foothold within businesses. We have expanded our platform both organically through internal initiatives and through acquisitions, which have all been focused on adding capabilities to our offerings. All of our features and content areas are fully integrated into our platform, allowing a seamless and unified experience for our customers.
Our additions and improvements to our product offering have allowed us to accelerate our revenue growth and enabled us to strengthen our relationships with our business customers. We derive substantially all of our revenue from the sale of subscriptions to our platform. We sell subscriptions to our platform primarily to business customers through our direct sales team, as well as through our website. We also sell subscriptions to our platform to individual customers directly through our website. In addition, small teams often represent the “top of the funnel” for larger deployments, bringing our technology into their workplaces and proliferating usage of our platform within their companies.
We are focused on attracting businesses, particularly large enterprises, to our platform and expanding their use of our platform over time. We believe that there exists a significant opportunity to drive sales to large enterprises, including expanding relationships with existing customers and attracting new customers. Our ability to attract large enterprises to our platform and to expand their use of our platform will be important for the success of our business and our results of operations.
In May 2018, Pluralsight, Inc. completed an initial public offering, or IPO, in which it issued and sold 23,805,000 shares of Class A common stock. The price per share to the public was $15.00. We received net proceeds of $332.1 million, after deducting underwriting discounts and commissions.
In March 2019, we offered and issued $633.5 million aggregate principal amount of 0.375% convertible senior notes due in 2024, or the Notes, in a private placement to qualified institutional buyers exempt from registration under the Securities Act of 1933, as amended. We received net proceeds from the issuance of the Notes of $616.7 million after deducting the initial purchasers’ discounts and estimated issuance costs. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019. To mitigate potential dilution resulting from the issuance of the Notes, we entered into privately-negotiated capped call transactions, or Capped Calls, at the cost of $69.4 million.
In March 2019, we completed a secondary offering, in which certain stockholders sold 15,592,234 shares of Class A common stock at a public offering price of $29.25 per share. We did not receive any proceeds from the sale of shares by selling stockholders.
On April 30, 2019, we entered into a definitive merger agreement to acquire a leading provider of developer productivity software, GitPrime, Inc., or GitPrime, for cash consideration that is expected to total $170.0 million, subject to customary working capital adjustments. The acquisition is expected to close during the second quarter of 2019. We believe the acquisition will enhance our platform to measure developer productivity, which will enable technology leaders to identify talent and areas of improvement within their teams, in order to enhance skills and drive productivity.
Key Business Metrics
We monitor billings and certain related key business metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.


 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
            
 (dollars in thousands) (dollars in thousands)
Billings $72,243
 $50,005
 $192,959
 $134,917
 $77,928
 $55,419
Billings from business customers $61,143
 $39,920
 $161,018
 $105,092
 $67,156
 $45,252
% of billings from business customers 85% 80% 83% 78% 86% 82%
Billings
We use billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers and our ability to sell subscriptions to our platform to both existingnew and newexisting customers. Billings represent our total revenue plus the change in deferred revenue in the period, as presented in our condensed consolidated statements of cash flows.flows, less the change in contract assets and unbilled accounts receivable in the period. Billings in any particular period represent amounts invoiced to our customers and reflect subscription renewals and upsells to existing customers plus sales to new customers. Our pricing and subscription periods vary for business customers and individual customers. Subscription periods for our business customers generally range from one to three years, with a majority being one year. We typically invoice our business customers in advance in annual installments. Subscription periods for our individual customers range from one month to one year and we typically invoice them in advance in monthly or annual installments.


We use billings from business customers and our percentage of billings from business customers to measure and monitor our ability to sell subscriptions to our platform to business customers. We believe that billings from business customers will be a significant source of future revenue growth and a key factor affecting our long-term performance. We expect our billings from business customers to continue to increase as a percentage of billings over the long term.
As our billings continue to grow in absolute terms, we expect our billings growth rate to decline over the long term as we achieve scale in our business. As we recognize revenue from subscription fees ratably over the term of the contract, due to the difference in timing of billings received and when we recognize revenue, changes to our billings and billings growth rates are not immediately reflected in our revenue and revenue growth rates.
Components of Results of Operations
Revenue
We derive substantially all of our revenue from the sale of subscriptions to our platform. A small portion of our revenue is derived from providing professional services, which generally consist of content creation or other consulting services. Amounts that have been invoiced are initially recorded as deferred revenue and are recognized ratably as revenue over the subscription period. Subscription terms generally range from one year to three years for business customers and one month to one year for individual customers, and begin on the date access to our platform is made available to the customer. Nearly allMost of our subscriptions to business customers are billed in annual installments even if customers are contractually committed to multi-year agreements.
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue includes certain direct costs associated with delivering our platform and includes costs for author fees, amortization of our content library, hosting and delivery fees, merchant processing fees, depreciation of capitalized software development costs for internal-use software, employee-related costs, including equity-based compensation expense associated with our customer support organization, and third-party transcription costs.
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by various factors, including the mix of subscriptions we sell, the costscost of author fees, andthe costs associated with third-party hosting services, and the extent to which we expand our customer support and professional services organizations. We expect our gross margin to increase over the long term primarily due to a decrease in author fees as a percentage of revenue, although our gross margin may fluctuate from period to period depending on the interplay of the factors described above.
Operating Expenses
Our operating expenses are classified as sales and marketing, technology and content, and general and administrative. For each of these categories, the largest component is employee-related costs, which include salaries and bonuses, equity-based compensation, expense, and employee benefit costs. We allocate shared overhead costs such as information technology infrastructure and facility-related costs based on headcount in that category.
Sales and Marketing
Sales and marketing expenses consist primarily of employee compensation costs of our sales and marketing employees, including salaries, benefits, bonuses, commissions, equity-based compensation, expense, and allocated overhead costs. Commissions earned by our sales force are expensed as incurred. Other sales and


marketing costs include user events, search engine and email marketing, content syndication, lead generation, and online banner and video advertising. We expect that our sales and marketing expenses will increase in absolute dollars for the foreseeable future and, in the near term, may increase as a percentage of our revenue as we hire additional sales and marketing personnel, increase our marketing activities, and grow our domestic and international operations. Additionally, our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period depending on the timing of expenditures. However, we expect sales and marketing expenses to decrease as a percentage of revenue over the long term.
Technology and Content
Technology costs consist principally of research and development activities including personnel costs, consulting services, other costs associated with platform development efforts, and allocated overhead costs. Content costs consist principally of personnel costs and other activities associated with content development, course production, curriculum direction, and allocated overhead costs. Technology and content costs are expensed as incurred, except for certain costs relating to the development of internal-use software, including software used to upgrade and enhance our platform and applications supporting our business, which are capitalized and amortized over the estimated useful lives of one to three years. We expect that our technology and content expenses will increase in absolute dollars for the foreseeable future and, in the near term, may increase as a percentage of our revenue as we continue to increase the functionality of and enhance our platform and develop new content and features. Additionally, our technology and content expense may fluctuate as a percentage of our revenue from period to period depending on the timing of expenditures. However, we expect technology and content expenses to decrease as a percentage of revenue over the long term.


General and Administrative
General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, people operations, and administrative personnel, including salaries, benefits, bonuses, and equity-based compensation expense;compensation; professional fees for external legal, accounting, recruiting, and other consulting services; and allocated overhead costs. We are incurring additional general and administrative expenses as a result of operating as a public company and our UP-C structure, including additional expenses related to compliance with the rules and regulations of the SEC, additional insurance expenses, investor relations activities, and professional services. In addition, we expect to increase the size of our general and administrative function to support our increased compliance requirements and the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars for the foreseeable future and, in the near term, may increase as a percentage of our revenue. Additionally, our general and administrative expenses may fluctuate as a percentage of our revenue from period to period depending on the timing of expenditures. However, we expect general and administrative expenses to decrease as a percentage of revenue over the long term.
Other (Expense) Income
Other (expense) income consists primarily of interest expense on the Notes and other long-term debt, gains or losses on foreign currency transactions, and interest income earned on our cash and cash equivalents. We repaid our long-term debt following the completion of the IPO, and as a result, interest expense has significantly decreased.


Results of Operations
The following tables set forth selected unaudited condensed consolidated statements of operations data and such data as a percentage of revenue for each of the periods indicated:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
            
 (in thousands) (in thousands)
Revenue $61,553
 $43,286
 $164,769
 $119,416
 $69,617
 $49,644
Cost of revenue(1)(2)
 15,331
 12,582
 46,107
 35,678
 16,705
 14,886
Gross profit 46,222
 30,704
 118,662
 83,738
 52,912
 34,758
Operating expenses(1)(2):
 
 
 
 
    
Sales and marketing 41,392
 29,410
 109,792
 70,254
 44,050
 29,467
Technology and content 17,227
 12,448
 47,045
 33,979
 20,032
 13,325
General and administrative 17,398
 19,094
 48,138
 34,773
 21,809
 11,292
Total operating expenses 76,017
 60,952
 204,975
 139,006
 85,891
 54,084
Loss from operations (29,795) (30,248) (86,313) (55,268) (32,979) (19,326)
Other (expense) income: 
 
 
 
    
Interest expense (342) (3,252) (6,476) (8,376) (2,024) (3,710)
Loss on debt extinguishment —
 —
 (4,085) (1,882)
Other income, net 654
 55
 689
 124
Other income (expense), net 1,614
 (13)
Loss before income taxes (29,483) (33,445) (96,185) (65,402) (33,389) (23,049)
Provision for income taxes (254) (90) (506) (216) (154) (109)
Net loss $(29,737) $(33,535) $(96,691) $(65,618) $(33,543) $(23,158)



(1)Includes equity-based compensation expense as follows:
 Three Months Ended September 30,��Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
            
 (in thousands) (in thousands)
Cost of revenue $40
 $5
 $86
 $15
 $79
 $—
Sales and marketing 4,372
 631
 9,343
 2,010
 6,195
 539
Technology and content 2,790
 499
 5,839
 1,489
 3,498
 381
General and administrative 8,842
 11,762
 21,704
 15,474
 9,834
 2,453
Total equity-based compensation $16,044
 $12,897
 $36,972
 $18,988
 $19,606
 $3,373
(2)Includes amortization of acquired intangible assets as follows:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
            
 (in thousands) (in thousands)
Cost of revenue $880
 $1,642
 $6,803
 $4,926
 $525
 $2,962
Sales and marketing —
 161
 389
 483
 —
 195
Technology and content 176
 176
 529
 528
 177
 176
General and administrative —
 27
 —
 81
Total amortization of acquired intangible assets $1,056
 $2,006
 $7,721
 $6,018
 $702
 $3,333
 Three Months Ended March 31,
 Three Months Ended September 30, Nine Months Ended September 30, 2019 2018
 2018 2017 2018 2017    
Revenue 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenue 25
 29
 28
 30
 24
 30
Gross profit 75
 71
 72
 70
 76
 70
Operating expenses: 
 
 
 
    
Sales and marketing 67
 68
 67
 59
 63
 59
Technology and content 28
 29
 29
 28
 29
 27
General and administrative 28
 44
 29
 29
 31
 23
Total operating expenses 123
 141
 125
 116
 123
 109
Loss from operations (48) (70) (53) (46) (47) (39)
Other (expense) income: 
 
 
 
    
Interest expense (1) (8) (4) (7) (3) (7)
Loss on debt extinguishment —
 —
 (2) (2)
Other income, net 1
 —
 —
 —
Other income (expense), net 2
 —
Loss before income taxes (48) (78) (59) (55) (48) (46)
Provision for income taxes —
 —
 —
 —
 —
 —
Net loss (48)% (78)% (59)% (55)% (48)% (46)%
Comparison of the Three Months Ended September 30,March 31, 2019 and 2018 and 2017
Revenue
  Three Months Ended September 30, Change
  2018 2017 Amount %
         
  (dollars in thousands)
Revenue $61,553
 $43,286
 $18,267
 42%


  Three Months Ended March 31, Change
  2019 2018 Amount %
         
  (dollars in thousands)
Revenue $69,617
 $49,644
 $19,973
 40%
Revenue was $61.6$69.6 million for the three months ended September 30, 2018,March 31, 2019, compared to $43.3$49.6 million for the three months ended September 30, 2017,March 31, 2018, an increase of $18.3$20.0 million, or 42%40%. The increase in revenue was primarily due to a $17.8$19.7 million, or 55%51%, increase in revenue from business customers, driven by an increase of 2,2982,383 business customers from 13,88714,830 business customers as of September 30, 2017March 31, 2018 to 16,18517,213 business customers as of September 30, 2018,March 31, 2019, as well as increased sales to our existing business customers. In addition, there was an increase of $0.5$0.3 million in revenue from individual customers.


Cost of Revenue and Gross Profit
 Three Months Ended September 30, Change Three Months Ended March 31, Change
 2018 2017 Amount % 2019 2018 Amount %
                
 (dollars in thousands) (dollars in thousands)
Cost of revenue $15,331
 $12,582
 $2,749
 22% $16,705
 $14,886
 $1,819
 12%
Gross profit 46,222
 30,704
 15,518
 51% 52,912
 34,758
 18,154
 52%
Cost of revenue was $15.3$16.7 million for the three months ended September 30, 2018,March 31, 2019, compared to $12.6$14.9 million for the three months ended September 30, 2017,March 31, 2018, an increase of $2.7$1.8 million, or 22%12%. The increase in cost of revenue was primarily due to an increase of $2.3$3.0 million in author fees and an increase of $0.4 million in depreciation of capitalized software development costs, and an increase of $0.3 million in hosting and delivery fees to accommodate our growing customer base.costs. These increases were partially offset by a decrease of $0.6$2.3 million in amortization of acquired intangible assets and course creation costs.
Gross profit was $46.2$52.9 million for the three months ended September 30, 2018,March 31, 2019, compared to $30.7$34.8 million for the three months ended September 30, 2017,March 31, 2018, an increase of $15.5$18.2 million, or 51%52%. The increase in gross profit was the result of the increase in our revenue during the three months ended September 30, 2018.March 31, 2019. Gross margin increased from 71%70% for the three months ended September 30, 2017March 31, 2018 to 75%76% for the three months ended September 30, 2018. The increase in gross margin wasMarch 31, 2019 due to a decrease in amortization of acquired intangible assets from $1.6 million for the three months ended September 30, 2017 to $0.9 million for the three months ended September 30, 2018. The remaining increase was due to general improvementsand a decrease in efficiencyauthor fees as the growth in revenue exceeded the growth in costs.a percentage of revenue.
Operating Expenses
 Three Months Ended September 30, Change Three Months Ended March 31, Change
 2018 2017 Amount % 2019 2018 Amount %
                
 (dollars in thousands) (dollars in thousands)
Sales and marketing $41,392
 $29,410
 $11,982
 41 % $44,050
 $29,467
 $14,583
 49%
Technology and content 17,227
 12,448
 4,779
 38 % 20,032
 13,325
 6,707
 50%
General and administrative 17,398
 19,094
 (1,696) (9)% 21,809
 11,292
 10,517
 93%
Total operating expenses $76,017
 $60,952
 
 
 $85,891
 $54,084
 $31,807
 59%
Sales and Marketing
Sales and marketing expenses were $41.4$44.1 million for the three months ended September 30, 2018,March 31, 2019, compared to $29.4$29.5 million for the three months ended September 30, 2017,March 31, 2018, an increase of $12.0$14.6 million, or 41%49%. The increase was primarily due to an increase of $11.7$14.1 million in employee compensation costs, including $3.7$5.7 million in equity-based compensation, expense, as we added headcount to support our growth. In addition, there was an increase of $1.7$2.0 million related to allocated overhead costs primarily driven by our headcount growth, and an increase of $1.0$0.4 million due to additional travel expenses related to additional headcount. These increases were partially offset by a decrease of $2.2$1.5 million in certain marketing and event costs.expenses as a result of optimizing our digital marketing expenditures to more efficient channels.
Technology and Content
Technology and content expenses were $17.2$20.0 million for three months ended September 30, 2018,March 31, 2019, compared to $12.4$13.3 million for the three months ended September 30, 2017,March 31, 2018, an increase of $4.8$6.7 million, or 38%50%. The increase was primarily due to an increase of $4.8$7.1 million in employee compensation costs, including $2.3$3.1 million in equity-based compensation, expense, as we added headcount to support our growth. In addition, there was an increase of $0.3 million related to allocated overhead costs primarily driven by our headcount growth. These increases were partially offset by a $0.6 million increase in capitalized software development costs.
General and Administrative
General and administrative expenses were $17.4$21.8 million for the three months ended September 30, 2018,March 31, 2019, compared to $19.1$11.3 million for the three months ended September 30, 2017, a decreaseMarch 31, 2018, an increase of $1.7$10.5 million, or 9%93%. The decreaseincrease was primarily due


to a decreasean increase of $2.7$8.3 million in employee compensation costs, including $2.9$7.4 million less in equity-based compensation expense. These decreases were primarily due to equity-based compensation charges during the three months ended September 30, 2017 of $9.9 million associated with the sale of common units held by an affiliate of one of our co-founders to certain existing investors at a price in excess of fair value. These decreases were partially offset bycompensation. In addition, there was an increase of $7.2 million in employee compensation costs due to additional headcount to support our growth and ongoing costs as a public company, an increase of $0.6$1.2 million related to allocated overhead costs primarily driven by our headcount growth, and an increase of $0.2$0.9 million due to additional travel expenses related to additional headcount.costs associated with a secondary offering.



Other (Expense) Income
 Three Months Ended September 30, Change Three Months Ended March 31, Change
 2018 2017 Amount % 2019 2018 Amount %
                
 (dollars in thousands) (dollars in thousands)
Interest expense $(342) $(3,252) $2,910
 (89)% $(2,024) $(3,710) $1,686
 (45)%
Other income, net 654
 55
 599
 1,089 %
Other income (expense), net 1,614
 (13) 1,627
 NM
Interest expense decreased primarily as a result of our repayment of long-term debt in May 2018. This decrease was partially offset by the increase in interest expense and amortization of debt discount and issuance costs related to the Notes issued in March 2019.
Other income (expense), net was $0.7 million forincreased primarily as a result of the three months ended September 30, 2018, compared to $0.1 million for three months ended September 30, 2017, an increase of $0.6 million. The increase was primarily due to additional interest income earned from our increased cash and cash equivalents as a result of net proceeds from our IPO.
ComparisonIPO and the issuance of the Nine Months Ended September 30, 2018 and 2017
Revenue
  Nine Months Ended September 30, Change
  2018 2017 Amount %
         
  (dollars in thousands)
Revenue $164,769
 $119,416
 $45,353
 38%
Revenue was $164.8 million for the nine months ended September 30, 2018, compared to $119.4 million for the nine months ended September 30, 2017, an increase of $45.4 million, or 38%. The increase in revenue was primarily due to a $44.0 million, or 50%, increase in revenue from business customers, driven by an increase of 2,298 business customers from 13,887 business customers as of September 30, 2017 to 16,185 business customers as of September 30, 2018, as well as increased sales to our existing business customers. In addition, there was an increase of $1.4 million in revenue from individual customers.
Cost of Revenue and Gross Profit
  Nine Months Ended September 30, Change
  2018 2017 Amount %
         
  (dollars in thousands)
Cost of revenue $46,107
 $35,678
 $10,429
 29%
Gross profit 118,662
 83,738
 34,924
 42%
Cost of revenue was $46.1 million for the nine months ended September 30, 2018, compared to $35.7 million for the nine months ended September 30, 2017, an increase of $10.4 million, or 29%. The increase in cost of revenue was primarily due to an increase of $5.5 million in author fees, an increase of $2.3 million in amortization of acquired intangible assets and course creation costs, an increase of $0.9 million in depreciation of capitalized software development costs primarily due to an increase in amounts capitalized for internal-use software related to features added to our platform, and an increase of $0.6 million in hosting and delivery fees to accommodate our growing customer base.
Gross profit was $118.7 million for the nine months ended September 30, 2018, compared to $83.7 million for the nine months ended September 30, 2017, an increase of $34.9 million, or 42%. The increase in gross profit was the result of the increase in our revenue during the nine months ended September 30, 2018. Gross margin increased from 70% for the nine months ended September 30, 2017 to 72% for the nine months ended September 30, 2018.


Operating Expenses
  Nine Months Ended September 30, Change
  2018 2017 Amount %
         
  (dollars in thousands)
Sales and marketing $109,792
 $70,254
 $39,538
 56%
Technology and content 47,045
 33,979
 13,066
 38%
General and administrative 48,138
 34,773
 13,365
 38%
Total operating expenses $204,975
 $139,006
 
 
Sales and Marketing
Sales and marketing expenses were $109.8 million for the nine months ended September 30, 2018, compared to $70.3 million for the nine months ended September 30, 2017, an increase of $39.5 million, or 56%. The increase was primarily due to an increase of $34.1 million in employee compensation costs, including an increase in equity-based compensation expense of $7.3 million, as we added headcount to support our growth. Of the increase in equity-based compensation expense, approximately $1.6 million was related to a cumulative catch-up adjustment recorded upon completion of the IPO as the vesting condition for certain RSUs satisfied by the expiration of the lock-up period following the IPO became probable. In addition, there was an increase of $3.4 million related to allocated overhead costs driven by our headcount growth and an increase of $2.1 million due to additional travel expenses related to additional headcount. These increases were partially offset by a decrease of $1.2 million in marketing and event costs.
Technology and Content
Technology and content expenses were $47.0 million for the nine months ended September 30, 2018, compared to $34.0 million for the nine months ended September 30, 2017, an increase of $13.1 million, or 38%. The increase was primarily due to an increase of $12.0 million in employee compensation costs, including an increase in equity-based compensation expense of $4.4 million, as we added headcount to support our growth. Of the total increase in equity-based compensation expense, approximately $0.9 million was related to a cumulative catch-up adjustment recorded upon completion of the IPO as the vesting condition for certain RSUs satisfied by the expiration of the lock-up period following the IPO became probable. In addition, there was an increase of $1.1 million related to allocated overhead costs primarily driven by our headcount growth and an increase of $0.4 million in depreciation expense of property and equipment. These increases were offset by an increase of $0.7 million in capitalized software development costs.
General and Administrative
General and administrative expenses were $48.1 million for the nine months ended September 30, 2018, compared to $34.8 million for the nine months ended September 30, 2017, an increase of $13.4 million, or 38%. The increase was primarily due to an increase of $9.6 million in employee compensation costs, including $6.2 million in equity-based compensation expense, primarily due to additional headcount to support our growth. Of the total increase in equity-based compensation expense, approximately $5.3 million was related to a cumulative catch-up adjustment recorded upon completion of the IPO as the vesting condition for certain RSUs satisfied by the expiration of the lock-up period following the IPO became probable. In addition, there was an increase of $2.6 million related to allocated overhead costs primarily driven by our headcount growth and an increase of $0.5 million due to additional travel expenses related to increased headcount.
Other (Expense) Income
  Nine Months Ended September 30, Change
  2018 2017 Amount %
         
  (dollars in thousands)
Interest expense $(6,476) $(8,376) $1,900
 (23)%
Loss on debt extinguishment (4,085) (1,882) (2,203) 117 %
Other income, net 689
 124
 565
 456 %
Interest expense decreased primarily as a result of our repayment of long-term debt in May 2018. In connection with the repayment, we incurred a loss on debt extinguishment of $4.1 million.


Other income, net was $0.7 million for the nine months ended September 30, 2018, compared to $0.1 million for nine months ended September 30, 2017, an increase of $0.6 million. The increase was primarily due to additional interest income earned from our increased cash equivalents as a result of net proceeds from our IPO.Notes.
Non-GAAP Financial Measures
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
            
 (dollars in thousands) (dollars in thousands)
Non-GAAP gross profit $47,142
 $32,351
 $125,551
 $88,679
 $53,519
 $37,720
Non-GAAP gross margin 77% 75% 76% 74% 77% 76%
Non-GAAP operating loss $(12,695) $(15,345) $(41,620) $(30,262) $(10,309) $(12,620)
Free cash flow $(909) $(8,840) $(23,204) $(17,044) $2,470
 $(13,061)
Non-GAAP Gross Profit and Non-GAAP Gross Margin
Non-GAAP gross profit is a non-GAAP financial measure that we define as gross profit plus equity-based compensation, and amortization related toof acquired intangible assets.assets, and employer payroll taxes on employee stock transactions. We define non-GAAP gross margin as our non-GAAP gross profit divided by our revenue. We believe non-GAAP gross profit and non-GAAP gross margin are useful to investors as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses. We believe these non-GAAP measures are useful in evaluating our operating performance compared to that of other companies in our industry, as these metrics generally eliminate the effects of certain non-cash items that may vary from company to company for reasons unrelated to overall profitability.profitability or operating performance.
See the section below titled “—Reconciliation of Non-GAAP Financial Measures” for information regarding the limitations of using our non-GAAP gross profit and non-GAAP gross margin as financial measures and for a reconciliation of our non-GAAP gross profit to gross profit, the most directly comparable financial measure calculated in accordance with GAAP.
Non-GAAP Operating Loss
Non-GAAP operating loss is a non-GAAP financial measure that we define as loss from operations plus equity-based compensation, and amortization related toof acquired intangible assets.assets, employer payroll taxes on employee stock transactions, and secondary offering costs. We believe non-GAAP operating loss provides investors with useful information on period-to-period performance as evaluated by management and comparison with our past financial performance. We believe non-GAAP operating loss is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance.
See the section below titled “—Reconciliation of Non-GAAP Financial Measures” for information regarding the limitations of using our non-GAAP operating loss as a financial measure and for a reconciliation of our non-GAAP operating loss to loss from operations, the most directly comparable financial measure calculated in accordance with GAAP.
Free Cash Flow
We define free cash flow as net cash used in operating activities less purchases of property and equipment and purchases of our content library and other intangible assets. We consider free cash flow to be an important measure because it measures the amount of cash we spend or generate and reflects changes in our working capital. For the three months ended September 30, 2017, and the nine months ended September 30, 2018 and 2017, our free cash flow included cash paid for interest on our long-term debt of $2.1 million, $4.3 million, and $4.7 million, respectively. We repaid all amounts outstanding under our credit facilities in May 2018, and therefore have eliminated cash paid for interest on our long-term debt. For each of the periods presented, our free cash flow was negative as a result of our continued investments to support the growth of our business. We expect our free cash flow to improve as we experience greater scale in our business and improve operational efficiency. We expect to generate positive free cash flow over the long term.
See the section below titled “—Reconciliation of Non-GAAP Financial Measures” for information regarding the limitations of using free cash flow as a financial measure and for a reconciliation of free cash flow to net cash used in operations, the most directly comparable financial measure calculated in accordance with GAAP.


Reconciliation of Non-GAAP Financial Measures
We use non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating loss, and free cash flow in conjunction with traditional GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of


directors concerning our financial performance. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating loss, and free cash flow should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.
We compensate for these limitations by providing a reconciliation of non-GAAP gross profit, non-GAAP operating loss, and free cash flow to the related GAAP financial measures, gross profit, loss from operations, and net cash used in operating activities, respectively. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating loss, and free cash flow in conjunction with their respective related GAAP financial measures.
The following table provides a reconciliation of gross profit to non-GAAP gross profit:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
            
 (dollars in thousands) (dollars in thousands)
Gross profit $46,222
 $30,704
 $118,662
 $83,738
 $52,912
 $34,758
Equity-based compensation 40
 5
 86
 15
 79
 —
Amortization of acquired intangible assets 880
 1,642
 6,803
 4,926
 525
 2,962
Employer payroll taxes on employee stock transactions 3
 —
Non-GAAP gross profit $47,142
 $32,351
 $125,551
 $88,679
 $53,519
 $37,720
Gross margin 75% 71% 72% 70% 76% 70%
Non-GAAP gross margin 77% 75% 76% 74% 77% 76%
The following table provides a reconciliation of loss from operations to non-GAAP operating loss:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
            
 (in thousands) (in thousands)
Loss from operations $(29,795) $(30,248) $(86,313) $(55,268) $(32,979) $(19,326)
Equity-based compensation 16,044
 12,897
 36,972
 18,988
 19,606
 3,373
Amortization of acquired intangible assets 1,056
 2,006
 7,721
 6,018
 702
 3,333
Employer payroll taxes on employee stock transactions 1,444
 —
Secondary offering costs 918
 —
Non-GAAP operating loss $(12,695) $(15,345) $(41,620) $(30,262) $(10,309) $(12,620)
The following table provides a reconciliation of net cash used inprovided by (used in) operating activities to free cash flow:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
            
 (in thousands) (in thousands)
Net cash provided by (used in) operating activities $1,934
 $(6,866) $(14,283) $(10,816) $5,540
 $(10,424)
Less: Purchases of property and equipment (2,002) (1,434) (6,576) (4,459) (2,133) (1,868)
Less: Purchases of content library (841) (540) (2,345) (1,769) (937) (769)
Free cash flow $(909) $(8,840) $(23,204) $(17,044) $2,470
 $(13,061)

Liquidity and Capital Resources
As of September 30, 2018,March 31, 2019, our principal sources of liquidity were cash, cash equivalents, and restricted cash totaling $209.4$764.4 million, which were held for working capital purposes. Our cash equivalents are comprised primarily of money market funds. Since our inception, we have financed our operations primarily through private sales of equity securities, long-term debt facilities, and


our net cash provided by operating activities. In May 2018, Pluralsight, Inc. completed an IPO, in which it issued and sold 23,805,000 shares of Class A common stock at a price of $15.00 per share. We received net proceeds of $332.1 million, after underwriting discounts and commissions.
Following We used the proceeds from our IPO we repaidto repay our outstanding long-term debt of $137.7 million. In March 2019, we received net proceeds of $616.7 million from the issuance of the Notes after deducting the initial purchasers' discounts and incurred a loss on debt extinguishmentestimated issuance costs. We used $69.4 million of $4.1 million in connection with the repayment.


Forproceeds to purchase the three and nine months ended September 30, 2018 and 2017, our free cash flow was negative as a resultCapped Calls to reduce or offset potential dilution from the conversion of our continued investments to support the growth of our business.Notes. We expect our free cash flow to improve as we experience greater scaleuse the remainder of the proceeds for general corporate purposes including investments in our business and improve operational efficiency,short-term marketable securities as well as eliminate cash paid for interest as a resultthe acquisition of, or investment in, complementary products technologies, solutions, or businesses, including the debt repayment in May 2018.acquisition of GitPrime. We expect to generate positive free cash flow overcomplete the long term.acquisition of GitPrime during the second quarter of 2019 and we expect the total purchase consideration to be approximately $170.0 million, subject to customary working capital adjustments.
We believe our existing cash, cash equivalents, and restricted cash, as well as our projected cash flows from operations, will be sufficient to meet our projected operating requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support the expansion of sales and marketing activities, technology and content efforts, and the continuing market acceptance of our platform.platform, and future acquisitions. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected.
In connection with the IPO and our UP-C structure, we entered into the TRA with members of Pluralsight Holdings who did not exchange their LLC Units of Pluralsight Holdings in the Reorganization Transactions, or the TRA Members. As a result of the TRA, we will be obligated to pass along certain tax benefits and cash flows by making future payments to the TRA Members. Although the actual timing and amount of any payments we make to the TRA Members under the TRA will vary, such payments may be significant. Any payments we make to TRA Members under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us and, to the extent that we are unable to make payments under the TRA for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us.
The following table shows cash flows for the ninethree months ended September 30, 2018March 31, 2019 and 2017:2018:
 Nine Months Ended September 30, Three Months Ended March 31,
 2018 2017 2019 2018
        
 (in thousands) (in thousands)
Net cash used in operating activities $(14,283) $(10,816)
Net cash provided by (used in) operating activities $5,540
 $(10,424)
Net cash used in investing activities (8,921) (6,228) (3,070) (2,637)
Net cash provided by financing activities 204,242
 29,311
 550,848
 17,647
Effect of exchange rate change on cash, cash equivalents, and restricted cash (136) 38
 26
 9
Net increase in cash, cash equivalents, and restricted cash $180,902
 $12,305
 $553,344
 $4,595
Operating Activities
Cash used inprovided by operating activities for the ninethree months ended September 30, 2018March 31, 2019 of $14.3$5.5 million was primarily due to a net loss of $96.7$33.5 million, partially offset by equity-based compensation of $37.0$19.6 million, a favorable change in operating assets and liabilities of $24.1$8.7 million, amortization of deferred contract acquisition costs of $5.9 million, depreciation of property and equipment of $2.1 million, amortization of debt discount and debt issuance costs of $1.5 million, amortization of acquired intangible assets of $7.7$0.7 million, and amortization of course creation costs of $1.4 million, and depreciation of property and equipment of $6.3$0.6 million. The net change in operating assets and liabilities was primarily due to a decrease in accounts receivable of $11.4 million, an increase in the deferred revenue balance of $28.2$8.3 million, an increase in accounts payable of $1.0 million, and an increase in accrued expenses and other liabilitiesauthor fees of $6.9$0.7 million, partially offset by an increase in accounts receivabledeferred contract acquisition costs of $10.4$5.9 million, a decrease in accrued expenses of $5.0 million, and an increase in prepaid expenses and other assets of $3.0$1.9 million.
Cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2018 of $10.8$10.4 million was primarily due to a net loss of $65.6$23.2 million, partially offset by equity-based compensation of $3.4 million, amortization of acquired intangible assets of $3.3 million, a favorable change in operating assets and liabilities of $22.0 million, equity-based compensation of $19.0 million, amortization of acquired intangible assets of $6.0$2.3 million, depreciation of property and equipment of $4.4$2.2 million, and amortization of course creation costs of $1.1$0.4 million. The net change in operating assets and liabilities was primarily due to an increasea decrease in accounts receivable of $6.8 million and a favorable change in the deferred revenue balance of $15.5 million, an increase in accrued expenses and other liabilities of $8.7 million, and an increase in accounts payable of $2.4$5.8 million, partially offset by an increasea decrease in prepaidaccrued expenses of $3.2 million and an increase in accounts receivable of $2.7$10.2 million.
Investing Activities
Cash used in investing activities for the ninethree months ended September 30, 2018March 31, 2019 of $8.9$3.1 million related to purchases of property and equipment of $6.6$2.1 million and purchases of our content library of $2.3$0.9 million.


Cash used in investing activities for the ninethree months ended September 30, 2017March 31, 2018 of $6.2$2.6 million was primarily related to purchases of property and equipment of $4.5$1.9 million and purchases of our content library and intangible assets of $1.8$0.8 million.
Financing Activities
Cash provided by financing activities for the ninethree months ended September 30, 2018March 31, 2019 of $204.2$550.8 million was due to net proceeds from the IPOissuance of $332.1the Notes of $617.7 million and proceeds from the issuance of common stock from employee equity plans of $2.6 million, partially offset by the purchase of the Capped Calls of $69.4 million.
Cash provided by financing activities for the three months ended March 31, 2018 of $17.6 million was due to borrowings of long-term debt of $20.0 million, partially offset by repayments of


long-term debt of $137.7 million, payments of deferred offering costs related to the IPO of $7.1 million, and payments of debt extinguishment costs of $2.2 million.
Cash provided by financing activities for the nine months ended September 30, 2017 of $29.3 million was due to borrowings of long-term debt of $115.0 million and proceeds from the issuance of common units of $3.1 million, partially offset by repayments of long-term debt of $85.0 million, redemption of incentive units of $2.8$1.9 million, and payments of debt issuance costs of $0.8$0.5 million.
Commitments and Contractual Obligations
A portionIn March 2019, we offered and issued $633.5 million aggregate principal amount of 0.375% Notes due in 2024 in a private placement to qualified institutional buyers exempt from registration under the Securities Act of 1933, as amended. We received net proceeds from the IPO were used to repayissuance of the outstanding principal balanceNotes of $137.7$616.7 million under our credit agreement with Guggenheim Corporate Funding LLC, orafter deducting the Guggenheim Credit Agreement,initial purchasers’ discounts and extinguishestimated issuance costs. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2019. To mitigate potential dilution resulting from the debt in May 2018. The Company incurred a loss on debt extinguishmentissuance of $4.1 million in connection with the repayment.Notes, we entered into the Capped Calls at the cost of $69.4 million.
In August 2018,On April 30, 2019, we entered into a new non-cancellable operating leasedefinitive merger agreement to rent office spaceacquire of GitPrime in exchange for our future headquarters to be constructed in Draper, Utah for a period of 15 years beginning on the earlier to occur of the datecash consideration that we open for business in the leased premises or the commencement date of June 24, 2020 (which date may be extended by construction delays). We will pay basic annual rent in monthly installments beginning on the rent commencement date. The annual rent amount will be determined based on the cost of construction of the premises. Based on the current estimate of the cost of construction, the basic rent amount for the first year is expected to be $7.9approximately $170.0 million, andsubject to customary working capital adjustments. The acquisition is expected to close during the annual rent amount will increase by two percent each year following the rent commencement date. In the event the costs incurred by the landlord exceed the agreed upon costsecond quarter of construction, the landlord may elect to pay such amounts and add such amounts to the cost of construction and increase the basic rent amount or require us to pay such amounts. The landlord has agreed to an abatement of basic rent payments at the commencement of the initial lease term of up to approximately $3.2 million.2019.
Outside of the repayment ofNotes, the debt outstanding under the Guggenheim Credit Agreement, the non-cancellable lease discussed above,merger agreement with GitPrime, and routine transactions made in the ordinary course of business, there have been no material changes to the contractual obligations as disclosed in the Prospectus.our Annual Report on Form 10-K. Refer to "Note 8—Convertible Senior Notes and Other Long-Term Debt" and "Note 9—Commitments and Contingencies" of our unaudited condensed consolidating financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding our commitments and contractual obligations.
Off-Balance Sheet Arrangements
Through September 30, 2018,March 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies and estimates are those that we consider critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
The Company's significant accounting policies are discussed in "Index to the Consolidated Financial Statements—Description of Business and "Note 2—Summary of Significant Accounting Policies"Policies and Recent Accounting Pronouncements" in the Prospectus.our Annual Report on Form 10-K. There have been no significant changes to these policies for the three months ended September 30, 2018,March 31, 2019, except as noted in "Note 2—Summary of Significant Accounting Policies" of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
JOBS Act Accounting Election
We meet the definition of an emerging growth company under the Jumpstart Our Business Startups Act of 2012, which permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies.


Recent Accounting Pronouncements
See "Note 2—Summary of Significant Accounting Policies" of our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of business. Our market risk is primarily a result of fluctuations in foreign currency exchange rates and variable interest rates.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound Sterling, Euro, Swedish Krona, Australian Dollar, Singapore Dollar, Canadian Dollar, and Indian Rupee. Due to the relative size of our international operations to date, our foreign currency exposure has been fairly limited and thus we have not instituted a hedging program. We expect our international operations to continue to grow in the near term and we are continually monitoring our foreign currency exposure to determine when we should begin a hedging program. Today, our international contracts are mostly denominated in U.S. dollars, while our international operating expenses are often denominated in local currencies. In the future, we plan to begin denominating certain of our international contracts in local currencies, and over time, an increasing portion of our international contracts may be denominated in local currencies. Additionally, as we expand our international operations a larger portion of our operating expenses will be denominated in local currencies. Therefore, fluctuations in the value of the U.S. dollar and foreign currencies may affect our results of operations when translated into U.S. dollars. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical condensed consolidated financial statements for any of the periods presented.
Interest Rate Sensitivity
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. As of September 30, 2018,March 31, 2019, we had cash, cash equivalents, and restricted cash of $209.4$764.4 million, which consisted primarily of bank deposits and money market funds. Such interest-earning instruments carry a degree of interest rate risk; however, historical fluctuations of interest income have not been significant.
In March 2019, we offered and issued $633.5 million aggregate principal amount of Notes. The Notes have a fixed annual interest rate of 0.375%, and, therefore, we do not have economic interest rate exposure on the Notes. However, the values of the Notes are exposed to interest rate risk. Generally, the fair value of our fixed interest rate Notes will increase as interest rates fall and decrease as interest rates rise. We carry the Notes as face value less unamortized discount on our balance, and we present the fair value for required disclosure purposes only.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a–15(e) and Rule 15d–15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018.March 31, 2019. Based on the evaluation of our disclosure controls and procedures as of September 30, 2018,March 31, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control


system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur


because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur and not be detected.


PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, subject to legal proceedings and claims arising from the normal course of business activities, and an unfavorable resolution of any of these matters could materially affect our future business, results of operations, financial condition, and cash flows.
Future litigation may be necessary, among other things, to defend ourselves or our users by determining the scope, enforceability, and validity of third-party proprietary rights or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
For a discussion of potential risks and uncertainties, see the information in the section titled "Risk Factors" in our Annual Report on Form 10-K filed with the Prospectus.SEC on February 21, 2019. The following risk factors, related to the issuance of our Notes in March 2019, supplement and should be read in conjunction with those addressed in our Annual Report on Form 10-K.
Servicing our future debt may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our indebtedness.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, any of our future debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of our debt.
We may still incur substantially more debt or take other actions which would intensify the risks discussed above.
We and our subsidiaries may incur substantial additional debt in the future, some of which may be secured debt. We will not be restricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing debt, or taking a number of other actions that are not limited by the terms of the indenture governing the Notes that could have the effect of diminishing our ability to make payments on the Notes when due.
We may not have the ability to raise the funds necessary to make periodic interest payments, pay the principal amount at maturity, settle conversions of the Notes in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion of the Notes or to repurchase the Notes.
Holders of the Notes will have the right to require us to repurchase their Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. Moreover, we will be required to repay the Notes in cash at their maturity unless earlier converted, redeemed or repurchased. Our ability to meet our obligations to holders of the Notes will depend on the earnings and cash flows of Pluralsight Holdings. However, if Pluralsight Holdings does not provide cash to us to meet our obligations under the Notes, we may not have enough available cash on hand or be able to obtain financing at the time we are required to make payments with respect to notes at maturity, upon surrender for repurchase or upon conversion. In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes or at maturity may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Notes at a time when the repurchase is required by the indenture governing the Notes or to pay any cash payable on future conversions of the Notes or at maturity as required by such indenture would constitute a default under such indenture. A default under the indenture or upon a fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof.

The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Conversion of the Notes may dilute the ownership interest of our stockholders or may otherwise depress the price of our Class A common stock.
The conversion of some or all of the Notes may dilute the ownership interests of our stockholders. Upon conversion of the Notes, we have the option to pay or deliver, as the case may be, cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock. If we elect to settle our conversion obligation in shares of our Class A common stock or a combination of cash and shares of our Class A common stock, any sales in the public market of our Class A common stock issuable upon such conversion could adversely affect prevailing market prices of our Class A common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our Class A common stock could depress the price of our Class A common stock.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
Under FASB Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. ASC 470-20 requires the value of the conversion option of the Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders’ equity in our condensed consolidated balance sheet and as a discount to the Notes, which reduces their initial carrying value. The carrying value of the Notes, net of the discount recorded, will be accreted up to the principal amount of the Notes from the issuance date until maturity, which will result in non-cash charges to interest expense in our condensed consolidated statement of operations. Accordingly, we will report lower net income or higher net loss in our financial results because ASC 470-20 requires interest to include both the current period’s accretion of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our Class A common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount, and the effect of the conversion on diluted earnings per share is not antidilutive. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of Class A common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share could be adversely affected.
Certain provisions in the indenture governing the Notes may delay or prevent an otherwise beneficial takeover attempt of us.
Certain provisions in the indenture governing the Notes may make it more difficult or expensive for a third party to acquire us. For example, the indenture governing the Notes will require us to repurchase the Notes for cash upon the occurrence of a fundamental change (as defined in the indenture governing the notes) of us and, in certain circumstances, to increase the conversion rate for a holder that converts its Notes in connection with a make-whole fundamental change. A takeover of us may trigger the requirement that we repurchase the Notes and/or increase the conversion rate, which could make it more costly for a potential acquirer to engage in such takeover. Such additional costs may have the effect of delaying or preventing a takeover of us that would otherwise be beneficial to investors.
The capped call transactions may affect the value of the Notes and our Class A common stock.
In connection with the capped call transactions, the counterparties, or their respective affiliates, may purchase shares of our Class A common stock, and/or enter into or modify various derivative transactions with respect to our Class A common stock or

other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause or prevent an increase or a decrease in the market price of our Class A common stock or the Notes.
We are subject to counterparty risk with respect to the capped call transactions.
The counterparties to the capped call transactions are financial institutions, and we will be subject to the risk that one or more of the counterparties may default or otherwise fail to perform, or may exercise certain rights to terminate, their obligations under the capped call transactions. Our exposure to the credit risk of the counterparties will not be secured by any collateral. Recent global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If a counterparty to one or more capped call transaction becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our Class A common stock increases. In addition, upon a default or other failure to perform, or a termination of obligations, by a counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our Class A common stock. We can provide no assurances as to the financial stability or viability of the counterparties.
We have broad discretion to use the net proceeds from the Notes, which we may not use effectively.
In connection with the Notes, we entered into capped call transactions with certain financial institutions and we used a portion of the net proceeds to pay the cost of the capped call transactions. We provided the remainder of the net proceeds from the Notes to Pluralsight Holdings to be used for working capital and other general corporate purposes, as well as the acquisition of, or investment in, complementary products, technologies, solutions, or businesses. The net proceeds from that offering may be invested with a view towards long-term benefits for our stockholders and this may not increase our results of operations or market value. The failure by our management to apply those funds effectively may adversely affect our operations or business prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds from Public Offering of Common StockConvertible Senior Notes

On May 21, 2018,In March 2019, we closedcompleted our private placement of $633.5 million aggregate principal of Notes, including the IPO,exercise in which we sold 23,805,000 shares of Class A common stock at a price tofull by the public of $15.00 per share, including shares sold in connection with the full exerciseinitial purchasers of the underwriters'Notes of their option to purchase up to an additional shares.$83.5 million principal amount of Notes. The offer and sale of all of the shares in the IPONotes are our senior unsecured obligations. The Notes were registered under the Securities Actissued pursuant to a registration statement on Form S-1 (File No. 333-224301), which was declared effective by the SEC on May 16, 2018. The shares were sold for an aggregate offering price of approximately $357.1 million. Indenture, dated March 11, 2019, between us and U.S. Bank National Association as trustee.

We raised $332.1 million inreceived net proceeds of $616.7 million, after deducting $25.0 million in underwriters'the initial purchasers’ discounts and commissions but before deductingand the estimated offering costs. As of September 30, 2018, we have reclassifiedexpenses payable by us. We used approximately $7.4$69.4 million in offering costs into stockholders' equity as a reduction of the net proceeds received from the IPO. The managing underwriters of our IPO were Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC. No payments were made by us to directors, officers, or persons owning ten percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries.

Pluralsight, Inc. used all of the net proceeds to make a capital contribution to Pluralsight Holdings in exchange for 23,805,000 LLC Unitspay the cost of Pluralsight Holdings. As its sole managing member, Pluralsight, Inc. caused Pluralsight Holdingsthe capped call transactions related thereto. We intend to use the remainder of the net proceeds it received from Pluralsight, Inc. to repay allfor working capital and other general corporate purposes. We may also use a portion of the $137.7net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, including the acquisition of GitPrime. We expect to pay total cash consideration of approximately $170.0 million for the acquisition of outstanding long-term debt underGitPrime, which is expected to close during the Guggenheim Credit Agreement and a prepayment premiumsecond quarter of $2.1 million. In addition, Pluralsight, Inc. caused Pluralsight Holdings to settle outstanding equity appreciation rights for $0.3 million and pay costs of $7.4 million associated with the offering.2019.






Item 6. Exhibits
Incorporated by ReferenceFiled or Furnished Herewith
Exhibit
Number
DescriptionFormFile No.Exhibit Number
Filing Date
with SEC
10.1
Lease Agreement, between Highline Office 1, L.C. and Pluralsight, LLC, dated as of August 31, 2018.
X
31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1*
Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
32.2*
Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
101.INSXBRL Instance DocumentX
101.SCHXBRL Taxonomy Extension Schema DocumentX
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABXBRL Taxonomy Extension Label Linkbase DocumentX
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentX
    Incorporated by Reference Filed or Furnished Herewith
Exhibit
Number
 Description Form File No. Exhibit Number 
Filing Date
with SEC
 
3.1 
Certificate of Correction of Amended and Restated Certificate of Incorporation of Pluralsight, Inc.
 S-1 333-230057 3.3 3/4/2019  
4.1 
Indenture, dated March 11, 2019, between Pluralsight, Inc. and U.S. Bank National Association
 8-K 001-38498 4.1 3/11/2019  
4.2 
Form of 0.375% Convertible Senior Note due 2024 (included in Exhibit 4.1)
 8-K 001-38498 4.1 3/11/2019  
10.1 
Purchase Agreement, dated March 6, 2019, by and among Pluralsight, Inc., Pluralsight Holdings, LLC and Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC as representatives of the several parties named in Schedule I thereto
 8-K 001-38498 10.1 3/7/2019  
10.2 
Form of Capped Call Confirmation
         X
10.3 
Agreement and Plan of Merger, dated April 30, 2019 by and among Pluralsight, Inc., Sundance Merger Sub, Inc., Gitprime, Inc. and Fortis Advisors LLC as Securityholder Representative
 8-K 001-38498 2.1 5/1/2019  
31.1 
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
         X
31.2 
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
         X
32.1* 
Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
         X
32.2* 
Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
         X
101.INS XBRL Instance Document         X
101.SCH XBRL Taxonomy Extension Schema Document         X
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document         X
101.DEF XBRL Taxonomy Extension Definition Linkbase Document         X
101.LAB XBRL Taxonomy Extension Label Linkbase Document         X
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document         X

*The certifications attached as Exhibit 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Pluralsight, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.


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.
 
PLURALSIGHT, INC.
  
 By:/s/ Aaron Skonnard
October 24, 2018May 1, 2019 
Aaron Skonnard
Chief Executive Officer

 
PLURALSIGHT, INC.
  
 By:/s/ James Budge
October 24, 2018May 1, 2019 
James Budge
Chief Financial Officer