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 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
June 30, 2018
, 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"):
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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 into a single class of common units. See Note 9—Stockholders' Equity for additional details.
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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.
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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—Stockholders' Equity for additional details.
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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
June 30, 2018
, Pluralsight, Inc. owned
47.7%
of Pluralsight Holdings and the Continuing Members owned the remaining
52.3%
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.
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, 2017 included in the prospectus dated May 16, 2018 (File No. 333-224301), as filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended ("Prospectus").
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
June 30, 2018
, the interim condensed consolidated statements of operations for the
three and six months ended June 30, 2018
and
2017
, the interim condensed consolidated statements of redeemable convertible preferred units, members' deficit, and stockholders' equity for the
six months ended June 30, 2018
, and the interim condensed consolidated statements of cash flows for the
six months ended June 30, 2018
and
2017
are unaudited. The condensed consolidated balance sheet as of
December 31, 2017
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 six months ended June 30, 2018
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 fair value of equity awards, the fair value of warrants to purchase common units, useful lives of property and equipment, content library and intangible assets, provisions for doubtful accounts receivable and deferred revenue, accounting for business combinations, 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. 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 six months ended June 30, 2018
, except as noted below.
Deferred Offering Costs
Deferred offering costs are capitalized and consist of legal, accounting, printing, and other costs that are directly attributable to the IPO. As of
December 31, 2017
, the balance of deferred offering costs was
$2.0 million
and included in other assets in the condensed consolidated balance sheets. As of
June 30, 2018
, the Company reclassified
$7.4 million
of offering costs into stockholders’ equity as a reduction of the net proceeds received from the IPO.
Advertising Costs
Advertising costs are expensed as incurred. The Company recorded advertising costs of
$3.2 million
and
$3.8 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$5.8 million
and
$6.9 million
for the
six months ended June 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:
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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.
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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.
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•
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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.
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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.
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•
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Dividend Yield:
The Company has not and does not expect to pay dividends for the foreseeable future.
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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
June 30, 2018
, the non-controlling interests owned
52.3%
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 period following the Reorganization Transactions by the weighted-average number of shares of Class A common shares outstanding during the same period 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 period 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 period 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, the Financial Accounting Standards Board ("FASB") issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. This update clarifies how certain cash flows should be classified with the objective 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 method 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. The Company early adopted the standard during the second quarter of 2018. As a result of the adoption, the Company recorded
$2.2 million
in payments of debt extinguishment costs within financing activities on the condensed consolidated statements of cash flows for the
six months ended June 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 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 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 guidance will apply to the Company’s reporting requirements in performing goodwill impairment testing; however, the Company does not anticipate the adoption of this guidance will have a material impact on its unaudited condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which clarifies 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 guidance is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods. For all other entities, the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The impact to the Company’s unaudited condensed consolidated financial statements will depend on the facts and circumstances of any specific future transactions.
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 the Company has elected to use the extended transition period available to emerging growth companies, the Company does not anticipate adopting the standard until the fiscal year ended December 31, 2020. The Company is currently evaluating the potential changes from this ASU to its future financial reporting and disclosures. 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 the 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,
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. The core principle behind ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers 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 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 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 standard for the fiscal year ending December 31, 2019. The Company is currently evaluating adoption methods.
The Company is evaluating 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. Depending on the outcome of the Company’s evaluation, the timing of when revenue is recognized could change for multi-year subscription agreements.
As part of its preliminary 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. Under the Company’s current accounting policy, incremental costs 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 over which these costs are expected to be recognized is still being evaluated by the Company.
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 unaudited condensed consolidated financial statements at this time.
Note 3. 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):
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June 30, 2018
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Level 1
|
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Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
206,996
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
206,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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December 31, 2017
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|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
25,146
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,146
|
|
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. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
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|
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|
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|
|
June 30, 2018
|
|
December 31, 2017
|
Prepaid expenses
|
|
$
|
8,694
|
|
|
$
|
4,586
|
|
Other current assets
|
|
213
|
|
|
539
|
|
Prepaid expenses and other current assets
|
|
$
|
8,907
|
|
|
$
|
5,125
|
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Accrued Expenses
Accrued expenses consisted of the following (in thousands):
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|
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|
June 30, 2018
|
|
December 31, 2017
|
Accrued compensation
|
|
$
|
12,976
|
|
|
$
|
18,568
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|
Accrued income and other taxes payable
|
|
4,139
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|
|
3,492
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|
Accrued other current liabilities
|
|
7,093
|
|
|
4,454
|
|
Accrued expenses
|
|
$
|
24,208
|
|
|
$
|
26,514
|
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Note 5. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
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|
|
June 30, 2018
|
|
December 31, 2017
|
Computer equipment
|
|
$
|
8,789
|
|
|
$
|
7,482
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Software
|
|
2,026
|
|
|
1,982
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|
Capitalized internal-use software costs
|
|
11,016
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|
|
8,631
|
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Furniture and fixtures
|
|
5,452
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|
|
5,234
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Buildings
|
|
11,251
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|
|
11,251
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Leasehold improvements
|
|
1,941
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|
|
1,324
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Construction in progress
|
|
594
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|
|
587
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|
Total property and equipment
|
|
41,069
|
|
|
36,491
|
|
Less: Accumulated depreciation
|
|
(18,386
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)
|
|
(14,034
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)
|
Property and equipment, net
|
|
$
|
22,683
|
|
|
$
|
22,457
|
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Depreciation expense totaled
$2.2 million
and
$1.3 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$4.4 million
and
$2.6 million
for the
six months ended June 30, 2018
and
2017
, respectively.
In September 2017, the Company committed to a plan to expand operations in Utah and, as a result, consolidate certain offices of subsidiaries of the Company. In connection with the plan, the Company disposed of certain furniture, leasehold improvements, and computer equipment at the respective office cease-use dates. Accordingly, the useful lives of assets with a net book value of
$1.8 million
were shortened. The revised useful lives resulted in an increase in depreciation expense of $
0.2
million and $
0.5
million during the
three and six months ended June 30, 2018
, respectively.
Note 6. Intangible Assets
Intangible assets, net are summarized as follows (in thousands):
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|
|
|
|
|
|
June 30, 2018
|
|
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Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Content library:
|
|
|
|
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|
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Acquired content library
|
|
$
|
32,835
|
|
|
$
|
30,566
|
|
|
$
|
2,269
|
|
Course creation costs
|
|
12,145
|
|
|
6,321
|
|
|
5,824
|
|
Total
|
|
$
|
44,980
|
|
|
$
|
36,887
|
|
|
$
|
8,093
|
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Intangible assets:
|
|
|
|
|
|
|
Technology
|
|
$
|
4,500
|
|
|
$
|
2,434
|
|
|
$
|
2,066
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|
Trademarks
|
|
162
|
|
|
162
|
|
|
—
|
|
Noncompetition agreements
|
|
390
|
|
|
390
|
|
|
—
|
|
Customer relationships
|
|
2,750
|
|
|
2,750
|
|
|
—
|
|
Database
|
|
40
|
|
|
40
|
|
|
—
|
|
Domain names
|
|
45
|
|
|
—
|
|
|
45
|
|
Total
|
|
$
|
7,887
|
|
|
$
|
5,776
|
|
|
$
|
2,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Content library:
|
|
|
|
|
|
|
Acquired content library
|
|
$
|
32,835
|
|
|
$
|
24,643
|
|
|
$
|
8,192
|
|
Course creation costs
|
|
10,640
|
|
|
5,391
|
|
|
5,249
|
|
Total
|
|
$
|
43,475
|
|
|
$
|
30,034
|
|
|
$
|
13,441
|
|
Intangible assets:
|
|
|
|
|
|
|
Technology
|
|
$
|
4,500
|
|
|
$
|
2,080
|
|
|
$
|
2,420
|
|
Trademarks
|
|
1,162
|
|
|
773
|
|
|
389
|
|
Noncompetition agreements
|
|
390
|
|
|
390
|
|
|
—
|
|
Customer relationships
|
|
2,750
|
|
|
2,750
|
|
|
—
|
|
Database
|
|
40
|
|
|
40
|
|
|
—
|
|
Domain names
|
|
45
|
|
|
—
|
|
|
45
|
|
Total
|
|
$
|
8,887
|
|
|
$
|
6,033
|
|
|
$
|
2,854
|
|
Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of acquired intangible assets was
$3.3 million
and
$2.0 million
for the
three months ended June 30, 2018
, and
2017
, respectively, and
$6.7 million
and
$4.0 million
for the
six months ended June 30, 2018
and
2017
, respectively. Amortization expense of course creation costs was
$0.5 million
and
$0.4 million
for the
three months ended June 30, 2018
, and
2017
, respectively, and
$0.9 million
and
$0.7 million
for the
six months ended June 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 an increase in amortization expense of $
1.5
million and
$3.0 million
during the
three and six months ended June 30, 2018
, respectively. The fully-amortized assets were disposed of in June 2018.
Note 7. Credit Facilities
Silicon Valley Bank Credit Agreement
On November 17, 2014, the Company entered into the amended and restated credit agreement (“Second Amended and Restated Credit Agreement”) with a lending syndicate, which was led by Silicon Valley Bank. The agreement provided for a total term loan of
$100.0 million
and a revolving line of credit of up to
$10.0 million
, which was used to finance the acquisitions of Code School LLC and Smarterer, Inc.
Under the terms of the Second Amended and Restated Credit Agreement, the Company was required to maintain compliance 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 maintenance of depository accounts, the disposition of assets, mergers, acquisitions, investments, the granting of liens, and the payment of dividends. On March 1, 2017, the Company entered into a waiver and amendment to the Second Amended and Restated Credit Agreement with its lenders, which provided a waiver on certain events of default that occurred in fiscal quarter ended September 30, 2016, for failure to comply with the consolidated total leverage ratio covenant. The Second Amended and Restated Credit Agreement was secured with a lien against substantially all of the assets of the Company.
The outstanding borrowings under the Second Amended 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.
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 price of
$8.25
per share. See Note 9—Stockholders' Equity for additional details. The warrants were measured at the estimated fair value of
$1.0 million
on the date of issuance and were recorded as debt issuance costs.
Under the terms of the Guggenheim Credit Agreement, the Company was required to maintain compliance 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 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 of the net proceeds from the IPO were used to repay the outstanding principal balance of
$137.7 million
and extinguish the Guggenheim Credit Agreement in May 2018. The Company incurred a loss on debt extinguishment of
$4.1 million
in connection with 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
|
|
Note 8. Commitments and Contingencies
Letters of Credit
As of
June 30, 2018
and
December 31, 2017
, the Company had a total of
$0.7 million
and
$0.2 million
, respectively, in letters of credit outstanding. These outstanding letters of credit were issued for purposes of securing the Company’s obligations under facility leases. The letters of credit are collateralized by a portion of the Company’s cash, which is reflected as restricted cash and classified within other assets on the condensed consolidated balance sheets.
Lease Commitments
The Company is committed under certain operating leases with third parties for office space. These leases expire at various times through
2024
. 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.
At
June 30, 2018
, future minimum lease payments, including lease payments for the Company’s facilities in Farmington, Utah, were as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
2018 (remaining six months)
|
$
|
2,672
|
|
2019
|
4,885
|
|
2020
|
2,867
|
|
2021
|
1,912
|
|
2022
|
1,745
|
|
Thereafter
|
2,370
|
|
Total future minimum lease payments
|
$
|
16,451
|
|
Rent expense under operating leases was
$1.1 million
and
$0.4 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$2.2 million
and
$0.8 million
for the
six months ended June 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.
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 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. 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.
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 Shares of Class A Common Stock
In connection with the first amendment 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 vested and exercisable, in whole or in part, prior to their expiration. The warrants will expire at the earlier of (i) the acquisition of the Company by another entity or (ii) six months after 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 for shares of the Company’s Class A common stock, the Company recorded the warrants within stockholders’ equity.
Note 10. 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. Following the Reorganization Transactions, the total adjustments to the non-controlling interests were
$3.8 million
and were primarily related to equity-based compensation and the settlement of equity-based awards. 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
June 30, 2018
, the non-controlling interests of Pluralsight Holdings owned
52.3%
of the outstanding LLC Units, with the remaining
47.7%
owned by Pluralsight, Inc. The ownership of the LLC Units is summarized as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Units
|
|
Ownership %
|
Pluralsight, Inc.'s ownership of LLC Units
(1)
|
|
62,326,654
|
|
|
47.7
|
%
|
LLC Units owned by the Continuing Members
(2)
|
|
68,275,082
|
|
|
52.3
|
%
|
|
|
130,601,736
|
|
|
100.0
|
%
|
|
|
|
(1) Excludes 589,006 LLC Units still subject to time-based vesting requirements.
|
(2) Excludes 3,884,628 LLC Units still subject to time-based vesting requirements.
|
Note 11. 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.
The shares of unvested 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
|
|
(16,384
|
)
|
|
4.96
|
|
Unvested Class A common shares outstanding—June 30, 2018
|
|
589,006
|
|
|
$
|
6.59
|
|
The shares of 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
|
|
(58,046
|
)
|
|
5.37
|
|
Unvested LLC Units outstanding—June 30, 2018
|
|
3,884,628
|
|
|
$
|
7.77
|
|
The Company evaluated the conversion and exchange of incentive units as part of the Reorganization Transactions and concluded the conversion and exchange was not a modification of the original incentive units. 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
June 30, 2018
, total unrecognized equity-based compensation related to all unvested Class A common shares and unvested LLC Units was
$28.3 million
, which is expected to be recognized over a weighted-average period of
2.6
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
June 30, 2018
was
$1.6 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 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 are 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, 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, will automatically be transferred to the 2018 Plan up to
4,508,835
shares.
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
six months ended June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2018
|
|
5,232,176
|
|
|
$
|
15.00
|
|
|
9.9
|
|
$
|
49.4
|
|
As of
June 30, 2018
,
no
options were vested or exercisable. The total unrecognized equity-based compensation related to the stock options was
$39.0 million
, which is expected to be recognized over a weighted-average period of
1.9
years.
The grant date fair value of the stock options was determined using the Black Scholes model with the following assumptions:
|
|
|
|
Dividend yield
|
|
None
|
Volatility
|
|
55.0%
|
Risk-free interest rate
|
|
2.97%
|
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. RSUs 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 or upon expiration of a 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 RSUs granted were initially RSUs of Pluralsight Holdings. In connection with the IPO, all RSUs were converted into RSUs of Pluralsight, Inc., except for Class B RSUs, which remain RSUs 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
six months ended June 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
Weighted-Average
Grant Date Fair
Value
|
RSUs of Pluralsight, Inc.
|
|
|
|
|
Balance at December 31, 2017
|
|
2,178,450
|
|
|
$
|
7.06
|
|
Granted
|
|
3,059,010
|
|
|
10.22
|
|
Forfeited or cancelled
|
|
(167,675
|
)
|
|
7.28
|
|
Balance at June 30, 2018
|
|
5,069,785
|
|
|
$
|
8.96
|
|
RSUs of Pluralsight Holdings
|
|
|
|
|
Balance at December 31, 2017 and June 30, 2018
|
|
3,000,000
|
|
|
$
|
8.24
|
|
As of
June 30, 2018
, unrecognized compensation cost related to the RSUs, including RSUs of Pluralsight Holdings, was
$59.6 million
, which is expected to be recognized over a weighted-average period of
3.2
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.
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 on the IPO date. As of
June 30, 2018
, a total of
2,876,788
shares were issuable to employees based on contribution elections made under the ESPP and
no
shares had yet been purchased. As of
June 30, 2018
, total unrecognized equity-based compensation was
$15.6 million
, which is expected to be recognized over a weighted-average period of
1.9
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 yield
|
|
None
|
Volatility
|
|
55.0%
|
Risk-free interest rate
|
|
2.05%—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 June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of revenue
|
|
$
|
46
|
|
|
$
|
5
|
|
|
$
|
46
|
|
|
$
|
10
|
|
Sales and marketing
|
|
4,432
|
|
|
715
|
|
|
4,971
|
|
|
1,379
|
|
Technology and content
|
|
2,668
|
|
|
526
|
|
|
3,049
|
|
|
990
|
|
General and administrative
|
|
10,409
|
|
|
3,133
|
|
|
12,862
|
|
|
3,712
|
|
Total equity-based compensation
|
|
$
|
17,555
|
|
|
$
|
4,379
|
|
|
$
|
20,928
|
|
|
$
|
6,091
|
|
Note 12. 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 June 30, 2018
and
2017
the Company's estimated effective tax rate was
(0.5)%
and
(0.3)%
, respectively. For the
six months ended June 30, 2018
and
2017
, the Company's estimated effective tax rate was
(0.5)%
and
(0.4)%
, 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. 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 reversed 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.
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 to the tax attributes generated as a result of redemptions of LLC Units or exchanges described above until it is determined that the benefits are more-likely-than-not to be realized. As of
June 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.
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 remeasured its deferred tax assets and liabilities to reflect the lower corporate income tax rate. The amounts were computed based on information available to the Company; however, there is still uncertainty as to the application of the Tax Act. As of June, 30, 2018, the Company had 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. Because the Company has recorded a full valuation allowance in the United States, changes to the reported impact of 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 made as of June 30, 2018.
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 six months ended June 30, 2018
and has not provided additional GILTI on deferred items.
Note 13. 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):
|
|
|
|
|
|
|
|
May 16, 2018 through June 30, 2018
|
|
|
Numerator:
|
|
|
Net Loss
|
|
$
|
(24,294
|
)
|
Less: Net loss attributable to non-controlling interests
|
|
(12,706
|
)
|
Net loss attributable to Pluralsight, Inc.
|
|
$
|
(11,588
|
)
|
Denominator:
|
|
|
Weighted-average common shares outstanding
|
|
62,847
|
|
Less: Weighted-average common shares subject to time-based vesting
|
|
(595
|
)
|
Weighted-average common shares outstanding, basic and diluted
|
|
62,252
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.19
|
)
|
During the period from May 16, 2018 through June 30, 2018, 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 June 30, 2018
|
LLC Units held by Continuing Members
|
|
72,160
|
|
Stock options
|
|
5,232
|
|
RSUs of Pluralsight, Inc.
|
|
5,070
|
|
RSUs of Pluralsight Holdings
|
|
3,000
|
|
Shares issuable under ESPP
|
|
2,877
|
|
Unvested Class A common shares
|
|
589
|
|
Warrants to purchase Class A common shares
|
|
424
|
|
Total
|
|
89,352
|
|
Note 14. Segment and Geographic Information
The Company operates in a single operating segment. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision makers, who in the Company’s case are 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 location of the customer, was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
United States
|
$
|
33,955
|
|
|
$
|
25,109
|
|
|
$
|
65,533
|
|
|
$
|
48,720
|
|
United Kingdom
|
5,756
|
|
|
4,254
|
|
|
11,088
|
|
|
8,453
|
|
Other foreign locations
|
13,861
|
|
|
9,528
|
|
|
26,595
|
|
|
18,957
|
|
Total revenue
|
$
|
53,572
|
|
|
$
|
38,891
|
|
|
$
|
103,216
|
|
|
$
|
76,130
|
|
Percentage of revenue generated outside of the United States
|
37
|
%
|
|
35
|
%
|
|
37
|
%
|
|
36
|
%
|
With the exception of the United Kingdom, no other foreign country accounted for 10% or more of revenue during the
three months ended June 30, 2018
and
2017
, and the
six months ended June 30, 2018
and
2017
.
Note 15. Subsequent Events
In July 2018, the Company entered into a new non-cancellable operating lease agreement to rent office space in Dublin, Ireland for a period of
one
year. Total minimum lease payments under the lease agreement are approximately
$1.3 million
.