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. In connection with the IPO, the Company 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 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 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 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
March 31, 2019
, Pluralsight, Inc. owned
70.1%
of Pluralsight Holdings and the Continuing Members owned the remaining
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, 2018 included in Pluralsight, Inc.'s Annual Report on Form 10-K, as filed with the SEC 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
March 31, 2019
, and the interim condensed consolidated statements of operations, comprehensive loss, redeemable convertible preferred units, members' deficit, and stockholders' equity, and cash flows for the
three months ended March 31, 2019
and
2018
are unaudited. The condensed consolidated balance sheet as of
December 31, 2018
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 months ended March 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, fair value of 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 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 months ended March 31, 2019
, except as noted below.
Revenue Recognition (ASC 606)
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 recognizes revenue when control of these services is transferred to its customers, in an amount that reflects the consideration 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 obligation 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 nonrefundable.
A small portion of the Company’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 events or changes in circumstances have occurred that could impact the period of benefit of these deferred contract acquisition costs. There were no material impairment losses recorded during the periods presented.
Advertising Costs
Advertising costs are expensed as incurred. The Company recorded advertising costs of
$3.6 million
and
$2.7 million
for the
three months ended March 31, 2019
and
2018
, respectively.
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 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 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 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 guidance 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 Company adopted the standard as of January 1, 2019 using the modified retrospective adoption method applied to those contracts that were not completed as of that 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 new standard, the Company capitalizes 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 additional 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 ASC 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, deferred 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 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 this standard on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement 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 allowance for credit losses are recorded in the statements of operations. For public business entities that meet the definition of an SEC filer, it is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, it is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the potential impact of this standard on its consolidated financial 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. The Company anticipates adopting the standard during the fiscal year ended December 31, 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 to its future financial reporting and 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 this 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.
Note 3. Revenue
Effect of Adopting ASC 606
The adoption of ASC 606 resulted in changes to the Company's condensed consolidated balance sheet as of March 31, 2019 and its statement of operations for the three months ended March 31, 2019 due to the timing of revenue recognition and the capitalization of incremental costs of obtaining contracts. In addition, there were offsetting shifts in the statement of cash flows through net loss and various changes in operating assets and liabilities, which resulted in no impact on the total cash provided by operating activities. Refer to Note 2—Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a description of the primary impacts resulting from the adoption of ASC 606.
The following tables present the amount by which each condensed consolidated financial statement 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 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 costs
|
5,851
|
|
Amortization of deferred contract acquisition costs
|
(5,867
|
)
|
Balance as of March 31, 2019
|
$
|
20,196
|
|
Note 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
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 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
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
9,921
|
|
|
$
|
7,931
|
|
Other current assets
|
|
317
|
|
|
392
|
|
Prepaid expenses and other current assets
|
|
$
|
10,238
|
|
|
$
|
8,323
|
|
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Accrued compensation
|
|
$
|
14,959
|
|
|
$
|
22,285
|
|
Accrued income and other taxes payable
|
|
5,487
|
|
|
5,408
|
|
Accrued other current liabilities
|
|
7,198
|
|
|
4,354
|
|
Accrued expenses
|
|
$
|
27,644
|
|
|
$
|
32,047
|
|
Note 6. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
Computer equipment
|
|
$
|
9,720
|
|
|
$
|
9,369
|
|
Software
|
|
2,031
|
|
|
2,031
|
|
Capitalized internal-use software costs
|
|
16,043
|
|
|
13,880
|
|
Furniture and fixtures
|
|
5,574
|
|
|
5,478
|
|
Buildings
|
|
11,251
|
|
|
11,251
|
|
Leasehold improvements
|
|
1,490
|
|
|
1,490
|
|
Construction in progress
|
|
1,731
|
|
|
1,671
|
|
Build-to-suit lease asset under construction
|
|
12,578
|
|
|
8,281
|
|
Total property and equipment
|
|
60,418
|
|
|
53,451
|
|
Less: Accumulated depreciation
|
|
(23,866
|
)
|
|
(21,810
|
)
|
Property and equipment, net
|
|
$
|
36,552
|
|
|
$
|
31,641
|
|
Depreciation expense totaled
$2.1 million
and
$2.2 million
for the
three months ended March 31, 2019
and
2018
, respectively.
Note 7. Intangible Assets
Intangible assets, net are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
|
|
|
|
|
|
Content library:
|
|
|
|
|
|
|
Acquired content library
|
|
$
|
32,835
|
|
|
$
|
32,754
|
|
|
$
|
81
|
|
Course creation costs
|
|
14,303
|
|
|
7,526
|
|
|
6,777
|
|
Total
|
|
$
|
47,138
|
|
|
$
|
40,280
|
|
|
$
|
6,858
|
|
Intangible assets:
|
|
|
|
|
|
|
Technology
|
|
$
|
4,500
|
|
|
$
|
2,963
|
|
|
$
|
1,537
|
|
Trademarks
|
|
162
|
|
|
162
|
|
|
—
|
|
Noncompetition agreements
|
|
390
|
|
|
390
|
|
|
—
|
|
Customer relationships
|
|
2,750
|
|
|
2,750
|
|
|
—
|
|
Database
|
|
40
|
|
|
40
|
|
|
—
|
|
Domain names
|
|
45
|
|
|
—
|
|
|
45
|
|
Total
|
|
$
|
7,887
|
|
|
$
|
6,305
|
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
|
|
|
|
|
|
Content library:
|
|
|
|
|
|
|
Acquired content library
|
|
$
|
32,835
|
|
|
$
|
32,229
|
|
|
$
|
606
|
|
Course creation costs
|
|
13,552
|
|
|
7,108
|
|
|
6,444
|
|
Total
|
|
$
|
46,387
|
|
|
$
|
39,337
|
|
|
$
|
7,050
|
|
Intangible assets:
|
|
|
|
|
|
|
Technology
|
|
$
|
4,500
|
|
|
$
|
2,786
|
|
|
$
|
1,714
|
|
Trademarks
|
|
162
|
|
|
162
|
|
|
—
|
|
Noncompetition agreements
|
|
390
|
|
|
390
|
|
|
—
|
|
Customer relationships
|
|
2,750
|
|
|
2,750
|
|
|
—
|
|
Database
|
|
40
|
|
|
40
|
|
|
—
|
|
Domain names
|
|
45
|
|
|
—
|
|
|
45
|
|
Total
|
|
$
|
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
$0.7 million
and
$3.3 million
for the
three months ended March 31, 2019
and
2018
, respectively. Amortization expense of course creation costs was
$0.6 million
and
$0.4 million
for the
three months ended March 31, 2019
and
2018
, respectively.
Note 8. Convertible Senior Notes and Other Long-Term Debt
Convertible Senior Notes
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, as the issuer, and U.S. Bank National Association, as trustee. The Notes are Pluralsight, Inc.'s senior unsecured obligations and rank senior in right of payment to any of its indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company's unsecured indebtedness then existing and future liabilities that are not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness, to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of its subsidiaries. The Indenture does not contain any financial covenants or restrictions on the payments of dividends, the incurrence of 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 corporate event that constitutes a “fundamental change” per the Indenture, holders of the Notes may require the Company to repurchase for cash all or a portion of their Notes at a purchase price equal to
100%
of the principal amount of 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 conversion rate on each such trading day; or
|
|
|
•
|
Upon the occurrence of specified corporate events described in the Indenture.
|
On or after December 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion rate at any time irrespective of the foregoing conditions. Upon conversion, holders will receive cash, shares of the Company's Class A common stock or a combination of cash and shares of Class A common stock, at the Company's election.
During the three months ended March 31, 2019, the conditions allowing holders of 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.
The Company accounts for the Notes as separate liability and equity components. The Company 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 the 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 condensed consolidated balance sheets.
The net carrying value of the 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 are 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 a reduction to additional paid-in capital on the condensed consolidated balance sheets.
Convertible Promissory Note with Pluralsight Holdings
In connection with the issuance of the Notes, Pluralsight, Inc. entered into a convertible promissory note with Pluralsight Holdings, whereby Pluralsight, Inc. provided the net proceeds from the issuance of the Notes to Pluralsight Holdings. The terms of the convertible promissory note mirror the terms of the Notes 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 order to preserve the Company's legal structure.
Note 9. Commitments and Contingencies
Letters of Credit
As of
March 31, 2019
and
December 31, 2018
, the Company had a total of
$0.7 million
in letters of credit 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 were collateralized by
$0.7 million
of the Company’s cash, which is reflected as restricted cash on the condensed consolidated balance 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.
In August 2018, the Company entered into a new non-cancellable 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 the building, the Company is deemed the owner of the construction project for accounting purposes during the construction period. As a result, the Company recorded a construction in progress asset of
$12.6 million
and a corresponding facility financing obligation as of
March 31, 2019
.
In connection with the lease agreement, the Company is required to maintain a deposit of
$16.0 million
with a financial institution for the benefit 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.
Future Minimum Lease Payments
At
March 31, 2019
, future minimum lease payments, including lease payments for the Company’s facilities in Farmington, Utah, and lease payments for the Company’s future headquarters in Draper, Utah were as follows (in thousands):
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019 (remaining nine months)
|
4,128
|
|
2020
|
7,489
|
|
2021
|
9,881
|
|
2022
|
9,871
|
|
2023
|
9,861
|
|
Thereafter
|
99,324
|
|
Less: Sublease rental income
|
(173
|
)
|
Total future minimum lease payments
|
$
|
140,381
|
|
Rent expense under operating leases was
$1.5 million
and
$1.0 million
for the
three months ended March 31, 2019
and
2018
, 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 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 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.
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.
Exchanges 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 B and Class C common stock for an equal number of shares of Class A common stock. Simultaneously, and in connection with these exchanges, the Company cancelled the exchanged shares of Class B and Class C common stock.
Note 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. During the
three months ended March 31, 2019
, the total adjustments to the non-controlling interests were
$31.8 million
and were primarily related to equity-based compensation, the settlement of equity-based 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
March 31, 2019
, the non-controlling interests of Pluralsight Holdings owned
29.9%
of the outstanding LLC Units, with the remaining
70.1%
owned by Pluralsight, Inc. The ownership of the LLC Units is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
As of December 31, 2018
|
|
|
Units
|
|
Ownership %
|
|
Units
|
|
Ownership %
|
Pluralsight, Inc.'s ownership of LLC Units
|
|
95,096,979
|
|
|
70.1
|
%
|
|
65,191,907
|
|
|
48.6
|
%
|
LLC Units owned by the Continuing Members
(1)
|
|
40,492,749
|
|
|
29.9
|
%
|
|
68,881,732
|
|
|
51.4
|
%
|
|
|
135,589,728
|
|
|
100.0
|
%
|
|
134,073,639
|
|
|
100.0
|
%
|
|
|
|
(1) Excludes 2,741,351 and 3,195,322 LLC Units still subject to time-based vesting requirements as of March 31, 2019 and December 31, 2018, respectively
|
Note 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.
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—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
|
|
As of
March 31, 2019
, total unrecognized equity-based compensation related to unvested LLC Units was
$19.1 million
, which is expected to be recognized over a weighted-average period of
2.0
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
March 31, 2019
was
$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 restricted 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.
In connection with the IPO and the adoption of the 2018 Plan, the 2017 Plan was terminated. 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.
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
three months ended 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, 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
|
|
During the
three months ended March 31, 2019
, the total intrinsic value of options exercised was
$2.6 million
. The total unrecognized equity-based compensation related to the stock options was
$23.1 million
, which is expected to be recognized over a weighted-average period of
1.1
years.
RSUs
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 was satisfied upon expiration of the lock-up period following the IPO. Prior to the IPO, the Company had not recorded any equity-based compensation 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 totaling
$7.8 million
. The remaining unrecognized equity-based compensation 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
three months ended March 31, 2019
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs or Units
|
|
Weighted-Average
Grant Date Fair
Value
|
RSUs of Pluralsight, Inc.
|
|
|
|
|
Balance at December 31, 2018
|
|
4,801,536
|
|
|
$
|
11.11
|
|
Granted
|
|
4,102,071
|
|
|
31.87
|
|
Forfeited or cancelled
|
|
(237,882
|
)
|
|
14.34
|
|
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, 2018
|
|
2,062,500
|
|
|
$
|
8.24
|
|
Vested
|
|
(187,500
|
)
|
|
8.24
|
|
Balance at March 31, 2019
|
|
1,875,000
|
|
|
$
|
8.24
|
|
As of
March 31, 2019
, unrecognized compensation cost related to RSUs, including restricted share units of Pluralsight Holdings, was
$52.2 million
, which is expected to be recognized over a weighted-average period of
2.7
years.
Employee Stock Purchase Plan
In May 2018, Pluralsight, Inc.'s board of directors adopted the 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 start on the first trading day on or after May 31 and November 30 of each year.
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.
ESPP 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 condensed consolidated balance sheets. Employee payroll contributions ultimately used to purchase shares under the ESPP will be reclassified to stockholders' equity at the end of the purchase period. As of
March 31, 2019
, total unrecognized equity-based compensation for purchase rights committed under the ESPP was
$10.9 million
, which is expected to be recognized over a weighted-average period of
1.2
years.
Equity-Based Compensation
Equity-based compensation was classified as follows in the accompanying condensed consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Cost of revenue
|
|
$
|
79
|
|
|
$
|
—
|
|
Sales and marketing
|
|
6,195
|
|
|
539
|
|
Technology and content
|
|
3,498
|
|
|
381
|
|
General and administrative
|
|
9,834
|
|
|
2,453
|
|
Total equity-based compensation
|
|
$
|
19,606
|
|
|
$
|
3,373
|
|
Equity-based compensation capitalized as internal-use software was
$0.3 million
for the
three months ended March 31, 2019
.
Note 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 March 31, 2019
and
2018
the Company's estimated effective tax rate was
(0.8)%
and
(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. 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 released 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 released.
Tax Receivable Agreement
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.
During the three months ended March 31, 2019, Continuing Members exchanged
28,949,710
LLC Units for shares of Class A common stock. The Company has concluded that, based on applicable accounting standards, it is more-likely-than-not that its deferred tax assets subject to the TRA will not be realized; therefore, the Company has not recorded a TRA liability related to the tax savings it may realize from the utilization of deferred tax assets arising from the exchanges that have occurred through March 31, 2019. The total unrecorded TRA liability as of March 31, 2019 is approximately
$226.5 million
.
Note 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 March 31, 2019
|
|
|
Numerator:
|
|
|
Net loss
|
|
$
|
(33,543
|
)
|
Less: Net loss attributable to non-controlling interests
|
|
(14,660
|
)
|
Net loss attributable to Pluralsight, Inc.
|
|
$
|
(18,883
|
)
|
Denominator:
|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
75,927
|
|
Net loss per share:
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.25
|
)
|
During the
three months ended 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 March 31, 2019
|
LLC Units held by Continuing Members
|
|
43,234
|
|
Stock options
|
|
4,930
|
|
RSUs of Pluralsight, Inc.
|
|
7,966
|
|
Restricted Share Units of Pluralsight Holdings
|
|
1,875
|
|
Purchase rights committed under the ESPP
|
|
1,949
|
|
Total
|
|
59,954
|
|
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 15. Related Party Transactions
The Company utilizes an aircraft owned by the Company’s Chief Executive Officer on an as-needed basis. The Company has agreed to reimburse the Chief Executive Officer for use of the private aircraft for business purposes at an hourly rate per flight hour. The reimbursement rate was approved by the Company's Board of Directors based upon a review of comparable chartered aircraft rates. The Company accrued approximately
$0.1 million
during the
three months ended March 31, 2019
included within accrued expenses on the condensed consolidated balance sheets. A total of
$0.5 million
has been paid under the arrangement during the
three months ended March 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, 2019, 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 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.