Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Nature of Operations
PROS Holdings, Inc., a Delaware corporation, through its operating subsidiaries (collectively, the "Company"), provides software-as-a-service ("SaaS") solutions that optimize shopping and selling experiences. Built on the PROS platform, these intelligent solutions leverage business artificial intelligence ("AI"), intuitive user experiences and process automation to deliver frictionless, personalized purchasing experiences designed to meet the real-time demands of today’s business-to-business ("B2B") and business-to-consumer ("B2C") omnichannel shoppers, regardless of industry. Companies can use these solutions to assess their market environments in real time to deliver customized prices and offers. The Company's solutions enable buyers to move fluidly across its customers’ direct sales, partner, online, mobile and emerging channels with personalized experiences regardless of which channel those buyers choose. The Company's decades of data science and AI expertise are infused into its solutions and are designed to reduce time and complexity through actionable intelligence.
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial reporting and applicable quarterly reporting regulations of the Securities and Exchange Commission ("SEC"). In management's opinion, the accompanying interim unaudited condensed consolidated financial statements include all adjustments necessary for a fair statement of the financial position of the Company as of June 30, 2021, the results of operations for the three and six months ended June 30, 2021 and 2020, cash flows for the six months ended June 30, 2021 and 2020, and stockholders' equity for the three and six months ended June 30, 2021 and 2020.
Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 ("Annual Report") filed with the SEC. The unaudited condensed consolidated balance sheet as of December 31, 2020 was derived from the Company's audited consolidated financial statements but does not include all disclosures required under GAAP.
Risks and uncertainties
Since its initial onset in early 2020, the coronavirus ("COVID-19") pandemic has created significant global uncertainty, and compliance with the various containment measures implemented by governmental authorities has impacted the Company's business, as well as the businesses of its customers, suppliers and other counterparties, and the scope and duration of the outbreak and timeframe for economic recovery is uncertain. As there are no comparable recent events that provide guidance as to the long-term effect of the COVID-19 pandemic, the Company is unable to predict the full impact that COVID-19 will have on its results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures.
Changes in accounting policies
There have been no material changes in the Company’s significant accounting policies and their application as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, except for the Company's adoption of certain accounting standards described in more detail under "Recently adopted accounting pronouncements" in this Note 2 below.
Fair value measurement
The Company's financial assets that are included in cash and cash equivalents and that are measured at fair value on a recurring basis consisted of $293.8 million and $301.3 million at June 30, 2021 and December 31, 2020, respectively, and were invested in treasury money market funds. The fair value of the treasury money market funds is determined based on quoted market prices, which represents level 1 in the fair value hierarchy as defined by ASC 820.
Trade and other receivables
Trade and other receivables are primarily comprised of trade receivables, net of allowance for doubtful accounts, contract assets and unbilled receivables. The Company records trade accounts receivable for its unconditional rights to consideration arising from the Company's performance under contracts with customers. The Company's standard billing terms are that payment is due upon receipt of invoice, payable generally within thirty to sixty days. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. When developing its estimate of expected credit losses on trade and other receivables, the Company considers the available information relevant to assessing the collectability of cash flows, which includes a combination of both internal and external information relating to past events, current conditions, and future forecasts as well as relevant qualitative and quantitative factors that relate to the environment in which the Company operates.
Contract assets represent conditional rights to consideration that have been recognized as revenue in advance of billing the customer. Unbilled receivables represent unconditional rights to consideration arising from contingent revenue that have been recognized as revenue in advance of billing the customer.
Deferred costs
Sales commissions earned by the Company's sales representatives are considered incremental and recoverable costs of obtaining a customer contract. Sales commissions are deferred and amortized on a straight-line basis over the period of benefit, which the Company has determined to be five to eight years. The Company determined the period of benefit by taking into consideration its customer contracts, expected renewals of those customer contracts (as the Company currently does not pay an incremental sales commission for renewals), the Company's technology and other factors. The Company also defers amounts earned by employees other than sales representatives who earn incentive payments under compensation plans that are also tied to the value of customer contracts acquired. Deferred costs were $17.1 million and $18.5 million as of June 30, 2021 and December 31, 2020, respectively. Amortization expense for the deferred costs was $1.5 million and $1.4 million for the three months ended June 30, 2021 and 2020, respectively, and $3.1 million and $2.9 million for the six months ended June 30, 2021 and 2020, respectively. Amortization of deferred costs is included in selling and marketing expense in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).
Deferred implementation costs
The Company capitalizes certain contract fulfillment costs, including personnel and other costs (such as hosting, employee salaries, benefits and payroll taxes), that are associated with arrangements where professional services are not distinct from other undelivered obligations in its customer contracts. The Company analyzes implementation costs and capitalizes those costs that are directly related to customer contracts, that are expected to be recoverable, and that enhance the resources which will be used to satisfy the undelivered performance obligations in those contracts. Deferred implementation costs are amortized ratably over the remaining contract term once the revenue recognition criteria for the respective performance obligation has been met and revenue recognition commences. Deferred implementation costs were $2.7 million and $2.9 million as of June 30, 2021 and December 31, 2020, respectively. Amortization expense for the deferred implementation costs was $0.3 million and $0.6 million for the three months ended June 30, 2021 and 2020, respectively, and $0.6 million and $1.0 million for the six months ended June 30, 2021 and 2020, respectively. Deferred implementation costs are included in prepaid and other current assets and other assets, noncurrent in the unaudited condensed consolidated balance sheets. Amortization of deferred implementation costs is included in cost of subscription and cost of services revenues in the accompanying unaudited condensed consolidated statements of comprehensive income (loss).
Recently adopted accounting pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options ("Subtopic 470-20") and Derivatives and Hedging - Contracts in an Entity's Own Equity ("Subtopic 815-40"), which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. This new standard is effective for the Company's interim and annual periods beginning January 1, 2022, and earlier adoption is permitted on January 1, 2021. The Company may elect to apply the amendments on a retrospective or modified retrospective basis. The Company early adopted the new standard effective January 1, 2021 on the modified retrospective basis. The adoption decreased additional paid-in capital by $80.1 million related to the equity conversion component of the outstanding convertible notes which was previously separated and recorded in equity, and increased convertible debt, net by $68.8 million related to the removal of the debt discounts and adjustment of debt issuance cost recorded under the previous standard. The net cumulative effect of the adjustments of $11.3 million was recorded as a decrease to the opening balance of the accumulated deficit as of January 1, 2021. As a result of the adoption the non-cash interest expense was lower for three and six months ended June 30, 2021 and will be lower for the remaining term of the outstanding convertible notes. The adoption had no impact on the condensed consolidated statements of cash flows.
Recently issued accounting pronouncements not yet adopted
With the exception of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2021, as compared to the recent accounting pronouncements described in the Company's Annual Report, that are of significance or potential significance to the Company.
3. Deferred Revenue and Performance Obligations
Deferred Revenue
For the three months ended June 30, 2021 and 2020, the Company recognized approximately $45.3 million and $48.8 million, respectively, and for the six months ended June 30, 2021 and 2020, the Company recognized approximately $70.3 million and $84.0 million, respectively, of revenue that was included in the deferred revenue balances at the beginning of the respective periods and primarily related to subscription services, maintenance and support, and services.
Performance Obligations
As of June 30, 2021, the Company expects to recognize approximately $390.5 million of revenue from remaining performance obligations. The Company expects, based on the terms of the related, underlying contractual arrangements, to recognize revenue on approximately $190.3 million of these performance obligations over the next 12 months, with the balance recognized thereafter. However, as a result of uncertain economic conditions caused by COVID-19, the amount of revenue recognized from the Company's contractual remaining performance obligations could vary and be less than what the Company expects as revenue recognized could be delayed or not occur depending on the ongoing impact of COVID-19.
4. Disaggregation of Revenue
Revenue by Geography
The geographic information in the table below is presented for the three and six months ended June 30, 2021 and 2020. The Company categorizes geographic revenues based on the location of the customer's headquarters. Because the Company's contracts are predominately denominated in U.S. dollars, it has limited exposure to foreign currency exchange risk as discussed under "Foreign Currency Exchange Risk" of Part I, Item 3 below.
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|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
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2021
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|
2020
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|
2021
|
|
2020
|
(in thousands)
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Revenue
|
|
Percent
|
|
Revenue
|
|
Percent
|
|
Revenue
|
|
Percent
|
|
Revenue
|
|
Percent
|
United States of America
|
$
|
21,875
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|
|
35
|
%
|
|
$
|
20,715
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|
|
32
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%
|
|
$
|
42,751
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|
|
35
|
%
|
|
$
|
42,515
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|
|
33
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%
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Europe
|
18,562
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|
|
30
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%
|
|
17,682
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|
|
28
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%
|
|
37,254
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|
|
30
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%
|
|
37,612
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|
|
29
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%
|
The rest of the world
|
21,964
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|
|
35
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%
|
|
25,350
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|
|
40
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%
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|
43,774
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|
|
35
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%
|
|
49,931
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|
|
38
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%
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Total revenue
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$
|
62,401
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|
100
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%
|
|
$
|
63,747
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|
|
100
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%
|
|
$
|
123,779
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|
|
100
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%
|
|
$
|
130,058
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|
|
100
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%
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5. Leases
The Company has operating leases for data centers, computer infrastructure, corporate offices and certain equipment. These leases have remaining lease terms ranging from 1 year to 12 years. Some of these leases include options to extend for up to 15 years, and some include options to terminate within 1 year.
As of June 30, 2021, the Company did not have any finance leases.
Supplemental cash flow information related to leases was as follows (in thousands):
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Three Months Ended June 30,
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Six Months Ended June 30,
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2021
|
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2020
|
|
2021
|
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2020
|
Cash paid for operating lease liabilities
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$
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1,917
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|
|
$
|
1,973
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|
|
$
|
4,378
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|
|
$
|
3,600
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Right-of-use asset obtained in exchange for operating lease liability
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$
|
194
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|
|
$
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—
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|
|
$
|
291
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|
|
$
|
1,759
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|
As of June 30, 2021, maturities of lease liabilities were as follows (in thousands):
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Year Ending December 31,
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Amount
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Remaining 2021
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$
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4,894
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2022
|
|
10,468
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2023
|
|
11,374
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2024
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|
5,383
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2025
|
|
4,253
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2026
|
|
4,134
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Thereafter
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27,726
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Total operating lease payments
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68,232
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Less: Imputed interest
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(19,807)
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Less: Anticipated lease incentive
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|
(1,385)
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Total operating lease liabilities
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|
$
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47,040
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6. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2021 and 2020:
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Three Months Ended June 30,
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Six Months Ended June 30,
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(in thousands, except per share data)
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2021
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2020
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2021
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2020
|
Numerator:
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Net loss
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$
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(18,046)
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|
$
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(17,208)
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|
|
$
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(40,075)
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|
|
$
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(39,943)
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|
Denominator:
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Weighted average shares (basic)
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44,321
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|
|
43,304
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|
|
44,283
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|
|
43,203
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Dilutive effect of potential common shares
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—
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|
|
—
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|
|
—
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|
|
—
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|
Weighted average shares (diluted)
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44,321
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|
|
43,304
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|
|
44,283
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|
|
43,203
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Basic loss per share
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$
|
(0.41)
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|
|
$
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(0.40)
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|
|
$
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(0.90)
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|
|
$
|
(0.92)
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Diluted loss per share
|
$
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(0.41)
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|
|
$
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(0.40)
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|
|
$
|
(0.90)
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|
|
$
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(0.92)
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|
Dilutive potential common shares consist of shares issuable upon the settlement of stock appreciation rights ("SARs"), and the vesting of restricted stock units ("RSUs") and market stock units ("MSUs"). Potential common shares determined to be antidilutive and excluded from diluted weighted average shares outstanding were approximately 1.2 million for the three months ended June 30, 2021 and 2020, and 1.3 million and 1.4 million for the six months ended June 30, 2021 and 2020, respectively. In addition, potential common shares related to the convertible notes determined to be antidilutive and excluded from diluted weighted average shares outstanding were 5.8 million for three and six months ended June 30, 2021, and 2.2 million for the three and six months ended June 30, 2020.
7. Noncash Share-based Compensation
The Company's 2017 Equity Incentive Plan (as amended and restated, the "2017 Stock Plan") was approved by the Company's stockholders in May 2019 and reserved an aggregate amount of 4,550,000 shares available for issuance. In May 2021, the Company's stockholders approved an amendment to the 2017 Stock Plan increasing the aggregate amount of shares available for issuance to 7,650,000. As of June 30, 2021, 4,047,069 shares remain available for issuance under the 2017 Stock Plan.
The following table presents the number of shares or units outstanding for each award type as of June 30, 2021 and December 31, 2020, respectively, (in thousands):
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Award type
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|
June 30, 2021
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December 31, 2020
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Restricted stock units (time-based)
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1,869
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|
|
1,802
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Restricted stock units (performance-based)
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|
140
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162
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|
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|
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Stock appreciation rights
|
|
—
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|
|
28
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Market stock units
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|
126
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|
|
111
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|
During the three months ended June 30, 2021, the Company granted 39,695 RSUs (time-based) with a weighted average grant-date fair value of $38.32 per share.
During the six months ended June 30, 2021, the Company granted 823,589 RSUs (time-based) with a weighted average grant-date fair value of $47.59 per share. The Company also granted 125,541 MSUs with a weighted average grant-date fair value of $56.05 to certain executive employees during the six months ended June 30, 2021. These MSUs vest on January 31, 2024 and the actual number of MSUs that will be eligible to vest is based on the total stockholder return of the Company relative to the total stockholder return of the Index over the performance period, as defined by each award's plan documents or individual award agreements. The maximum number of shares issuable upon vesting is 200% of the MSUs initially granted. The Company did not grant any stock options, SARs or performance-based RSUs during the six months ended June 30, 2021.
The assumptions used to value the MSUs granted during the six months ended June 30, 2021 were as follows:
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|
|
June 30, 2021
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Volatility
|
53.29
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%
|
Risk-free interest rate
|
0.22
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%
|
Expected option life in years
|
2.97
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Dividend yield
|
—
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Share-based compensation expense is allocated to expense categories on the unaudited condensed consolidated statements of comprehensive income (loss). The following table summarizes share-based compensation expense included in the Company's unaudited condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Share-based compensation:
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
976
|
|
|
$
|
502
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|
|
$
|
1,802
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|
|
$
|
1,026
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling and marketing
|
2,510
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|
|
1,965
|
|
|
4,734
|
|
|
3,831
|
|
Research and development
|
2,117
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|
|
1,368
|
|
|
3,943
|
|
|
2,875
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|
General and administrative
|
3,003
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|
|
1,917
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|
|
6,297
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|
|
4,367
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|
Total included in operating expenses
|
7,630
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|
|
5,250
|
|
|
14,974
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|
|
11,073
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|
Total share-based compensation expense
|
$
|
8,606
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|
|
$
|
5,752
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|
|
$
|
16,776
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|
|
$
|
12,099
|
|
At June 30, 2021, the Company had an estimated $78.4 million of total unrecognized compensation costs related to share-based compensation arrangements. These costs will be recognized over a weighted average period of 2.8 years.
The Company's Employee Stock Purchase Plan (as amended, the "ESPP") provides for eligible employees to purchase shares on an after-tax basis in an amount between 1% and 10% of their annual pay: (i) on June 30 of each year at a 15% discount of the fair market value of the Company's common stock on January 1 or June 30, whichever is lower, and (ii) on December 31 of each year at a 15% discount of the fair market value of the Company's common stock on July 1 or December 31, whichever is lower. An employee may not purchase more than $5,000 in either of the six-month measurement periods described above or more than $10,000 annually. In May 2021, the Company's stockholders approved an amendment to the ESPP Plan increasing the aggregate amount of shares available for issuance under the ESPP to 1,000,000. During the three and six months ended June 30, 2021, the Company issued zero and 41,970 shares under the ESPP, respectively. As of June 30, 2021, 532,824 shares remain authorized and available for issuance under the ESPP. As of June 30, 2021, the Company held approximately $1.5 million on behalf of employees for future purchases under the ESPP, and this amount was recorded in accrued payroll and other employee benefits in the Company's unaudited condensed consolidated balance sheet.
8. Convertible Senior Notes
The following is a summary of the Company's convertible senior notes as of June 30, 2021 (in thousands):
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|
|
Date of Issuance
|
|
Unpaid Principal Balance
|
|
Net Carrying Amount
|
|
Contractual Interest Rates
|
|
|
|
Current
|
|
Noncurrent
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
1% Convertible Notes due in 2024 ("2024 Notes")
|
May 2019
|
|
$
|
143,750
|
|
|
$
|
—
|
|
|
$
|
141,210
|
|
|
1%
|
2.25% Convertible Notes due in 2027 ("2027 Notes")
|
September 2020
|
|
$
|
150,000
|
|
|
$
|
—
|
|
|
$
|
146,332
|
|
|
2.25%
|
The 2027 and 2024 Notes (collectively, the "Notes") are general unsecured obligations and rank senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with all of the Company's existing and future liabilities that are not so subordinated, are effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries (including trade payables but excluding intercompany obligations owed to the Company or its subsidiaries).
Interest related to the 2027 Notes is payable semiannually in arrears in cash on March 15 and September 15 of each year, beginning on March 15, 2021. Interest related to the 2024 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2019. The 2027 Notes mature on September 15, 2027 and the 2024 Notes mature on May 15, 2024, unless redeemed or converted in accordance with their terms prior to such date.
Each $1,000 of principal of the 2027 Notes will initially be convertible into 23.9137 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $41.82 per share. Each $1,000 of principal of the 2024 Notes will initially be convertible into 15.1394 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $66.05 per share. The initial conversion price for the 2027 and the 2024 Notes is subject to adjustment upon the occurrence of certain specified events.
As of June 30, 2021, the 2027 and 2024 Notes are not yet convertible and their remaining term is approximately 74 months and 34 months, respectively.
As of June 30, 2021 and December 31, 2020, the fair value of the principal amount of the Notes in the aggregate was $342.9 million and $363.8 million, respectively. The estimated fair value was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price and interest rates, which represents level 2 in the fair value hierarchy.
Effective January 1, 2021, the Company early adopted ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in an Entity's Own Equity. Upon adoption of the new standard, the Company removed the debt discount and adjusted the debt issuance cost which was previously allocated between the liability and the equity component, resulting in an increase of $68.8 million to convertible debt, net. In addition, the Company recorded a reduction to additional paid-in capital of $80.1 million related to the equity conversion component of the outstanding convertible notes which was previously separated and recorded in equity. The net cumulative impact of the adoption of the standard was recorded as a decrease to accumulated deficit.
The Notes consist of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
Liability component:
|
|
|
|
Principal
|
$
|
293,750
|
|
|
$
|
293,750
|
|
Less: debt discount and issuance cost, net of amortization
|
(6,208)
|
|
|
(75,722)
|
|
Net carrying amount
|
$
|
287,542
|
|
|
$
|
218,028
|
|
|
|
|
|
Equity component(1)
|
$
|
—
|
|
|
$
|
80,098
|
|
(1) Recorded within additional paid-in capital in the unaudited condensed consolidated balance sheet. As of December 31, 2020, it included $47.2 million and $32.9 million related to the 2027 and 2024 Notes, respectively, which was net of $1.3 million and $1.1 million issuance cost in equity, respectively.
The following table sets forth total interest expense recognized related to the Notes (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Coupon interest
|
$
|
1,203
|
|
|
$
|
359
|
|
|
$
|
2,406
|
|
|
$
|
719
|
|
Amortization of debt issuance costs
|
373
|
|
|
158
|
|
|
746
|
|
|
314
|
|
Amortization of debt discount
|
—
|
|
|
1,568
|
|
|
—
|
|
|
3,114
|
|
Total
|
$
|
1,576
|
|
|
$
|
2,085
|
|
|
$
|
3,152
|
|
|
$
|
4,147
|
|
Capped Call Transactions
In September 2020 and in May 2019, in connection with the offering of the 2027 and 2024 Notes, respectively, the Company entered into privately negotiated capped call transactions (collectively, the "Capped Call") with certain option counterparties. The Capped Call transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock initially underlying the Notes, at a strike price that corresponds to the initial conversion price of the Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The Capped Call transactions are intended to reduce potential dilution to the Company’s common stock and/or offset any cash payments the Company will be required to make in excess of the principal amounts upon any conversion of Notes, and to effectively increase the overall conversion price of the 2027 Notes from $41.82 to $78.90 per share, and for the 2024 Notes from $66.05 to $101.62 per share. As the Capped Call transactions meet certain accounting criteria, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of the Capped Call was $25.3 million and $16.4 million for the 2027 and 2024 Notes, respectively, and was recorded as part of additional paid-in capital.
9. Commitments and Contingencies
Litigation
In the ordinary course of business, the Company regularly becomes involved in contract and other negotiations and, in more limited circumstances, becomes involved in legal proceedings, claims and litigation. The outcomes of these matters are inherently unpredictable. The Company is not currently involved in any outstanding litigation that it believes, individually or in the aggregate, will have a material adverse effect on its business, financial condition, results of operations or cash flows.
Purchase commitments
In the ordinary course of business, the Company enters into various purchase commitments for goods and services.
In March 2019, the Company entered into a noncancelable agreement with a computing infrastructure vendor that amended the existing agreement dated June 2017. The amended agreement expires in March 2022. The purchase commitment as of June 30, 2021 was $24.9 million for the remaining period through the expiration of the agreement.