PLURALSIGHT, INC.
The accompanying notes are an integral part of these condensed consolidated financial statements.
PLURALSIGHT, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
| | | | | | | | |
| | | Six Months Ended June 30, |
| | | 2018 | | 2017 |
| Operating activities | | | | |
| Net loss | | $ | (66,954 | ) | | $ | (32,083 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
| Depreciation of property and equipment | | 4,358 |
| | 2,626 |
|
| Amortization of acquired intangible assets | | 6,665 |
| | 4,012 |
|
| Amortization of course creation costs | | 930 |
| | 671 |
|
| Equity-based compensation | | 20,928 |
| | 6,091 |
|
| Provision for doubtful accounts | | 358 |
| | 188 |
|
| Amortization of debt discount and debt issuance costs | | 1,215 |
| | 306 |
|
| Debt extinguishment costs | | 4,180 |
| | 931 |
|
| Deferred tax benefit | | (64 | ) | | — |
|
| Changes in assets and liabilities: | | | | |
| Accounts receivable | | 1,335 |
| | 1,833 |
|
| Prepaid expenses and other assets | | (3,858 | ) | | (3,215 | ) |
| Accounts payable | | (588 | ) | | 1,328 |
|
| Accrued expenses and other liabilities | | (2,839 | ) | | 3,641 |
|
| Accrued author fees | | 617 |
| | 939 |
|
| Deferred revenue | | 17,500 |
| | 8,782 |
|
| Net cash used in operating activities | | (16,217 | ) | | (3,950 | ) |
| Investing activities | | | | |
| Purchases of property and equipment | | (4,574 | ) | | (3,025 | ) |
| Purchases of content library | | (1,504 | ) | | (1,229 | ) |
| Net cash used in investing activities | | (6,078 | ) | | (4,254 | ) |
| Financing activities | | | | |
| Proceeds from initial public offering, net of underwriting discounts and commissions | | 332,080 |
| | — |
|
| Payments of costs related to initial public offering | | (3,085 | ) | | — |
|
| Borrowings of long-term debt | | 20,000 |
| | 115,000 |
|
| Repayments of long-term debt | | (137,710 | ) | | (85,000 | ) |
| Payments of debt extinguishment costs | | (2,162 | ) | | — |
|
| Payments of debt issuance costs | | (450 | ) | | (809 | ) |
| Payments to settle equity appreciation rights | | (325 | ) | | — |
|
| Taxes paid related to net share settlement | | (78 | ) | | — |
|
| Proceeds from the issuance of common units | | — |
| | 22 |
|
| Payments of facility financing obligation | | (8 | ) | | (8 | ) |
| Net cash provided by financing activities | | 208,262 |
| | 29,205 |
|
| Effect of exchange rate change on cash, cash equivalents, and restricted cash | | (86 | ) | | 24 |
|
| Net increase in cash, cash equivalents, and restricted cash | | 185,881 |
| | 21,025 |
|
| Cash, cash equivalents, and restricted cash, beginning of period | | 28,477 |
| | 19,397 |
|
| Cash, cash equivalents, and restricted cash, end of period | | $ | 214,358 |
| | $ | 40,422 |
|
| Supplemental cash flow disclosure: | | | | |
| Cash paid for interest | | $ | 4,271 |
| | $ | 2,572 |
|
| Cash paid for income taxes, net | | $ | 172 |
| | $ | 142 |
|
| Supplemental disclosure of non-cash investing and financing activities: | | | | |
| Conversion of redeemable convertible preferred units | | $ | 582,041 |
| | $ | — |
|
| Redeemable convertible preferred unit accretion | | $ | 176,275 |
| | $ | 22,825 |
|
| Unpaid capital expenditures | | $ | 568 |
| | $ | 196 |
|
| Costs related to initial public offering, accrued but not yet paid | | $ | 4,009 |
| | $ | — |
|
| Issuance of warrants to purchase shares of Class A common stock | | $ | 984 |
| | $ | — |
|
| Reconciliation of cash, cash equivalents, and restricted cash: | | | | |
| Cash and cash equivalents | | $ | 213,645 |
| | $ | 40,212 |
|
| Restricted cash included in other assets | | 713 |
| | 210 |
|
| Total cash, cash equivalents, and restricted cash | | $ | 214,358 |
| | $ | 40,422 |
|
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| | | | | |
| Operating activities | | | | |
| Net loss | | $ | (47,513 | ) | | $ | (33,884 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
| Depreciation of property and equipment | | 2,643 |
| | 2,247 |
|
| Amortization of acquired intangible assets | | 1,435 |
| | 702 |
|
| Amortization of course creation costs | | 761 |
| | 579 |
|
| Equity-based compensation | | 25,578 |
| | 20,268 |
|
| Amortization of deferred contract acquisition costs | | 6,451 |
| | 5,867 |
|
| Amortization of debt discount and issuance costs | | 6,591 |
| | 1,545 |
|
| Investment discount and premium amortization, net | | (376 | ) | | — |
|
| Other | | 661 |
| | 25 |
|
| Changes in assets and liabilities: | | | | |
| Accounts receivable | | 39,200 |
| | 11,392 |
|
| Deferred contract acquisition costs | | (5,871 | ) | | (5,851 | ) |
| Prepaid expenses and other assets | | 286 |
| | (1,801 | ) |
| Right-of-use assets | | 1,490 |
| | 1,284 |
|
| Accounts payable | | (2,467 | ) | | 1,035 |
|
| Accrued expenses and other liabilities | | (6,331 | ) | | (5,159 | ) |
| Accrued author fees | | (98 | ) | | 735 |
|
| Lease liabilities | | (1,925 | ) | | (1,736 | ) |
| Deferred revenue | | (2,220 | ) | | 8,288 |
|
| Net cash provided by operating activities | | 18,295 |
| | 5,536 |
|
| Investing activities | | | | |
| Purchases of property and equipment | | (13,894 | ) | | (2,133 | ) |
| Purchases of content library | | (1,680 | ) | | (937 | ) |
| Purchases of investments | | (161,862 | ) | | — |
|
| Proceeds from maturities of investments | | 160,535 |
| | — |
|
| Net cash used in investing activities | | (16,901 | ) | | (3,070 | ) |
| Financing activities | | | | |
| Proceeds from issuance of common stock from employee equity plans | | 699 |
| | 2,621 |
|
| Taxes paid related to net share settlement | | (2,350 | ) | | — |
|
| Proceeds from issuance of convertible senior notes, net of discount and issuance costs | | — |
| | 617,663 |
|
| Purchase of capped calls related to issuance of convertible senior notes | | — |
| | (69,432 | ) |
| Net cash (used in) provided by financing activities | | (1,651 | ) | | 550,852 |
|
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash and cash equivalents | | (267 | ) | | 26 |
|
| Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents | | (524 | ) | | 553,344 |
|
| Cash, cash equivalents, and restricted cash and cash equivalents, beginning of period | | 119,431 |
| | 211,071 |
|
| Cash, cash equivalents, and restricted cash and cash equivalents, end of period | | $ | 118,907 |
| | $ | 764,415 |
|
| Supplemental cash flow disclosure: | | | | |
| Cash paid for interest | | $ | 1,113 |
| | $ | — |
|
| Cash paid for income taxes, net | | $ | 270 |
| | $ | 116 |
|
| Supplemental disclosure of non-cash investing and financing activities: | | | | |
| Unpaid capital expenditures | | $ | 5,008 |
| | $ | 870 |
|
| Equity-based compensation capitalized as internal-use software | | $ | 363 |
| | $ | 348 |
|
| Unrealized losses on investments | | $ | (1,565 | ) | | $ | — |
|
| Reconciliation of cash, cash equivalents, and restricted cash and cash equivalents as shown in the statement of cash flows: | | | | |
| Cash and cash equivalents | | $ | 94,476 |
| | $ | 736,566 |
|
| Restricted cash and cash equivalents | | 24,431 |
| | 27,849 |
|
| Total cash, cash equivalents, and restricted cash and cash equivalents | | $ | 118,907 |
| | $ | 764,415 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PLURALSIGHT, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Description of Business
Pluralsight, Inc. was incorporated as a Delaware corporation on December 4, 2017 as a holding company for the purpose of facilitating an initial public offering (“IPO”) and other related transactions in order to carry on the business of Pluralsight Holdings, LLC ("(“Pluralsight Holdings"Holdings”) and its subsidiaries (together with Pluralsight, Inc., the “Company” or "Pluralsight"“Pluralsight”). Pluralsight Holdings is a limited liability company (“LLC”) and was organized on August 29, 2014 in the state of Delaware and is the parent company of Pluralsight, LLC, and its directly and indirectly wholly-owned subsidiaries. Pluralsight, LLC was organized on June 17, 2004 in the state of Nevada. Pluralsight operates a cloud-based technology learning platform that provides a broad range of tools for businesses and individuals, including skill assessments, a curated library of courses, learning paths, and business analytics. As the sole managing member of Pluralsight Holdings, Pluralsight, Inc. operates and controls all the business operations and affairs of Pluralsight.
Initial Public Offering
In May 2018, Pluralsight, Inc. completed anits IPO in which it sold 23,805,000 shares of Class A common stock at a public offering price of $15.00 per share forand used the net proceeds of $332.1 million, after deducting underwriters' discounts and commissions, which Pluralsight, Inc. used to purchase newly-issuednewly issued common limited liability company units ("(“LLC Units") from Pluralsight Holdings. As of June 30, 2018,Following the Company has reclassified $7.4 million of offering costs into stockholders’ equity as a reduction of the net proceeds received from the IPO.
Reorganization Transactions
Inreorganization transactions completed in connection with the IPO the Company completed the following transactions ("Reorganization Transactions"):
The amended and restated limited liability company agreement of Pluralsight Holdings ("LLC Agreement") was amended and restated to, among other things: (i) appoint, Pluralsight, Inc. as its sole managing member and (ii) effectuate the conversion of all outstanding redeemable convertible preferred limited liability company units, incentive units, and Class B incentive units into a single class of common units. See Note 9—Stockholders' Equity for additional details.
Certain members of Pluralsight Holdings that were corporations merged with and into Pluralsight, Inc. and certain members of Pluralsight Holdings contributed certain of their LLC Units to Pluralsight, Inc., in each case in exchange for shares of Class A common stock.
The certificate of incorporation of Pluralsight, Inc. was amended and restated to authorize three classes of common stock, Class A common stock, Class B common stock, Class C common stock, and one class of preferred stock. Class B and Class C common stock were issued on a one-for-one basis to the members of Pluralsight Holdings who retained LLC Units ("Continuing Members"). Class B and Class C common stock have voting rights but no economic rights. See Note 9—Stockholders' Equity for additional details.
Asbecame the sole managing member of Pluralsight Holdings,Holdings. As the sole managing member, 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 representing the economic interests held by the other members of the Continuing Members' LLC Units on its consolidated financial statements.Pluralsight Holdings. As of June 30, 2018,March 31, 2020, Pluralsight, Inc. owned 47.7%74.5% of Pluralsight Holdings and the Continuing Members owned the remaining 52.3%members of Pluralsight Holdings.
As the Reorganization Transactions are considered transactions between entities under common control, the financial statements for periodsHoldings who retained LLC Units prior to the IPO (the "Continuing Members") owned the remaining 25.5% of Pluralsight Holdings.
Pluralsight operates a cloud-based technology skills platform that provides a broad range of tools for businesses and Reorganization Transactions have been adjusted to combineindividuals, including skill assessments, a curated library of courses, learning paths, developer productivity metrics, and business analytics. As the previously separate entities for presentation purposes. Prior to the Reorganization Transactions,sole managing member of Pluralsight Holdings, Pluralsight, Inc. had no operations.operates and controls all of the business operations and affairs of Pluralsight.
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"GAAP”) and the applicable regulations of the U.S. Securities and Exchange Commission ("SEC"(“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, 20172019 included in the prospectus dated May 16, 2018 (File No. 333-224301),Pluralsight, Inc.'s Annual Report on Form 10-K/A, as filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amendedon March 2, 2020 ("Prospectus"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"(“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. AUnder the VIE accounting model, Pluralsight, Inc. is an entitythe primary beneficiary as it has the majority economic interest in whichPluralsight Holdings, and, as the equity investors as a group, if any, lacksole managing member, has decision making authority that significantly affects the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity's economic performance of the entity, while the limited partners have no substantive kick-out or participating rights.
The assets and liabilities of Pluralsight Holdings represent substantially all of the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support.consolidated assets and liabilities of Pluralsight, Inc. with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement ("TRA") as discussed in Note 15—Income Taxes and the obligations under the Company's convertible senior notes discussed in Note 10—Convertible Senior Notes.
Interim Unaudited Condensed Consolidated Financial Statements
The accompanying interim condensed consolidated balance sheet as of June 30, 2018,March 31, 2020, and the interim condensed consolidated statements of operations, for the three and six months ended June 30, 2018 and 2017, the interim condensed consolidated statements of redeemable convertible preferred units, members' deficit, andcomprehensive loss, stockholders' equity, for the six months ended June 30, 2018, and the interim condensed consolidated statements of cash flows for the sixthree months ended June 30, 2018March 31, 2020 and 20172019, are unaudited. The condensed consolidated balance sheet as of December 31, 20172019 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,condition, its operations and cash flows for the periods presented. The historical results are not necessarily indicative of future results, and the results of operations for the three and six months ended June 30, 2018March 31, 2020 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, but not limited to, those related to the determination of the fair value of equity awards, the fair value of warrants to purchase common units,the liability and equity components of the convertible senior notes, the fair value of identified assets and liabilities acquired in business combinations, the useful lives of property and equipment, content library and intangible assets, provisions for doubtful accounts receivable and deferred revenue, accounting for business combinations, impairment of long-lived and intangible assets, including goodwill, andprovisions for doubtful accounts receivable, the standalone selling price (“SSP”) of performance obligations, the determination of the period of benefit for deferred contract acquisition costs, certain accrued expenses, including author fees.fees, and the discount rate used for operating leases. 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 Note 2—Summary of Significant Accounting Policies”Policies and Recent Accounting Pronouncements in the Prospectus.Annual Report. There have been no significant changes to these policies that have had a material impact on the Company's unaudited condensed consolidated financial statements and related notes during the three and six months ended June 30, 2018,March 31, 2020, except as noted below.
Deferred Offering Costs
Deferred offering costs are capitalized and consist of legal, accounting, printing, and other costs that are directly attributable to the IPO. As of December 31, 2017, the balance of deferred offering costs was $2.0 million and included in other assets in the condensed consolidated balance sheets. As of June 30, 2018, the Company reclassified $7.4 million of offering costs into stockholders’ equity as a reduction of the net proceeds received from the IPO.
Advertising Costs
Advertising costs are expensed as incurred. The Company recorded advertising costs of $3.2 million and $3.8 million for the three months ended June 30, 2018 and 2017, respectively, and $5.8 million and $6.9 million for the six months ended June 30, 2018 and 2017, respectively.
Equity-Based Compensation
In connection with the IPO, the Company granted Class A common stock options to certain employees. Equity-based compensation expense for Class A common stock options granted to employees is recognized based on the fair value of the awards granted, determined using the Black-Scholes option pricing model. Equity-based compensation expense is recognized as expense on a straight-line basis over the requisite service period.
Equity-based compensation expense related to purchase rights issued under the 2018 Employee Stock Purchase Plan ("ESPP") is based on the Black-Scholes option pricing model fair value of the estimated number of awards as of the beginning of the offering period. Equity-based compensation expense is recognized following the straight-line attribution method over the offering period.
The Black-Scholes option pricing model is affected by the share price and a number of assumptions, including the award’s expected life, risk-free interest rate, the expected volatility of the underlying stock, and expected dividends. The assumptions used in the Black Scholes pricing model are estimated as follows:
Fair Value of Common Stock: Prior to the IPO, the fair value of the common units underlying equity awards was determined considering numerous objective and subjective factors and required judgment to determine the fair value as of each grant date. Subsequent to the IPO, the Company determines the fair value of common stock as of each grant date using the market closing price of Pluralsight, Inc.'s Class A common stock on the date of grant.
Risk-free Interest Rate: The risk-free interest rate is derived from the implied yield available on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options.
Expected Term: The expected term is estimated using the simplified method due to a lack of historical exercise activity for the Company. The simplified method calculates the expected term as the mid-point between the vesting date and the contractual expiration date of the award. For the ESPP, the Company uses the period from the beginning of the offering period to the end of each purchase period.
Volatility: The price volatility factor is based on the historical volatilities of comparable companies as the Company does not have sufficient trading history for its common stock. To determine comparable companies, the Company considers public enterprise cloud-based application providers and selects those that are similar in size, stage of life cycle, and financial leverage. The Company will continue to use this process until a sufficient amount of historical information regarding volatility becomes available, or until circumstances change such that the identified companies are no longer relevant, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.
Dividend Yield: The Company has not and does not expect to pay dividends for the foreseeable future.
Non-Controlling Interests
The non-controlling interests balance represents the economic interests of LLC Units of Pluralsight Holdings held by Continuing Members, based on the portion of LLC Units owned by Continuing Members. Income or loss is attributed to the non-controlling interests based on the weighted-average LLC Units outstanding during the period, excluding LLC Units that are subject to time-based vesting requirements. As of June 30, 2018, the non-controlling interests owned 52.3% of the vested LLC Units outstanding. The non-controlling interests' ownership percentage can fluctuate over time as LLC Units vest and as Continuing Members elect to exchange LLC Units for Class A common stock of Pluralsight, Inc.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss attributable to Pluralsight, Inc. for the period following the Reorganization Transactions by the weighted-average number of shares of Class A common shares outstanding during the same period after giving effect to weighted-average shares of Class A common stock that remain subject to time-based vesting requirements.
Diluted net loss per share is computed giving effect to all potential weighted-average dilutive shares for the period following the Reorganization Transactions including LLC Units held by Continuing Members that are convertible into Class A common stock, stock options, restricted stock units ("RSUs"), warrants to purchase Class A common stock, and shares issuable under the ESPP for the period after the Reorganization Transactions. The dilutive effect of outstanding awards, if any, is reflected in diluted earnings per share by application of the treasury stock method or if-converted method, as applicable.
Recent Accounting Pronouncements
Under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), the Company meets the definition of an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the Company is no longer an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period. As a result, the Company’s financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Recently Adopted Accounting Pronouncements
In AugustJune 2016, the Financial Accounting Standards Board ("FASB")FASB issued ASU 2016-15, StatementNo. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash PaymentsCredit Losses on Financial Instruments. This update clarifies how certain cash flows should be classified with the objective of reducing the existing diversity in practice. This update is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December
15, 2019. Early adoption is permitted, including adoption in an interim period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. Among other provisions, the ASU requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. 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. The allowance for credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that cash paymentsaffect the collectibility of the reported amount. The ASU also amends the impairment model for certainavailable-for-sale debt prepayment orsecurities and requires any credit losses on available-for-sale debt extinguishment costssecurities to be classifiedpresented as cash outflows for financing activities.an allowance rather than as a write-down, with changes presented through earnings. The Company early adopted the standard duringeffective January 1, 2020 using the second quartermodified retrospective approach. The effect of 2018.the adoption was not material to the Company's condensed consolidated financial statements.
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 Company adopted the standard prospectively effective January 1, 2020. As a result of the adoption, the Company recorded $2.2 million in payments of debt extinguishmentcapitalizes certain implementation costs within financing activities onthat were previously expensed as incurred. These costs will be amortized to expense over the condensed consolidated statements of cash flows for the six months ended June 30, 2018. The retrospective adoption had no material effect on any prior periods.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update clarifies that transfers between cash and restricted cash are not partterm of the entity’s operating, investing, and financing activities, and detailshosting arrangement. The effect of those transfers areadopting the standard was not reported as cash flow activities in the statements of cash flows. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, this update is effective for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption for all entities is permitted. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company early adopted this standard during the year ended December 31, 2017, and retroactively adjusted the consolidated statements of cash flows for all periods presented. The retrospective adoption had no material effect on any prior periods.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in the ASU. The ASU is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. During the first quarter of 2018, the Company adopted the ASU prospectively. The adoption of the ASU had no material effect on the unaudited condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. For public business entities that are SEC filers, the ASU is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. For public business entities that are not SEC filers, the ASU is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. For all other entities, the ASU is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. The guidance will apply to the Company’s reporting requirements in performing goodwill impairment testing; however, the Company does not anticipate the adoption of this guidance will have a material impact on its unaudited condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods. For all other entities, the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The impact to the Company’s unauditedCompany's condensed consolidated financial statements will dependfor the three months ended March 31, 2020.
Note 3. Revenue
Disaggregation of Revenue
Subscription revenue accounted for approximately 96% and 99% of the Company's revenue for the three months ended March 31, 2020 and 2019, respectively.
Revenue by geographic region, based on the factsphysical location of the customer, was as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | Growth |
| | | 2020 | | 2019 | | Rate |
| | | Amount | | % | | Amount | | % | | % |
| | | | | | | | | | | |
| United States | | $ | 58,166 |
| | 63 | % | | $ | 43,581 |
| | 63 | % | | 33 | % |
Europe, Middle East and Africa(1) | | 25,972 |
| | 28 | % | | 18,986 |
| | 27 | % | | 37 | % |
| Other foreign locations | | 8,508 |
| | 9 | % | | 7,050 |
| | 10 | % | | 21 | % |
| Total revenue | | $ | 92,646 |
| | 100 | % | | $ | 69,617 |
| | 100 | % | | |
| |
| (1) | Revenue from the United Kingdom represented 12% and 11% of revenue for the three months ended March 31, 2020 and 2019, respectively. No other foreign country accounted for 10% or more of revenue during the three months ended March 31, 2020 and 2019 . |
Revenue by type of customer, was as follows (dollars in thousands):
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| | | | | |
| Business customers | | $ | 81,291 |
| | $ | 58,567 |
|
| Individual customers | | 11,355 |
| | 11,050 |
|
| Total revenue | | $ | 92,646 |
| | $ | 69,617 |
|
Contract Balances
Contract assets represent amounts for which we have recognized revenue, pursuant to our revenue recognition policy, for contracts that have not yet been invoiced to our customers where there is a remaining performance obligation, typically for multi-year arrangements. Total contract assets were $0.9 million and circumstances$0.8 million as of March 31, 2020 and December 31, 2019, respectively. The change in contract assets reflects the difference in timing between our satisfaction of remaining performance obligations and our contractual right to bill our customers.
Deferred revenue consists of contract liabilities and includes payments received in advance of performance under the contract. Such amounts are generally recognized as revenue over the contractual period. For the three months ended March 31, 2020 and 2019, the Company recognized revenue of $80.3 million and $58.6 million, respectively, that was included in the corresponding deferred revenue balance at the beginning of the period.
Remaining Performance Obligations
As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $308.4 million. The Company expects to recognize 76% of the transaction price over the next 12 months.
Costs to Obtain a Contract
The following table summarizes the activity of the deferred contract acquisition costs (in thousands):
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| | | | | |
| Beginning balance | | $ | 24,313 |
| | $ | 20,212 |
|
| Capitalization of contract acquisition costs | | 5,871 |
| | 5,851 |
|
| Amortization of deferred contract acquisition costs | | (6,451 | ) | | (5,867 | ) |
| Ending balance | | $ | 23,733 |
| | $ | 20,196 |
|
Note 4. Cash Equivalents and Investments
Cash equivalents, short-term investments, and long-term investments consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | March 31, 2020 |
| | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | | |
| Cash equivalents | | | | | | | | |
| Money market funds | | $ | 72,737 |
| | $ | — |
| | $ | — |
| | $ | 72,737 |
|
| Commercial paper | | 998 |
| | — |
| | — |
| | 998 |
|
| Corporate notes and obligations | | 1,981 |
| | — |
| | (1 | ) | | 1,980 |
|
| Total cash equivalents | | $ | 75,716 |
| | $ | — |
| | $ | (1 | ) | | $ | 75,715 |
|
| Short-term investments | | | | | | | | |
| Commercial paper | | $ | 36,801 |
| | $ | — |
| | $ | — |
| | $ | 36,801 |
|
| U.S. treasury securities | | 139,636 |
| | 334 |
| | — |
| | 139,970 |
|
| Corporate notes and obligations | | 135,100 |
| | 95 |
| | (282 | ) | | 134,913 |
|
| Total short-term investments | | $ | 311,537 |
| | $ | 429 |
| | $ | (282 | ) | | $ | 311,684 |
|
| Restricted cash equivalents | | | | | | | | |
| Money market funds | | $ | 23,897 |
| | $ | — |
| | $ | — |
| | $ | 23,897 |
|
| Long-term investments | | | | | | | | |
| Corporate notes and obligations | | $ | 107,694 |
| | $ | 123 |
| | $ | (1,510 | ) | | $ | 106,307 |
|
| U.S. agency obligations | | 18,954 |
| | 14 |
| | (5 | ) | | 18,963 |
|
| Certificates of deposit | | 944 |
| | — |
| | — |
| | 944 |
|
| Total long-term investments | | $ | 127,592 |
| | $ | 137 |
| | $ | (1,515 | ) | | $ | 126,214 |
|
| | | | | | | | | |
| Total cash equivalents, restricted cash equivalents, and investments | | $ | 538,742 |
| | $ | 566 |
| | $ | (1,798 | ) | | $ | 537,510 |
|
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2019 |
| | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | | |
| Cash equivalents | | | | | | | | |
| Money market funds | | $ | 62,085 |
| | $ | — |
| | $ | — |
| | $ | 62,085 |
|
| Commercial paper | | 4,991 |
| | — |
| | — |
| | 4,991 |
|
| Total cash equivalents | | $ | 67,076 |
| | $ | — |
| | $ | — |
| | $ | 67,076 |
|
| Short-term investments | | | | | | | | |
| Commercial paper | | $ | 33,627 |
| | $ | — |
| | $ | — |
| | $ | 33,627 |
|
| U.S. treasury securities | | 149,353 |
| | 53 |
| | — |
| | 149,406 |
|
| Corporate notes and obligations | | 148,993 |
| | 215 |
| | (7 | ) | | 149,201 |
|
| Total short-term investments | | $ | 331,973 |
| | $ | 268 |
| | $ | (7 | ) | | $ | 332,234 |
|
| Restricted cash equivalents | | | | | | | | |
| Money market funds | | $ | 28,371 |
| | $ | — |
| | $ | — |
| | $ | 28,371 |
|
| Long-term investments | | | | | | | | |
| Corporate notes and obligations | | $ | 78,353 |
| | $ | 121 |
| | $ | (46 | ) | | $ | 78,428 |
|
| U.S. agency obligations | | 26,436 |
| | 1 |
| | (4 | ) | | 26,433 |
|
| Certificates of deposit | | 944 |
| | — |
| | — |
| | 944 |
|
| Total long-term investments | | $ | 105,733 |
| | $ | 122 |
| | $ | (50 | ) | | $ | 105,805 |
|
| | | | | | | | | |
| Total cash equivalents, restricted cash equivalents, and investments | | $ | 533,153 |
| | $ | 390 |
| | $ | (57 | ) | | $ | 533,486 |
|
The amortized cost and fair value of the Company's investments based on their stated maturities consisted of the following as of March 31, 2020 (in thousands):
|
| | | | | | | | |
| | | Amortized Cost | | Fair Value |
| | | | | |
| Due within one year | | $ | 311,537 |
| | $ | 311,684 |
|
| Due between one and two years | | 127,592 |
| | 126,214 |
|
| Total investments | | $ | 439,129 |
| | $ | 437,898 |
|
The Company reviews the individual securities that have unrealized losses in its investment portfolio on a regular basis to evaluate whether or not any specific future transactions.
In February 2016,declines in fair value are the FASB issued ASU 2016-02, Leases (Topic 842). Underresult of credit losses. The Company evaluates, among other factors, whether it has the new guidance, lesseesintention to sell any of these investments and whether it is more likely than not that it will be required to recognize a lease liability and a right-of-use asset for all leases (withsell any of them before recovery of 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 inamortized cost basis. Based on this update are effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Asevaluation, the Company has electeddetermined that the unrealized losses were primarily related to useinvestments in corporate notes and obligations, and were due to increases in credit spreads and temporary declines in liquidity for the extended transition period availableasset class that were not specific to emerging growth companies, the underlying issuer of the investments. The Company does not anticipate adoptingintend to sell the standard until the fiscal year ended December 31, 2020. The Companyinvestments with unrealized losses and it is currently evaluating the potential changes from this ASU to its future financial reporting and disclosures. As part of its preliminary assessment,not more likely than not that the Company expectswill be required to record right-of-use assets and lease liabilities forsell its operating leases as a result of adoptinginvestments before the standard. While the Company continues to assess all potential impacts under the new standard, including the areas described above, the Company does not know or cannot reasonably estimate quantitative information related to the impactrecovery of the adoption of the new standard on its consolidated financial statements at this time.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40), which will supersede nearly all existing revenue recognition guidance. The core principle behind ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering those goods and services. To achieve this core principle, the ASU provides a model, which involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction prices to the performance obligations in the contract, and recognizing revenue
when (or as) the entity satisfies the performance obligations. The standard also provides guidance on the recognition of costs related to obtaining customer contracts.
The ASU permits adoption either by using a full retrospective approach, in which all comparative periods are presented in accordance with the new standard, or a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. For public business entities, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For all other entities, the standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted for annual periods beginning after December 15, 2016. As the Company has elected to use the extend transition period available to emerging growth companies, the Company anticipates adopting the standard for the fiscal year ending December 31, 2019. The Company is currently evaluating adoption methods.
The Company is evaluating the impact of the adoption of the new standard on its accounting policies, processes, and system requirements. The Company has assigned internal resources to assist in the evaluation. Furthermore, the Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While the Company continues to assess all potential impacts under the new standard, there is potential the standard could have an impact on the timing of recognition of revenue and contract acquisition costs. Under the current revenue recognition guidance, the Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the delivery of future services. Under the new standard, the concept of contingent revenue no longer exists. Depending on the outcome of the Company’s evaluation, the timing of when revenue is recognized could change for multi-year subscription agreements.
As part of its preliminary evaluation, the Company has also considered the impact of the standard’s requirements with respect to the capitalization and amortization of incremental costs of obtaining a contract. Under the Company’s current accounting policy, incremental costs of obtaining a contract are expensed as incurred. The new standard requires the capitalization of all incremental costs that are incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained, provided the Company expects to recover those costs.amortized cost basis. As a result of this standard, the Company expects to capitalize incremental contract costs.evaluation, 0 credit losses were recorded for investments as of March 31, 2020. The period over which these costs are expected to be recognized is still being evaluated by the Company.
While the Company continues to assess all potential impacts under the new standard, including the areas described above, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the adoption of the new standard on its unaudited condensed consolidated financial statements at this time.investments with unrealized loss positions have been in an unrealized loss position for less than 12 months.
Note 3.5. 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.funds and investments in available-for-sale debt securities. 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 werewas as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | March 31, 2020 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | |
| Cash equivalents | | | | | | | | |
| Money market funds | | $ | 72,737 |
| | $ | — |
| | $ | — |
| | $ | 72,737 |
|
| Commercial paper | | — |
| | 998 |
| | — |
| | 998 |
|
| Corporate notes and obligations | | — |
| | 1,980 |
| | — |
| | 1,980 |
|
| Total cash equivalents | | $ | 72,737 |
| | $ | 2,978 |
| | $ | — |
| | $ | 75,715 |
|
| Short-term investments | | | | | | | | |
| Commercial paper | | $ | — |
| | $ | 36,801 |
| | $ | — |
| | $ | 36,801 |
|
| U.S. treasury securities | | — |
| | 139,970 |
| | — |
| | 139,970 |
|
| Corporate notes and obligations | | — |
| | 134,913 |
| | — |
| | 134,913 |
|
| Total short-term investments | | $ | — |
| | $ | 311,684 |
| | $ | — |
| | $ | 311,684 |
|
| Restricted cash equivalents | | | | | | | | |
| Money market funds | | $ | 23,897 |
| | $ | — |
| | $ | — |
| | $ | 23,897 |
|
| Long-term investments | | | | | | | | |
| Corporate notes and obligations | | $ | — |
| | $ | 106,307 |
| | $ | — |
| | $ | 106,307 |
|
| U.S. agency obligations | | — |
| | 18,963 |
| | — |
| | 18,963 |
|
| Certificates of deposit | | — |
| | 944 |
| | — |
| | 944 |
|
| Total long-term investments | | $ | — |
| | $ | 126,214 |
| | $ | — |
| | $ | 126,214 |
|
| | | | | June 30, 2018 | | December 31, 2019 |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents: | | | | | | | | | |
| | | | | | | | | | |
| Cash equivalents | | | | | | | | | |
| Money market funds | | $ | 206,996 |
| | $ | — |
| | $ | — |
| | $ | 206,996 |
| | $ | 62,085 |
| | $ | — |
| | $ | — |
| | $ | 62,085 |
|
| Commercial paper | | | — |
| | 4,991 |
| | — |
| | 4,991 |
|
| Total cash equivalents | | | $ | 62,085 |
| | $ | 4,991 |
| | $ | — |
| | $ | 67,076 |
|
| Short-term investments | | | | | | | | | |
| Commercial paper | | | $ | — |
| | $ | 33,627 |
| | $ | — |
| | $ | 33,627 |
|
| U.S. treasury securities | | | — |
| | 149,406 |
| | — |
| | 149,406 |
|
| Corporate notes and obligations | | | — |
| | 149,201 |
| | — |
| | 149,201 |
|
| Total short-term investments | | | $ | — |
| | $ | 332,234 |
| | $ | — |
| | $ | 332,234 |
|
| Restricted cash equivalents | | | | | | | | | |
| Money market funds | | | $ | 28,371 |
| | $ | — |
| | $ | — |
| | $ | 28,371 |
|
| Long-term investments | | | | | | | | | |
| Corporate notes and obligations | | | $ | — |
| | $ | 78,428 |
| | $ | — |
| | $ | 78,428 |
|
| U.S. agency obligations | | | — |
| | 26,433 |
| | — |
| | 26,433 |
|
| Certificates of deposit | | | — |
| | 944 |
| | — |
| | 944 |
|
| Total long-term investments | | | $ | — |
| | $ | 105,805 |
| | $ | — |
| | $ | 105,805 |
|
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents: | | | | | | | | |
| Money market funds | | $ | 25,146 |
| | $ | — |
| | $ | — |
| | $ | 25,146 |
|
As of March 31, 2020, the estimated fair value of the Company's convertible senior notes, with aggregate principal totaling $593.5 million, was $442.2 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 10—Convertible Senior Notes for further information.
Fair Value of Other Financial Instruments
The carrying amounts of the Company’s accounts receivable, accounts payable, accrued expenses, and other liabilities approximate their fair values due to the short maturities of these assets and liabilities.
Note 4.6. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
| | | | | | | | |
| | | March 31,
2020 | | December 31,
2019 |
| | | | | |
| Prepaid expenses | | $ | 11,485 |
| | $ | 11,469 |
|
| Other current assets | | 2,472 |
| | 2,705 |
|
| Prepaid expenses and other current assets | | $ | 13,957 |
| | $ | 14,174 |
|
|
| | | | | | | | |
| | | June 30, 2018 | | December 31, 2017 |
| Prepaid expenses | | $ | 8,694 |
| | $ | 4,586 |
|
| Other current assets | | 213 |
| | 539 |
|
| Prepaid expenses and other current assets | | $ | 8,907 |
| | $ | 5,125 |
|
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
| | | | | | | | |
| | | March 31,
2020 | | December 31,
2019 |
| | | | | |
| Accrued compensation | | $ | 17,287 |
| | $ | 23,310 |
|
| Accrued income and other taxes payable | | 6,241 |
| | 7,116 |
|
| Accrued other current liabilities | | 12,067 |
| | 10,277 |
|
| Accrued expenses | | $ | 35,595 |
| | $ | 40,703 |
|
|
| | | | | | | | |
| | | June 30, 2018 | | December 31, 2017 |
| Accrued compensation | | $ | 12,976 |
| | $ | 18,568 |
|
| Accrued income and other taxes payable | | 4,139 |
| | 3,492 |
|
| Accrued other current liabilities | | 7,093 |
| | 4,454 |
|
| Accrued expenses | | $ | 24,208 |
| | $ | 26,514 |
|
Note 5.7. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
|
| | | | | | | | |
| | | March 31,
2020 | | December 31,
2019 |
| | | | | |
| Computer equipment | | $ | 9,690 |
| | $ | 9,047 |
|
| Software | | 2,354 |
| | 2,047 |
|
| Capitalized internal-use software costs | | 24,802 |
| | 23,021 |
|
| Furniture and fixtures | | 5,956 |
| | 5,826 |
|
| Leasehold improvements | | 9,896 |
| | 9,871 |
|
| Construction in progress | | 16,689 |
| | 4,427 |
|
| Total property and equipment | | 69,387 |
| | 54,239 |
|
| Less: Accumulated depreciation | | (33,986 | ) | | (31,343 | ) |
| Property and equipment, net | | $ | 35,401 |
| | $ | 22,896 |
|
|
| | | | | | | | |
| | | June 30, 2018 | | December 31, 2017 |
| Computer equipment | | $ | 8,789 |
| | $ | 7,482 |
|
| Software | | 2,026 |
| | 1,982 |
|
| Capitalized internal-use software costs | | 11,016 |
| | 8,631 |
|
| Furniture and fixtures | | 5,452 |
| | 5,234 |
|
| Buildings | | 11,251 |
| | 11,251 |
|
| Leasehold improvements | | 1,941 |
| | 1,324 |
|
| Construction in progress | | 594 |
| | 587 |
|
| Total property and equipment | | 41,069 |
| | 36,491 |
|
| Less: Accumulated depreciation | | (18,386 | ) | | (14,034 | ) |
| Property and equipment, net | | $ | 22,683 |
| | $ | 22,457 |
|
Depreciation expense totaled $2.2$2.6 million and $1.3$2.2 million for the three months ended June 30, 2018March 31, 2020 and 2017, respectively,2019, respectively.
Note 8. Acquisition of GitPrime, Inc.
On May 9, 2019, the Company completed the acquisition of GitPrime, Inc. ("GitPrime"), a leading provider of software developer productivity software. Under the terms of the agreement, the Company acquired all of the outstanding stock of GitPrime for approximately $163.8 million in cash, excluding cash acquired and $4.4 million and $2.6 millionincluding working capital adjustments.
The Company accounted for the six months ended June 30, 2018transaction as a business combination using the acquisition method of accounting. The Company allocated the purchase price to the tangible and 2017, respectively.identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. The excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired was recorded as goodwill. The goodwill is attributable to GitPrime's assembled workforce and synergies acquired, and is not deductible for income tax purposes.
In September 2017,The following table summarizes the acquisition date fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):
|
| | | | |
| | | Fair Value |
| | | |
| Cash and cash equivalents | | $ | 5,290 |
|
| Accounts receivable | | 1,798 |
|
| Other assets acquired | | 207 |
|
| Property and equipment | | 223 |
|
| Right-of-use assets | | 549 |
|
| Goodwill | | 139,413 |
|
| Intangible assets | | 24,800 |
|
| Lease liabilities | | (549 | ) |
| Deferred revenue | | (1,367 | ) |
| Other liabilities assumed | | (1,303 | ) |
| Total fair value of net assets acquired | | $ | 169,061 |
|
The useful lives, primarily based on the period of benefit to the Company, committed to a plan to expand operations in Utah and as a result, consolidate certain offices of subsidiariesfair values of the identifiable intangible assets at acquisition date were as follows:
|
| | | | | | |
| | | Fair Value of Intangible Assets Acquired (in thousands) | | Useful Lives (in years) |
| | | | | |
| Technology | | $ | 24,000 |
| | 5 years |
| Customer relationships | | 800 |
| | 4 years |
| Total fair value of intangible assets acquired | | $ | 24,800 |
| | |
The fair value of the technology acquired in the acquisition was determined using the excess earnings model and the customer relationships acquired was determined using a distributor model. These models utilize certain unobservable inputs, including discounted cash flows, historical and projected financial information, customer attrition rates, and technology obsolescence rates, classified as Level 3 measurements as defined by Fair Value Measurement (Topic 820). The Company engaged third-party valuation specialists to assist in management's analysis of the fair value of the acquired intangibles. All estimates, key assumptions, and forecasts were reviewed by the Company. In connection with the plan,While the Company disposedchose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of certain furniture, leasehold improvements,management and computer equipment atnot those of any third party.
During the respective office cease-use dates. Accordingly,year ended December 31, 2019, the useful livesCompany incurred acquisition costs of $0.8 million. These costs include legal and accounting fees, and other costs directly related to the acquisition and are classified within general and administrative expenses in the Company's consolidated statements of operations.
Unaudited Pro Forma Information
The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the acquisition occurred on January 1, 2018. It includes pro forma adjustments related to the amortization of acquired intangible assets, with a net bookequity-based compensation expense, adjustments for ASC 606, and fair value adjustments for deferred revenue. The unaudited pro forma results have been prepared based on estimates and assumptions, which management believes are reasonable, however, the results are not necessarily indicative of $1.8 million were shortened. The revised useful lives resulted in an increase in depreciation expensethe consolidated results of $0.2 million and $0.5 million duringoperations had the three and six months ended June 30,acquisition occurred on January 1, 2018, respectively.or of future results of operations (in thousands, except per share amounts):
|
| | | | |
| | | Three Months Ended
March 31, 2019 |
| | | |
| Revenue | | $ | 72,269 |
|
| Net loss | | (37,464 | ) |
| Net loss per share, basic and diluted | | $ | (0.28 | ) |
Note 6.9. Intangible Assets
Intangible assets, net are summarized as follows (in thousands):
| | | | | | | | | | March 31, 2020 |
| | | June 30, 2018 | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | | | | | |
| Content library: | | | | | | | | | | | | |
| Acquired content library | | $ | 32,835 |
| | $ | 30,566 |
| | $ | 2,269 |
| | $ | 32,835 |
| | $ | 32,788 |
| | $ | 47 |
|
| Course creation costs | | 12,145 |
| | 6,321 |
| | 5,824 |
| | 19,012 |
| | 9,282 |
| | 9,730 |
|
| Total | | $ | 44,980 |
| | $ | 36,887 |
| | $ | 8,093 |
| | $ | 51,847 |
| | $ | 42,070 |
| | $ | 9,777 |
|
| Intangible assets: | | | | | | | | | | | | |
| Technology | | $ | 4,500 |
| | $ | 2,434 |
| | $ | 2,066 |
| | $ | 28,500 |
| | $ | 7,962 |
| | $ | 20,538 |
|
| Trademarks | | 162 |
| | 162 |
| | — |
| | 162 |
| | 162 |
| | — |
|
| Noncompetition agreements | | 390 |
| | 390 |
| | — |
| | 390 |
| | 390 |
| | — |
|
| Customer relationships | | 2,750 |
| | 2,750 |
| | — |
| | 3,550 |
| | 2,929 |
| | 621 |
|
| Database | | 40 |
| | 40 |
| | — |
| | 40 |
| | 40 |
| | — |
|
| Domain names | | 45 |
| | — |
| | 45 |
| | 45 |
| | — |
| | 45 |
|
| Total | | $ | 7,887 |
| | $ | 5,776 |
| | $ | 2,111 |
| | $ | 32,687 |
| | $ | 11,483 |
| | $ | 21,204 |
|
|
| | | | | | | | | | | | |
| | | December 31, 2019 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| | | | | | | |
| Content library: | | | | | | |
| Acquired content library | | $ | 32,835 |
| | $ | 32,780 |
| | $ | 55 |
|
| Course creation costs | | 17,717 |
| | 8,814 |
| | 8,903 |
|
| Total | | $ | 50,552 |
| | $ | 41,594 |
| | $ | 8,958 |
|
| Intangible assets: | | | | | | |
| Technology | | $ | 28,500 |
| | $ | 6,585 |
| | $ | 21,915 |
|
| Trademarks | | 162 |
| | 162 |
| | — |
|
| Noncompetition agreements | | 390 |
| | 390 |
| | — |
|
| Customer relationships | | 3,550 |
| | 2,879 |
| | 671 |
|
| Database | | 40 |
| | 40 |
| | — |
|
| Domain names | | 45 |
| | — |
| | 45 |
|
| Total | | $ | 32,687 |
| | $ | 10,056 |
| | $ | 22,631 |
|
|
| | | | | | | | | | | | |
| | | December 31, 2017 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| Content library: | | | | | | |
| Acquired content library | | $ | 32,835 |
| | $ | 24,643 |
| | $ | 8,192 |
|
| Course creation costs | | 10,640 |
| | 5,391 |
| | 5,249 |
|
| Total | | $ | 43,475 |
| | $ | 30,034 |
| | $ | 13,441 |
|
| Intangible assets: | | | | | | |
| Technology | | $ | 4,500 |
| | $ | 2,080 |
| | $ | 2,420 |
|
| Trademarks | | 1,162 |
| | 773 |
| | 389 |
|
| Noncompetition agreements | | 390 |
| | 390 |
| | — |
|
| Customer relationships | | 2,750 |
| | 2,750 |
| | — |
|
| Database | | 40 |
| | 40 |
| | — |
|
| Domain names | | 45 |
| | — |
| | 45 |
|
| Total | | $ | 8,887 |
| | $ | 6,033 |
| | $ | 2,854 |
|
Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of acquired intangible assets was $3.3$1.4 million and $2.0$0.7 million for the three months ended June 30, 2018,March 31, 2020 and 2017,2019, respectively and $6.7 million and $4.0 million for the six months ended June 30, 2018 and 2017, respectively. Amortization expense of course creation costs was $0.5$0.8 million and $0.4$0.6 million for the three months ended June 30, 2018,March 31, 2020 and 2017, respectively, and $0.9 million and $0.7 million for the six months ended June 30, 2018 and 2017,2019, respectively.
In December 2017, the Company committed to a plan to retire the website of an acquired subsidiary in order to provide a more unified user experienceBased on the Pluralsight platform. Accordingly, therecorded intangible assets at March 31, 2020, estimated useful lives of certain content library and trademark assets were adjusted. The revised useful lives resulted in an increase in amortization expense of $1.5 million and $3.0 million during the three and six months ended June 30, 2018, respectively. The fully-amortized assets were disposed of in June 2018.is expected to be as follows (in thousands):
|
| | | | |
| Year Ending December 31, | | Amortization |
| | | |
| 2020 (remaining nine months) | 6,417 |
|
| 2021 | 8,094 |
|
| 2022 | 7,228 |
|
| 2023 | 6,562 |
|
| 2024 | 2,593 |
|
| 2025 | 42 |
|
| Total | $ | 30,936 |
|
Note 10. Convertible Senior Notes
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.
Note 7. Credit Facilities
Silicon Valley Bank Credit Agreement
On November 17, 2014,The Notes are governed by an indenture (the “Indenture”) between the Company, entered intoas the amendedissuer, and restated credit agreement (“Second AmendedU.S. Bank National Association, as trustee. The Notes are Pluralsight, Inc.'s senior unsecured obligations and Restated Credit Agreement”) with a lending syndicate, which was led by Silicon Valley Bank. The agreement provided for a total term loanrank senior in right of $100.0 million and a revolving linepayment to any of creditits indebtedness that is expressly subordinated in right of uppayment to $10.0 million, which was usedthe Notes; equal in right of payment to finance the acquisitions of Code School LLC and Smarterer, Inc.
Under the termsany of the Second AmendedCompany's unsecured indebtedness then existing and Restated Credit Agreement,future liabilities that are not so subordinated; effectively junior in right of payment to any of the Company was requiredCompany's secured indebtedness, to maintain compliance with certain negativethe extent of the value of the assets securing such indebtedness; and affirmative covenants, includingstructurally junior to all indebtedness and other liabilities (including trade payables) of its subsidiaries. The Indenture does not contain any financial covenants and covenants relating toor restrictions on the payments of dividends, the incurrence of other indebtedness, or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Notes mature on March 1, 2024 unless earlier repurchased or converted. Interest is payable semi-annually in arrears on March 1 and September 1 of each year.
The Notes have an initial conversion rate of 25.8023 shares of the Company's Class A common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $38.76 per share of its Class A common stock and is subject to adjustment if certain events occur. Following certain corporate events that occur prior to the maturity date, the
Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event. Additionally, upon the occurrence of a material adverse change,corporate event that constitutes a “fundamental change” per the maintenanceIndenture, holders of depository accounts, the dispositionNotes may require the Company to repurchase for cash all or a portion of assets, mergers, acquisitions, investments,their Notes at a purchase price equal to 100% of the grantingprincipal amount of liens,the Notes plus accrued and unpaid interest.
Holders of the Notes may convert all or any portion of their Notes at any time prior to the close of business on December 1, 2023, in integral multiples of $1,000 principal amount, only under the following circumstances:
During any calendar quarter commencing after the calendar quarter ended 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 5 business day period after any 5 consecutive trading day period (the “measurement period”) in which the trading price as defined in the Indenture per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's Class A common stock and the paymentconversion rate on each such trading day; or
Upon the occurrence of dividends. On March 1, 2017,specified corporate events described in the Company entered intoIndenture. These events include a waiver and amendment to the Second Amended and Restated Credit Agreement with its lenders, which providedchange in control transaction, or a waiver on certain events of default that occurred in fiscal quarter ended September 30, 2016, for failure to comply with the consolidated total leverage ratio covenant. The Second Amended and Restated Credit Agreement was secured with a lien against substantially allrecapitalization, liquidation, or delisiting of the assetsCompany's Class A common stock.
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 Company.
The outstanding borrowings under the Second Amended and Restated Credit Agreement of $82.5 million were repaid in full in June 2017. The repaymentforegoing conditions. Upon conversion, holders will receive cash, shares of the borrowings resulted inCompany's Class A common stock or a loss on extinguishmentcombination of $1.9 million.
Guggenheim Credit Agreement
In June 2017, the Company entered into a long-term debt facility with Guggenheim Corporate Funding, LLC pursuant to a credit agreement (“Guggenheim Credit Agreement”), consisting of a term loan facility of $115.0 millioncash and a revolving credit facility of $5.0 million from Guggenheim Corporate Funding, LLC. Upon signing the Guggenheim Credit Agreement, the Company borrowed the $115.0 million term loan capacity available and used the majority of the proceeds to repay the full outstanding borrowings of $82.5 million under the Second Amended and Restated Credit Agreement with Silicon Valley Bank.
In February 2018, the Company amended the Guggenheim Credit Agreement and increased its term loan facility and its borrowings thereunder by an additional $20.0 million. In connection with the amendment, the Company issued warrants to the lenders to purchase 424,242 shares of Class A common stock, at an exercise pricethe Company's election.
During the three months ended March 31, 2020, the conditions allowing holders of $8.25 per share. See Note 9—Stockholders' Equitythe Notes to convert were not met. The Notes are therefore not currently convertible and are classified as long-term debt.
The Company accounts for additional details.the Notes as separate liability and equity components. The warrants were measured atCompany determined the carrying amount of the liability component as the present value of its cash flows using a discount rate of approximately 5.5% based on comparable debt transactions for similar companies. The estimated interest rate was applied to the Notes, which resulted in a fair value of the liability component of $492.7 million upon issuance, calculated as the present value of future contractual payments based on the $633.5 million aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense over the term of the Notes using the effective interest method. The $140.8 million difference between the gross proceeds received from issuance of the Notes of $633.5 million and the estimated fair value of $1.0the liability component represents the equity component, or the conversion option, of the Notes and was recorded in additional paid-in capital. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
The Company allocated issuance costs related to the issuance of the Notes to the liability and equity components using the same proportions as the initial carrying value of the Notes. Issuance costs attributable to the liability component were $13.1 million and are being amortized to interest expense using the effective interest method over the term of the Notes. Issuance costs attributable to the equity components were $3.7 million and are netted with the equity component of the Notes in stockholders’ equity on the datecondensed consolidated balance sheets.
In September 2019, Pluralsight, Inc. repurchased a total of issuance and were recorded as debt issuance costs.
Under$40.0 million in aggregate principal of its Notes for approximately $35.0 million in cash. The Company first allocated the termscash paid to repurchase the Notes to the liability component based on the estimated fair value of that component immediately prior to the extinguishment. The difference between the fair value of the Guggenheim Credit Agreement, the Company was required to maintain compliance with certain negative and affirmative covenants, including financial covenants and covenants relating to the incurrence of other indebtedness, the occurrence of a material adverse change, the disposition of assets, mergers, acquisitions and investments, the granting of liens,liability component and the payment of dividends. In addition, on a quarterly basis, the Company was required to maintain a maximum ratio of indebtedness to total recurring revenue for the most recent trailing twelve-month period ranging from 0.55 to 1 to 0.65 to 1. The Company was also required to maintain $10.0 million in liquidity, including amounts available under revolving loan commitments ascarrying value of the last day of any calendar month. The Guggenheim Credit Agreement was secured with a lien against substantially all of the assets of the Company.
Interest accrued under the credit agreement at an adjusted LIBOR rate plus 8.50%. Adjusted LIBOR was defined as greater LIBOR raterepurchased Notes resulted in effect for each interest period divided by 1 minus the Statutory Reserves (if any) for such Eurodollar borrowing for such interest period, and with respect to the term loan only, a minimum LIBOR floor of 1.00%. Under these borrowings, the Company elected to pay 2.50% of the interest due on each interest payment date in-kind rather than in cash.
A portion of the net proceeds from the IPO were used to repay the outstanding principal balance of $137.7 million and extinguish the Guggenheim Credit Agreement in May 2018. The Company incurred a loss on debt extinguishment of $4.1$1.0 million. The remaining consideration of approximately $3.0 million was allocated to the reacquisition of the equity component and recorded as a reduction of stockholders' equity.
The net carrying value of the liability component of the Notes was as follows (in thousands):
|
| | | | |
| | | March 31,
2020 |
| | | |
| Principal | | $ | 593,500 |
|
| Less: Unamortized debt discount | | (106,746 | ) |
| Less: Unamortized issuance costs | | (9,935 | ) |
| Net carrying amount | | $ | 476,819 |
|
The net carrying value of the equity component of the Notes was as follows (in thousands):
|
| | | | |
| | | March 31,
2020 |
| | | |
| Proceeds allocated to the conversion option (debt discount) | | $ | 140,776 |
|
| Less: Issuance costs | | (3,743 | ) |
| Less: Reacquisition of conversion option related to the repurchases of convertible senior notes | | (2,965 | ) |
| Net carrying amount | | $ | 134,068 |
|
The interest expense recognized related to the Notes was as follows (in thousands):
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| | | | | |
| Contractual interest expense | | $ | 556 |
| | $ | 132 |
|
| Amortization of debt issuance costs and discount | | 6,591 |
| | 1,545 |
|
| Total | | $ | 7,147 |
| | $ | 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.
In connection with the repurchase of the convertible senior notes in September 2019, the Company terminated a portion of its existing Capped Calls that cover 1,032,092 shares of the Company's Class A common stock, which corresponds to the number of shares underlying the principal amount of Notes that were repurchased. The Company received proceeds of $1.3 million in connection with the repayment.portion of the Capped Calls that were terminated in September 2019.
Intercompany Convertible Promissory Note with Pluralsight Holdings
In connection with the issuance of the Notes, Pluralsight, Inc. entered into an intercompany 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. This note was amended in September 2019 in connection with the Repurchase. All effects of the convertible promissory note on the condensed consolidated financial statements have been eliminated in consolidation.
Note 11. Leases
The Company’s debt consistedCompany leases office space under non-cancellable operating leases with lease terms expiring between 2020 and 2024. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases also include renewal options at the election of the followingCompany to renew or extend the lease for an additional three to five years. These optional periods have not been considered in the determination of the right-of-use assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.
The Company performed evaluations of its contracts and determined that each of its identified leases are operating leases. The components of operating lease expense were as follows:
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| | | | | |
| Operating lease expense | | $ | 1,800 |
| | $ | 1,460 |
|
| Variable lease expense | | 173 |
| | 60 |
|
| Short-term lease expense | | 271 |
| | 17 |
|
| Total lease expense | | $ | 2,244 |
| | $ | 1,537 |
|
Variable lease expense consists of the Company’s proportionate share of operating expenses, property taxes, and insurance and is classified as lease expense due to the Company’s election to not separate lease and non-lease components.
Cash paid for amounts included in the measurement of operating lease liabilities for the three months ended March 31, 2020 and 2019 was $1.7 million and $1.3 million, respectively, and was included in net cash used in operating activities in the consolidated statements of cash flows.
As of March 31, 2020, the maturities of the Company's operating lease liabilities were as follows (in thousands):
|
| | | | |
| Year Ending December 31, | | |
| | | |
| 2020 (remaining nine months) | $ | 4,602 |
|
| 2021 | 3,786 |
|
| 2022 | 3,598 |
|
| 2023 | 3,012 |
|
| 2024 | 2,119 |
|
| Total lease payments | 17,117 |
|
| Less: Imputed interest | (2,527 | ) |
| Lease liabilities | $ | 14,590 |
|
As of March 31, 2020, the weighted average remaining lease term is 3.8 years and the weighted average discount rate used to determine operating lease liabilities was 5.6%.
The Company has various sublease agreements with third parties. These subleases have remaining lease terms of between one and three years. Sublease income, which is recorded within other income, was $0.1 million during the three months ended March 31, 2020 and 2019.
In August 2018, the Company entered into a 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. 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 excludes maintenance, insurance, taxes and other variable costs. The annual rent amount will increase by 2 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. As of March 31, 2020, the lease has not yet commenced and is excluded from the table above.
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 and cash equivalents on the condensed consolidated balance sheets. 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, 2020 and December 31, 2019, the Company recorded a deposit of $7.2 million and $11.6 million, respectively, into restricted cash and cash equivalents on its condensed consolidated balance sheet for use in constructing tenant improvements in connection with the Draper headquarters.
|
| | | |
| | December 31, 2017 |
| Principal borrowings outstanding | $ | 116,620 |
|
| Less: Debt issuance costs, net of amortization | (583 | ) |
| Net carrying amount | $ | 116,037 |
|
Note 8.12. Commitments and Contingencies
Letters of Credit
As of June 30, 2018March 31, 2020 and December 31, 2017,2019, the Company had a total of $0.7$2.1 million and $0.2 million, respectively, in letters of credit outstanding.outstanding with financial institutions. These outstanding letters of credit were issued for purposes of securing certain of the Company’s obligations under facility leases. The letters of credit arewere collateralized by a portion$1.2 million and $1.3 million of the Company’s cash, as of March 31, 2020 and December 31, 2019, respectively, which is reflected as restricted cash and classified within other assetscash equivalents on the condensed consolidated balance sheets.
Lease Commitments
The Company is committed under certain operating leases with third parties for office space. These leases expire at various times through 2024. The Company recognizes rent expense on a straight-line basis over the lease period. Payments made under the Company’s lease for its corporate headquarters in Farmington, Utah are not recorded as rent expense in the condensed consolidated statements of operations. These payments are effectively recorded as repayments of the financing obligation and interest expense in the condensed consolidated statements of operations as the Company did not qualify for sale-leaseback accounting upon completion of the facilities build out and is considered to be the owner of the buildings for accounting purposes.
At June 30, 2018, future minimum lease payments, including lease payments for the Company’s facilities in Farmington, Utah, were as follows (in thousands):
|
| | | |
| Years Ending December 31, | |
| 2018 (remaining six months) | $ | 2,672 |
|
| 2019 | 4,885 |
|
| 2020 | 2,867 |
|
| 2021 | 1,912 |
|
| 2022 | 1,745 |
|
| Thereafter | 2,370 |
|
| Total future minimum lease payments | $ | 16,451 |
|
Rent expense under operating leases was $1.1 million and $0.4 million for the three months ended June 30, 2018 and 2017, respectively, and $2.2 million and $0.8 million for the six months ended June 30, 2018 and 2017, respectively.
Other Commitments
The Company has also entered into certain non-cancellable agreements primarily related to cloud infrastructure and software subscriptions in the ordinary course of business. There have been no material changes in the Company's commitments and contingencies, as disclosed in the Prospectus.Annual Report.
Legal Proceedings
In August 2019, a class action complaint was filed by a stockholder of the Company in the U.S. District Court for the Southern District of New York against the Company, and certain of the Company's officers alleging violation of securities laws and seeking unspecified damages. In October 2019, the action was transferred to the U.S. District Court for the District of Utah and in March 2020, a lead plaintiff was appointed. An amended complaint is due to be filed by June 3, 2020.
The Company believes this suit is without merit and intends to defend it vigorously. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision. If an unfavorable outcome were to occur, it is possible that the impact could be material to the Company's results of operations in the period(s) in which any such outcome becomes probable and estimable.
In March 2020, a derivative lawsuit was filed by a shareholder in the United States District Court for the District of Delaware as an outgrowth of the aforementioned class action. It includes as defendants certain of the Company’s officers and the Board of Directors, alleging violations of fiduciary duties to the Company. The Company is named as a nominal defendant. No response to the compliant has yet been filed.
The Company is involved in other legal proceedings from time to time arising in the normal course of business. The Company is unable to estimate a range of loss, if any, that could result were there to be an adverse final decision. Management believes that the outcome of these proceedings will not have a material impact on the Company’s financial position,condition, results of operations, or liquidity.
Warranties and Indemnification
The performance of the Company’s cloud-based technology learningskills 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’sthird-party’s intellectual property rights. In addition, the Company has some contractual arrangements with provisions for indemnifying customers against liabilities in the case of breaches of the Company’s platform or the other systems or networks used in the Company’s business, including those of vendors, contractors, or others with which the Company has strategic relationships. 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 condensed consolidated financial statements.
The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines, and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director or officer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurance coverage that would generally enable the Company to recover a portion of any future amounts paid. The Company may also be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
Note 9. Stockholders' Equity
Amendment and Restatement of Certificate of Incorporation
In connection with the Reorganization Transactions, the certificate of incorporation of Pluralsight, Inc. was amended and restated to, among other things, provide for the (i) authorization of 1,000,000,000 shares of Class A common stock with a par value of $0.0001 per share; (ii) authorization of 200,000,000 shares of Class B common stock with a par value of $0.0001 per share; (iii) authorization of 50,000,000 shares of Class C common stock with a par value of $0.0001 per share; (iv) authorization of 100,000,000 shares of undesignated preferred stock that may be issued from time to time; and (v) establishment of a classified board of directors, divided into three classes, each of whose members will serve for staggered three-year terms.
Holders of Class A and Class B common stock are entitled to one vote per share and holders of Class C common stock are entitled to ten votes per share. Except as otherwise required by applicable law, holders of Class A common stock, Class B common stock, and Class C common stock vote together as a single class on all matters on which stockholders generally are entitled to vote. Holders of Class B and Class C common stock are not entitled to receive dividends and will not be entitled to receive any distributions upon the liquidation, dissolution or winding up of the Company. Shares of Class B and Class C common stock may only be issued to the extent necessary to maintain the one-to-one ratio between the number of LLC Units held by the Continuing Members and the number of Class B or Class C common shares held by the Continuing Members. Shares of Class B and Class C common stock are transferable only together with an equal number of LLC Units. Subject to certain limitations and exceptions, Continuing Members may exchange or redeem LLC Units and shares of Class B or Class C common stock, as applicable, for, at the option of Pluralsight, Inc., cash or shares of Class A common stock, on a one-for-one basis.
Pluralsight, Inc. must at all times maintain a ratio of one LLC Unit for each share of Class A common stock issued, and Pluralsight Holdings must at all times maintain a one-to-one ratio between the number of shares of Class B or Class C common stock owned by the Continuing Members and the number of LLC Units owned by the Continuing Members.
Recapitalization of Pluralsight Holdings
In connection with the Reorganization Transactions and the amendment and restatement of the LLC Agreement, all membership interests in Pluralsight Holdings were converted into a single-class of common LLC Units and certain holders of LLC Units elected to exchange LLC Units for Class A common stock of Pluralsight, Inc. The following is a summary of the shares converted or exchanged in connection with the Reorganization Transactions:
•48,407,645 common units of Pluralsight Holdings outstanding prior to the Reorganization Transactions were converted on a one-for-one basis into LLC Units.
•48,447,880 redeemable convertible preferred units of Pluralsight Holdings outstanding prior to the Reorganization Transactions were converted on a one-for-one basis into LLC Units.
•15,783,689 incentive units of Pluralsight Holdings outstanding prior to the Reorganization Transactions were converted into 12,667,778 LLC Units after giving effect to the threshold price and catch-up price per unit.
•3,000,000 Class B incentive units of Pluralsight Holdings outstanding prior to the Reorganization Transactions were converted into 1,747,067 LLC Units after giving effect to the threshold price and catch-up price per unit.
In connection with the recapitalization, a total of 39,110,660 LLC Units were exchanged for shares of Class A common stock of Pluralsight, Inc. In addition, the Company issued 58,111,572 shares of Class B common stock and 14,048,138 shares of Class C common stock to the Continuing Members on a one-for-one basis to the corresponding LLC Units held by the Continuing Members.
The amended and restated LLC Agreement requires that Pluralsight Holdings at all times maintain (i) a one-to-one ratio between the number of outstanding shares of Class A common stock of Pluralsight, Inc. and the number of LLC Units and (ii) a one-to-one ratio between the number of shares of Class B or Class C common stock owned by the Continuing Members and the number of LLC Units held by the Continuing Members.
Redeemable Convertible Preferred Units Conversion
As described in Note 1—Organization and Description of Business, in connection with the Reorganization Transactions, the LLC Agreement of Pluralsight Holdings was amended and restated to, among other things, effectuate the conversion of 48,447,880 redeemable convertible preferred units into LLC Units of Pluralsight Holdings. Prior to the Reorganization Transactions, Series A redeemable convertible preferred units were redeemable at the option of the holder at an amount equal to the greater of the original issuance price or the aggregate fair value of the Series A redeemable convertible preferred units. Accordingly, prior to the Reorganization Transactions, the Series A redeemable convertible preferred units were accreted to the fair value on the date of conversion of the IPO price of $15.00 per share, or $412.5 million.
As the redeemable convertible preferred units were converted into common LLC Units of Pluralsight Holdings, and are no longer redeemable at the option of the holder, the Company reclassified the carrying value of the redeemable convertible preferred units of $582.0 million on the date of the Reorganization Transactions to stockholders' equity.
Initial Public Offering
As described in Note 1—Organization and Description of Business, in May 2018, Pluralsight, Inc. completed an IPO of 23,805,000 shares of Class A common stock at a public offering price of $15.00 per share. Pluralsight, Inc. received proceeds of $332.1 million, net of underwriting discounts and commissions, which Pluralsight, Inc. used to purchase newly-issued LLC Units of Pluralsight Holdings at a price per unit equal to the IPO price per share.
Warrants to Purchase Shares of Class A Common Stock
In connection with the first amendment of the Guggenheim Credit Agreement, the Company issued warrants to the lenders to purchase 424,242 shares of Class A common stock of Pluralsight, Inc. at an exercise price of $8.25 per share. See Note 7—Credit Facilities for additional details. The warrants are fully vested and exercisable, in whole or in part, prior to their expiration. The warrants will expire at the earlier of (i) the acquisition of the Company by another entity or (ii) six months after the effectiveness of the IPO. The warrants were measured at the fair value on the date of issuance, which was determined to be $1.0 million using a Black-Scholes option pricing model and a probability-weighted expected return methodology. As the warrants are exercisable for shares of the Company’s Class A common stock, the Company recorded the warrants within stockholders’ equity.
Note 10.13. 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 economic interests of the LLC Units held by Continuing Members, based onother members of Pluralsight Holdings. During the portion of LLC Units owned by Continuing Members. Followingthree months ended March 31, 2020, the Reorganization Transactions, the total adjustments to the non-controlling interests were $3.8 million and were primarily related to equity-based compensation and the settlement of equity-based awards. Income or loss is attributed to the non-controlling interests based on the weighted-average ownership percentages of LLC Units outstanding during the period, excluding LLC Units that are subject to time-based vesting
requirements. As of June 30, 2018,March 31, 2020, the non-controlling interests of Pluralsight Holdings owned 52.3%25.5% of the outstanding LLC Units, with the remaining 47.7%74.5% owned by Pluralsight, Inc. The ownership of the LLC Units is summarized as follows:
|
| | | | | | |
| | | June 30, 2018 |
| | | Units | | Ownership % |
Pluralsight, Inc.'s ownership of LLC Units(1) | | 62,326,654 |
| | 47.7 | % |
LLC Units owned by the Continuing Members(2) | | 68,275,082 |
| | 52.3 | % |
| | | 130,601,736 |
| | 100.0 | % |
|
| | | | | | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 |
| | | Units | | Ownership % | | Units | | Ownership % |
| | | | | | | | | |
| Pluralsight, Inc.'s ownership of LLC Units | | 105,459,701 |
| | 74.5 | % | | 104,083,271 |
| | 74.3 | % |
LLC Units owned by the Continuing Members(1) | | 36,152,429 |
| | 25.5 | % | | 35,936,804 |
| | 25.7 | % |
| | | 141,612,130 |
| | 100.0 | % | | 140,020,075 |
| | 100.0 | % |
|
| |
| (1) | Excludes 589,0061,231,044 and 1,543,813 LLC Units still subject to time-based vesting requirements. |
(2) Excludes 3,884,628 LLC Units still subject to time-based vesting requirements.requirements as of March 31, 2020 and December 31, 2019, respectively |
Note 11.14. Equity-Based Compensation
Incentive Unit Plan
Certain employees and directors were granted incentive units in Pluralsight Holdings, pursuant to the Incentive Unit Plan ("2013 Plan"). In connection with the Reorganization Transactions, all outstanding incentive units were converted into LLC Units of Pluralsight Holdings and certain holders of incentive units elected to exchange LLC Units for shares of Class A common stock of Pluralsight, Inc. Shares of Class A common stock and LLC Units issued as a result of the exchange or conversion of unvested incentive units remain subject to the same time-based vesting requirements that existed prior to the Reorganization Transactions. In connection with the IPO, the 2013 Plan was terminated.
The shares of unvested Class A common stock following the exchange of unvested incentive units are summarized as follows:
|
| | | | | | | |
| | | Unvested Shares | | Weighted- Average Grant Date Fair Value |
| Unvested Class A common shares outstanding following the Reorganization Transactions | | 605,390 |
| | $ | 6.55 |
|
| Vested | | (16,384 | ) | | 4.96 |
|
| Unvested Class A common shares outstanding—June 30, 2018 | | 589,006 |
| | $ | 6.59 |
|
The shares of unvested LLC Units following the conversion of unvested incentive units are summarized as follows:
|
| | | | | | | |
| | | Unvested Units | | Weighted- Average Grant Date Fair Value |
| Unvested LLC Units outstanding following the Reorganization Transactions | | 3,942,674 |
| | $ | 7.73 |
|
| Vested | | (58,046 | ) | | 5.37 |
|
| Unvested LLC Units outstanding—June 30, 2018 | | 3,884,628 |
| | $ | 7.77 |
|
The Company evaluated the conversion and exchange of incentive units as part of the Reorganization Transactions and concluded the conversion and exchange was not a modification of the original incentive units. Accordingly, the Company will continue to recognize equity-based compensation using the grant date fair value as measured on the original grant date of the incentive units. As of June 30, 2018, total unrecognized equity-based compensation related to all unvested Class A common shares and unvested LLC Units was $28.3 million, which is expected to be recognized over a weighted-average period of 2.6 years. The total fair value of Class A common shares and LLC Units vested during the period from the date of the Reorganization Transactions to June 30, 2018 was $1.6 million. If a forfeiture of an unvested LLC Unit occurs, the associated shares of Class B common stock or Class C common stock, as applicable, are also forfeited.
Equity Incentive Plans
In June 2017, Pluralsight Holdings adopted the 2017 Equity Incentive Plan ("(“2017 Plan"Plan”) and issued RSUs to employees. In connection with the IPO, the 2017 Plan was terminated. In May 2018, Pluralsight, Inc. adopted the 2018 Equity Incentive Plan ("(“2018 Plan"Plan”). The 2018 Plan provides for the grant of nonstatutory stock options, restricted stock, RSUs, stock appreciation rights, performance units, and performance shares to employees, directors, and consultants of the Company. A total of 22,149,995 shares of Class A common stock are reserved for issuance under the 2018 Plan. The number of shares available for issuance under the 2018 Plan also includes an annual increase on the first day of each fiscal year, beginning in 2019, equal to the lesser of: (i) 14,900,000 shares, (ii) 5.0% of the outstanding shares of capital stock as of the last day of the immediately preceding fiscal year, or (iii) a lower number of shares determined by the 2018 Plan'sPlan administrator.
In connection with The number of shares available under the IPO, the 20172018 Plan was terminated. At the time the 2017 Plan was terminated, a total of 4,508,835 RSUs grantedalso includes shares under the 2017 Plan remained outstanding. With the establishment of the 2018 Plan, the Company no longer grants equity-based awards under the 2017 Plan and any shares that expire, terminate, are forfeited or repurchased by the Company, or are withheld by the Company to cover tax withholding obligations,obligations. As of March 31, 2020, a total of 20,404,161 shares were available for issuance under the 2017 Plan, will automatically be transferred to the 2018 Plan up to 4,508,835 shares.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.
In connection with the GitPrime acquisition, the stock options granted to GitPrime employees under GitPrime’s 2015 and 2018 Equity Incentive Plans were replaced with options to purchase shares of the Company's Class A common stock, subject to appropriate adjustments to the number of shares issuable pursuant to such options and the exercise price of such options as provided in the Merger Agreement. The options are subject to time-based vesting conditions and continue to vest over the remaining vesting period of the original award ranging from two to four years.
The following table summarizes the stock option activity for the sixthree months ended June 30, 2018:March 31, 2020:
|
| | | | | | | | | | | | | |
| | | Stock Options Outstanding | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) |
| | | | | | | | | |
| Outstanding as of December 31, 2019 | | 4,361,718 |
| | $ | 14.55 |
| | | | |
| Granted | | — |
| | — |
| | | | |
| Exercised | | (57,749 | ) | | 12.11 |
| | | | |
| Forfeited or cancelled | | (10,843 | ) | | 4.45 |
| | | | |
| Outstanding as of March 31, 2020 | | 4,293,126 |
| | $ | 14.61 |
| | 8.1 | | $ | 1.2 |
|
| Vested and exercisable as of March 31, 2020 | | 3,104,307 |
| | $ | 14.84 |
| | 8.1 | | $ | 0.3 |
|
|
| | | | | | | | | | | | | |
| | | Stock Options Outstanding | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) |
| Balance as of December 31, 2017 | | — |
| |
| | | | |
| Granted | | 5,236,155 |
| | $ | 15.00 |
| | | | |
| Forfeited or cancelled | | (3,979 | ) | | 15.00 |
| | | | |
| Balance as of June 30, 2018 | | 5,232,176 |
| | $ | 15.00 |
| | 9.9 | | $ | 49.4 |
|
The total intrinsic value of options exercised during the three months ended March 31, 2020 was $0.4 million. As of June 30, 2018, no options were vested or exercisable. TheMarch 31, 2020, the total unrecognized equity-based compensation costs related to the stock options was $39.0$4.9 million, which is expected to be recognized over a weighted-average period of 1.91.2 years.
The grant date fair value of the stock options was determined using the Black Scholes model with the following assumptions: |
| | |
Dividend yield | | None |
Volatility | | 55.0% |
Risk-free interest rate | | 2.97% |
Expected term (years) | | 5.63 |
RSUs
The Company has granted RSUs to employees under the 2018 Plan and previously under the 2017 Plan. RSUs represent the right to receive shares of Pluralsight Inc.’s Class A common stock at a specified future date. RSUsRestricted share units of Pluralsight Holdings under the 2017 Plan are generally subject to both a service condition and a liquidity condition.condition, whereas RSUs under the 2018 Plan are generally subject to a service condition.conditions only. The service condition isconditions are 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 for RSUs granted under the 2017 Plan is deemed a performance condition and was satisfied upon the occurrence of a qualifying event, which is defined as a change of control transaction or upon expiration of athe lock-up period following the IPO. PriorRSUs with both performance and service conditions, including shares issued under the 2017 Plan, are recognized using the accelerated attribution method. RSUs issued under the 2018 Plan are primarily subject to the IPO, the Company had not recorded any equity-based compensation expense associated with the RSUs as the liquidity condition was not deemed probable. Following the completion of the IPO, the Company recorded a cumulative adjustment to equity-based compensation expense totaling $7.8 million. The remaining unrecognized equity-based compensation expense related to RSUs will beservice conditions only and are recognized over the remaining requisite service period using the straight-line attribution method.
Under the 2017 Plan, all RSUsrestricted share units granted were initially RSUsrestricted share units of Pluralsight Holdings. In connection with the IPO, all RSUsrestricted share units were converted into RSUs of Pluralsight, Inc., except for Class B RSUs, which remain RSUsrestricted share units of Pluralsight Holdings and representthat convey the right to receive LLC Units and corresponding shares of Class C common stock of Pluralsight, Inc. upon vesting.
The activity for RSUs of Pluralsight, Inc. and restricted share units of Pluralsight Holdings for the sixthree months ended June 30, 2018March 31, 2020 was as follows:
|
| | | | | | | |
| | | Number of RSUs or Units | | Weighted-Average Grant Date Fair Value |
| | | | | |
| RSUs of Pluralsight, Inc.: | | | | |
| Balance at December 31, 2019 | | 7,672,038 |
| | $ | 22.71 |
|
| Granted | | 5,604,865 |
| | 19.69 |
|
| Forfeited or cancelled | | (284,697 | ) | | 20.80 |
|
| Vested | | (1,157,244 | ) | | 25.45 |
|
| Balance at March 31, 2020 | | 11,834,962 |
| | $ | 21.06 |
|
| | | | | |
| Restricted Share Units of Pluralsight Holdings: | | | | |
| Balance at December 31, 2019 | | 1,312,500 |
| | $ | 8.24 |
|
| Vested | | (187,500 | ) | | 8.24 |
|
| Balance at March 31, 2020 | | 1,125,000 |
| | $ | 8.24 |
|
|
| | | | | | | |
| | | Number of RSUs | | Weighted-Average Grant Date Fair Value |
| RSUs of Pluralsight, Inc. | | | | |
| Balance at December 31, 2017 | | 2,178,450 |
| | $ | 7.06 |
|
| Granted | | 3,059,010 |
| | 10.22 |
|
| Forfeited or cancelled | | (167,675 | ) | | 7.28 |
|
| Balance at June 30, 2018 | | 5,069,785 |
| | $ | 8.96 |
|
| RSUs of Pluralsight Holdings | | | | |
| Balance at December 31, 2017 and June 30, 2018 | | 3,000,000 |
| | $ | 8.24 |
|
As of June 30, 2018,March 31, 2020, the total unrecognized equity-based compensation cost related to the RSUs, including RSUsthe restricted share units of Pluralsight Holdings, was $59.6$212.1 million, which is expected to be recognized over a weighted-average period of 3.2 years.
Employee Stock Purchase Plan
In May 2018, Pluralsight Inc.'s board’s Board of directorsDirectors adopted the ESPP. A total of 2,970,000 shares of Class A common stock were initially reserved for issuance under the ESPP. The number of shares of Class A common stock available for issuance under the ESPP will be increased on the first day of each fiscal year beginning in 2019 equal to the lesser of: (i) 2,970,000 shares of Class A common stock, (ii) 1.5% of the outstanding shares of all classes of common stock of the Company on the last day of the immediately preceding fiscal year, or (iii) an amount determined by the plan administrator. As of March 31, 2020, the total number of shares available for issuance under the ESPP was 5,016,379.
The ESPP generally provides for consecutive overlapping 24-month offering periods comprised of four4 six-month purchase periods. The offering periods are scheduled to start on the first trading day on or after May 31 and November 30 of each year. The first offering period commenced on the IPO date and is scheduled to end on the first trading day on or after May 31, 2020.
The ESPP permits participants to elect to purchase shares of Class A common stock through fixed contributions from eligible compensation paid during each purchase period during an offering period, provided that this fixed contribution amount will not exceed 75.0% of the eligible compensation a participant receives during a purchase period or $12,500 (increased to $25,000 for purposes of the first purchase period under the ESPP).$12,500. A participant may purchase a maximum of 5,000 shares during each purchase period. Amounts deducted and accumulated by the participant will be used to purchase shares of Class A common stock at the end of each purchase period. The purchase price of the shares will be 85% of the lower of the fair market value of Class A common stock on the first trading day of each offering period or on the purchase date, except for the first offering period, during which the purchase price of the shares will be 85% of the lower of (i) the IPO price or (ii) the fair market value of common stock on the
purchase date. If the fair market value of the common stock on any purchase date within an offering period is lower than the stock price as of the beginning of the offering period, the offering period will immediately reset after the purchase of shares on such purchase date and participants will automatically be re-enrolled in a new offering period. Participants may end their participation at any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of common stock. Participation ends automatically upon termination of employment.
The initial offering period began on the IPO date. As of June 30, 2018,March 31, 2020, a total of 2,876,7881,216,623 shares were issuable to employees based on contribution elections made under the ESPP and no shares had yet been purchased.ESPP. As of June 30, 2018,March 31, 2020, total unrecognized equity-based compensation costs was $15.6$6.7 million, which is expected to be recognized over a weighted-average period of 1.9 years.1.0 year.
The fair value
ESPP employee payroll contributions accrued at March 31, 2020 and December 31, 2019 totaled $5.8 million and $1.6 million, respectively, 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 right forperiod.
Incentive Unit Plan
The Company granted incentive units of Pluralsight Holdings to certain employees and directors prior to its IPO pursuant to the ESPP is estimated on the date of grant using the Black-Scholes model with the following assumptions:
|
| | |
Dividend yield | | None |
Volatility | | 55.0% |
Risk-free interest rate | | 2.05%—2.50% |
Expected term (years) | | 0.5—2.0 |
Equity Appreciation Rights
Incentive Unit Plan (“2013 Plan”). In connection with the IPO, the Company elected to settle all vested equity appreciation rights ("EARs") for a cash payment of $0.3 million. The EARs vest upon satisfaction of both timeReorganization Transactions and a liquidity condition, which was satisfied upon completion of the IPO. The remaining unvested EARs were cancelled on the date of the IPO. Prior to the IPO, the 2013 Plan was terminated and all outstanding incentive units were converted into LLC Units of Pluralsight Holdings. In addition, certain holders 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, and as such the Company continues to record equity-based compensation expense for unvested awards.
The activity of EARsunvested LLC Units during the three months ended March 31, 2020 was not probable and noas follows:
|
| | | | | | | |
| | | Unvested Units | | Weighted- Average Grant Date Fair Value |
| | | | | |
| Unvested LLC Units outstanding—December 31, 2019 | | 1,543,813 |
| | $ | 8.72 |
|
| Vested | | (312,769 | ) | | 8.78 |
|
| Unvested LLC Units outstanding—March 31, 2020 | | 1,231,044 |
| | $ | 8.71 |
|
As of March 31, 2020, total unrecognized equity-based compensation related to the EARs had been recognized.all unvested Class A common shares and unvested LLC Units was $8.6 million, which is expected to be recognized over a weighted-average period of 1.2 years. The Company recognized $0.1 million in compensation cost on the date of the IPO measured using the grant datetotal fair value of Class A common shares and LLC Units vested during the award using a Black-Scholes model.three months ended March 31, 2020 was $5.9 million.
Equity-Based Compensation Expense
Equity-based compensation expense was classified as follows in the accompanying condensed consolidated statements of operations (in thousands):
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2020 | | 2019 |
| | | | | |
| Cost of revenue | | $ | 270 |
| | $ | 84 |
|
| Sales and marketing | | 9,522 |
| | 6,276 |
|
| Technology and content | | 6,336 |
| | 3,710 |
|
| General and administrative | | 9,450 |
| | 10,198 |
|
| Total equity-based compensation | | $ | 25,578 |
| | $ | 20,268 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2018 | | 2017 | | 2018 | | 2017 |
| Cost of revenue | | $ | 46 |
| | $ | 5 |
| | $ | 46 |
| | $ | 10 |
|
| Sales and marketing | | 4,432 |
| | 715 |
| | 4,971 |
| | 1,379 |
|
| Technology and content | | 2,668 |
| | 526 |
| | 3,049 |
| | 990 |
|
| General and administrative | | 10,409 |
| | 3,133 |
| | 12,862 |
| | 3,712 |
|
| Total equity-based compensation | | $ | 17,555 |
| | $ | 4,379 |
| | $ | 20,928 |
| | $ | 6,091 |
|
Note 12.15. Income Taxes
As a result of the Reorganization Transactions, Pluralsight, Inc. becameis 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.basis, except as otherwise provided under Section 704 of the Internal Revenue Code. 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.Holdings. The Company is also subject to taxes in foreign jurisdictions.
The tax provision for interim periods is determined using an estimate of the Company's annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of its annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period. The quarterly tax provision and estimate of the Company's annual effective tax rate are subject to variation due to several factors including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how the Company conducts business, and tax law developments.
For the three months ended June 30, 2018March 31, 2020 and 20172019 the Company's estimated effective tax rate was (0.5)% and (0.3)%, respectively. For the six months ended June 30, 2018 and 2017, the Company's estimated effective tax rate was (0.5)% and (0.4)(0.8)%, 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 substantially all its U.S. deferred tax assets, including the deferred tax assets acquired in connection with the Reorganization Transactions as described below.assets. While the Company believes its current valuation allowance is appropriate, the Company assesses the need for an adjustment to the valuation allowance on a quarterly basis. The assessment is based on estimates of future sources of taxable income for the jurisdictions in which the Company operates and the periods over which deferred tax assets will be realizable. In the event the Company determines that it will be able to realize all or part of its net deferred tax assets in the future, all or part of the valuation allowance will be reversedreleased in the period in which the Company makes such determination. The release of all or part of the valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is reversed.released.
Tax Receivable Agreement and Reorganization Transactions
In connection with the Reorganization Transactions, certain members of Pluralsight Holdings ("Former Members") exchanged LLC Units for shares of Class A common stock of Pluralsight, Inc. As a result of this exchange, the Company acquired certain tax attributes held by the Former Members. Additionally, the Company could obtain future increases in its tax basis of the assets of Pluralsight Holdings when LLC Units are redeemed or exchanged by the Continuing Members. This increase in tax basis may have the effect of reducing the amounts paid in the future to various tax authorities. The increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On the date of the IPO, the Company entered into a Tax Receivable Agreement ("TRA"(“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, 2020, certain Continuing Members exchanged 201,240 LLC Units for shares of Class A common stock. The Company maintains a full valuation allowance againsthas 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 attributes generated as a resultsavings it may realize from the utilization of redemptions of LLC Units or exchanges described above until it is determined that the benefits are more-likely-than-not to be realized. As of June 30, 2018, no members of the TRA had exchanged LLC Units for Class A common shares and therefore the Company had not recorded any liabilities under the TRA.
Tax Reform Legislation
On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Act") was enacted in the United States resulting in a reduction of the corporate income tax rate to 21%. In addition, the Tax Act limits the deductibility of interest expense, implements a modified territorial tax system, and imposes a one-time repatriation tax on deemed repatriated untaxed earnings and profits of U.S.-owned foreign subsidiaries ("Toll Charge").
In the fourth quarter of 2017, the Company recorded a provisional Toll Charge and remeasured its deferred tax assets and liabilities to reflectarising from the lower corporate income tax rate.exchanges that have occurred through March 31, 2020. The amounts were computed based on information available to the Company; however, there is still uncertainty as to the application of the Tax Act. As of June, 30, 2018, the Company had not yet completed its analysis of the effects of the Tax Act, including the Toll Charge computation. The analysis is expected to be completed within one year of the enactment date of the Tax Act. Because the Company has recorded a full valuation allowance in the United States, changes to the reported impact of the Tax Act based on additional guidance or further analysis are not expected to materially affect the effective tax rate in future periods. No adjustments to the provisional amounts recorded in the fourth quarter of 2017 had been madetotal unrecorded TRA liability as of June 30, 2018.March 31, 2020 is approximately $271.9 million.
As a result of the Toll Charge, all previously unremitted earnings have now been subject to federal tax in the United States; however, the Company plans to, and has the ability to, indefinitely reinvest such earnings in their respective foreign jurisdictions; therefore, no additional tax liability such as state or withholding tax has been provided for on such earnings.
The Company continues to analyze the effects of new taxes due on certain foreign income, such as GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income) and limitations on interest expense deductions (if certain conditions apply) that became effective starting January 1, 2018, and other provisions of the Tax Act. The Company has delayed finalizing its GILTI policy election under SAB 118 until it has the necessary information available to analyze and make an informed policy decision. Because the Company is still evaluating the GILTI provisions and the future taxable income that is subject to GILTI, the Company has included GILTI related to current-year operations only in its estimated annual effective tax rate for the three and six months ended June 30, 2018 and has not provided additional GILTI on deferred items.
Note 13.16. 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, |
| | | 2020 | | 2019 |
| | | | | |
| Numerator: | | | | |
| Net loss | | $ | (47,513 | ) | | $ | (33,884 | ) |
| Less: Net loss attributable to non-controlling interests | | (12,194 | ) | | (14,809 | ) |
| Net loss attributable to Pluralsight, Inc. | | $ | (35,319 | ) | | $ | (19,075 | ) |
| Denominator: | | | | |
| Weighted-average shares of Class A common stock outstanding, basic and diluted | | 104,631 |
| | 75,927 |
|
| Net loss per share: | | | | |
| Net loss per share, basic and diluted | | $ | (0.34 | ) | | $ | (0.25 | ) |
|
| | | | |
| | | May 16, 2018 through June 30, 2018 |
| | |
| Numerator: | | |
| Net Loss | | $ | (24,294 | ) |
| Less: Net loss attributable to non-controlling interests | | (12,706 | ) |
| Net loss attributable to Pluralsight, Inc. | | $ | (11,588 | ) |
| Denominator: | | |
| Weighted-average common shares outstanding | | 62,847 |
|
| Less: Weighted-average common shares subject to time-based vesting | | (595 | ) |
| Weighted-average common shares outstanding, basic and diluted | | 62,252 |
|
| Net loss per share, basic and diluted | | $ | (0.19 | ) |
During the period from May 16, 2018 through June 30, 2018,three months ended March 31, 2020, the Company incurred net losses and, therefore, the effect of the Company’s potentially dilutive securities were not included in the calculation of diluted loss per share as the effect would be anti-dilutive.
The following table contains share/unit totals with a potentially dilutive impact (in thousands):
|
| | | |
| | | As of June 30, 2018March 31,
2020 |
| | |
| LLC Units held by Continuing Members | | 72,16037,383 |
|
| Stock options | | 5,2324,293 |
|
| RSUs of Pluralsight, Inc. | | 5,07011,835 |
|
RSUsRestricted Share Units of Pluralsight Holdings | | 3,0001,125 |
|
Shares issuablePurchase rights committed under the ESPP | | 2,8771,217 |
|
Unvested Class A common shares | | 589 |
|
Warrants to purchase Class A common shares | | 424 |
|
| Total | | 89,35255,853 |
|
We use billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers and our ability to sell subscriptions to our platform to both existingnew and newexisting customers. Billings represent our total revenue plus the change in deferred revenue in the period, as presented in our condensed consolidated statements of cash flows.flows, less the change in contract assets and unbilled accounts receivable in the period. Billings in any particular period represent amounts invoiced to our customers and reflect subscription renewals and upsells to existing customers plus sales to new customers. Our pricing and subscription periods vary for business customers and individual customers. Subscription periods for our business customers generally range from one to three years, with a majority being one year. We typically invoice our business customers in advance in annual installments. Subscription periods for our individual customers range from one month to one year and we typically invoice them in advance in monthly or annual installments.
We use billings from business customers and our percentage of billings from business customers to measure and monitor our ability to sell subscriptions to our platform to business customers. We believe that billings from business customers will be a significant source of future revenue growth and a key factor affecting our long-term performance. We expect our billings from business customers to continue to increase as a percentage of billings over the long term.
We derive substantially all of our revenue from the sale of subscriptions to our platform. A small portion of ourWe also derive revenue is derived from providing professional services, which generally consist of content creationimplementation, integration, or other consulting services. Amounts that have been invoiced are initially recorded as deferred revenue and are recognized ratably as revenue over the subscription period. Subscription terms generally range from one year to three years for business customers and one month to one year for individual customers, and begin on the date access to our platform is made available to the customer. Nearly allMost of our subscriptions to business customers are billed in annual installments even if customers are contractually committed to multi-year agreements. Subscriptions that allow the customer to take software on-premise without significant penalty are recognized at a point in time when the software is made available to the customer.
Cost of revenue includes certain direct costs associated with delivering our platform and includes costs for author fees, amortization of our content library, hosting and delivery fees, merchant processing fees, depreciation of capitalized software development costs for internal-use software, and employee-related costs, including equity-based compensation expense associated with our customer support organization, and third-party transcription costs.professional services organizations.
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by various factors, including the mix of subscriptions we sell, the costscost of author fees, andthe costs associated with third-party hosting services, and the extent to which we expand our customer support and professional services organizations. We expect our gross margin to increase over the long term primarily due to a decrease in author fees as a percentage of revenue, although our gross margin may fluctuate from period to period depending on the interplay of the factors described above.
Our operating expenses are classified as sales and marketing, technology and content, and general and administrative. For each of these categories, the largest component is employee-related costs, which include salaries and bonuses, equity-based compensation, expense, and employee benefit costs. We allocate shared overhead costs such as information technology infrastructure and facility-related costs based on headcount in that category.
Sales and marketing expenses consist primarily of employee compensation costs of our sales and marketing employees, including salaries, benefits, bonuses, commissions, equity-based compensation, expense, and allocated overhead costs. Commissions earned by our sales force are expensed as incurred. Other sales and marketing costs include user events, search engine and email marketing, content syndication, lead generation, and online banner and video advertising. We expect that our sales and marketing expenses will increase in absolute dollars for the foreseeable future and, in the near term, may increase as a percentage of our revenue as we hire additional sales and marketing personnel, increase our marketing activities, and grow our domestic and international operations. Additionally, our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period depending on the timing of expenditures. However, we expect sales and marketing expenses to decrease as a percentage of revenue over the long term.
Technology costs consist principally of research and development activities including personnel costs, consulting services, other costs associated with platform development efforts, and allocated overhead costs. Content costs consist principally of personnel costs and other activities associated with content development, course production, curriculum direction, and allocated overhead costs. Technology and content costs are expensed as incurred, except for certain costs relating to the development of internal-use software, including software used to upgrade and enhance our platform and applications supporting our business, which are capitalized and amortized over the estimated useful lives of one to three years. We expect that our technology and content expenses will increase in absolute dollars for the foreseeable future and, in the near term, may increase as a percentage of our revenue as we continue to increase the functionality of and enhance our platform and develop new content and features. Additionally, our technology and content expense may fluctuate as a percentage of our revenue from period to period depending on the timing of expenditures. However, we expect technology and content expenses to decrease as a percentage of revenue over the long term.
General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, people operations, and administrative personnel, including salaries, benefits, bonuses, and equity-based compensation expense;compensation; professional fees for external legal, accounting, recruiting, and other consulting services; and allocated overhead costs. We are incurring additional general and administrative expenses as a result of operating as a public company and our UP-C structure, including additional expenses related to compliance with the rules and regulations of the SEC, additional insurance expenses, investor relations activities, and professional services. In addition, we expect to increase the size of our general and administrative function to support our increased compliance requirements and the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars for the foreseeable future and, in the near term, may increase as a percentage of our revenue. Additionally, our general and administrative expenses may fluctuate as a percentage of our revenue from period to period depending on the timing of expenditures. However, we expect general and administrative expenses to decrease as a percentage of revenue over the long term.
The following tables set forth selected unaudited condensed consolidated statements of operations data and such data as a percentage of revenue for each of the periods indicated: