Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1. Organization and Description of Business
Pluralsight, Inc. was incorporated as a Delaware corporation on December 4, 2017 as a holding company for the purpose of facilitating an initial public offering (“IPO”) and other related transactions in order to carry on the business of Pluralsight Holdings, LLC (“Pluralsight Holdings”) and its subsidiaries (together with Pluralsight, Inc., the “Company” or “Pluralsight”).
In May 2018, Pluralsight, Inc. completed its IPO and used the net proceeds to purchase newly issued common limited liability company units (“LLC Units”) from Pluralsight Holdings. Following the reorganization transactions completed in connection with the IPO (“Reorganization Transactions”), Pluralsight, Inc. became the sole managing member of Pluralsight 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 Pluralsight Holdings. As of September 30, 2020, Pluralsight, Inc. owned 82.4% of Pluralsight Holdings and the members of Pluralsight Holdings who retained LLC Units prior to the IPO (the “Continuing Members”) owned the remaining 17.6% of Pluralsight Holdings.
Pluralsight operates a cloud-based technology skills and engineering management platform that provides a broad range of tools for businesses and individuals, including skill assessments, a curated library of courses, learning paths, developer productivity metrics, and business analytics. As the sole managing member of Pluralsight Holdings, Pluralsight, Inc. operates and controls all of the business operations and affairs of Pluralsight.
Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the applicable regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2019 included in Pluralsight, Inc.’s Annual Report on Form 10-K/A, as filed with the SEC on March 2, 2020 (“Annual Report”).
These unaudited condensed consolidated financial statements include the accounts of Pluralsight, Inc. and its directly and indirectly wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
As discussed in Note 1—Organization and Description of Business, Pluralsight, Inc. consolidates the financial results of Pluralsight Holdings as a Variable Interest Entity (“VIE”). The Company periodically evaluates entities for consolidation either through ownership of a majority voting interest, or through means other than a voting interest, in accordance with the VIE accounting model. Under the VIE accounting model, Pluralsight, Inc. is the primary beneficiary as it has the majority economic interest in Pluralsight Holdings, and, as the sole managing member, has decision making authority that significantly affects the 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 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 condensed consolidated balance sheet as of September 30, 2020, and the condensed consolidated statements of operations, comprehensive loss, and stockholders’ equity, for the three and nine months ended September 30, 2020 and 2019, and the interim condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019, are unaudited. The condensed consolidated balance sheet as of December 31, 2019 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 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 nine months ended September 30, 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 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, impairment of long-lived and intangible assets, including goodwill, provisions 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, and the discount rate used in measuring lease liabilities. 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 2—Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Annual Report. There have been no significant changes to these policies that have had a material impact on the Company’s unaudited condensed consolidated financial statements and related notes during the three months ended September 30, 2020, except as noted below.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU 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 affect the collectibility of the reported amount. The ASU also amends the impairment model for available-for-sale debt securities and requires any credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down, with changes presented through earnings. The Company adopted the standard effective January 1, 2020 using the modified retrospective approach. The effect of 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 capitalizes certain implementation costs that were previously expensed as incurred. These costs will be amortized to expense over the term of the hosting arrangement. The effect of adopting the standard was not material to the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2020.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740 and clarifies certain aspects of the current guidance to promote consistency among reporting entities. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The standard is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company early adopted the standard during the second quarter of 2020. The effect of adopting the standard was not material to the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2020. The standard removes the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and other comprehensive income, as a result the Company was not required to apply the incremental approach for intraperiod tax allocation.
Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This ASU removes certain separation models in ASC 470-20 for convertible instruments, and, as a result, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815. Consequently, a convertible debt instrument, such as the Company's convertible senior notes, will be accounted for as a single liability measured at its amortized
cost. As of September 30, 2020, the Company recorded a discount on the convertible notes of $94.4 million related to the separation of the conversion feature. This discount results in the accretion of interest expense over time and is expected to be removed upon adoption of this ASU. As a result, the standard is expected to have a material impact on the Company's consolidated financial statements. The standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those years. Early adoption is permitted, but no earlier than the fiscal year beginning after December 15, 2020. Adoption using either the full retrospective or modified retrospective transition method is permitted. The Company continues to evaluate the impact of the adoption of the new standard on its accounting policies and processes, and is currently evaluating adoption methods.
Note 3. Revenue
Disaggregation of Revenue
Subscription revenue accounted for approximately 97% and 95% of the Company’s revenue for the three months ended September 30, 2020 and 2019, respectively, and 97% for each of the nine months ended September 30, 2020 and 2019.
Revenue by geographic region, based on the physical location of the customer, was as follows (dollars in thousands):
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|
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|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Growth
|
|
|
2020
|
|
2019
|
|
Rate
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
60,283
|
|
|
61
|
%
|
|
$
|
51,869
|
|
|
63
|
%
|
|
16
|
%
|
Europe, Middle East and Africa(1)
|
|
28,700
|
|
|
29
|
%
|
|
22,314
|
|
|
27
|
%
|
|
29
|
%
|
Other foreign locations
|
|
10,482
|
|
|
10
|
%
|
|
8,437
|
|
|
10
|
%
|
|
24
|
%
|
Total revenue
|
|
$
|
99,465
|
|
|
100
|
%
|
|
$
|
82,620
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Growth
|
|
|
2020
|
|
2019
|
|
Rate
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
177,875
|
|
|
62
|
%
|
|
$
|
142,705
|
|
|
63
|
%
|
|
25
|
%
|
Europe, Middle East and Africa(1)
|
|
80,950
|
|
|
28
|
%
|
|
62,204
|
|
|
27
|
%
|
|
30
|
%
|
Other foreign locations
|
|
28,051
|
|
|
10
|
%
|
|
23,190
|
|
|
10
|
%
|
|
21
|
%
|
Total revenue
|
|
$
|
286,876
|
|
|
100
|
%
|
|
$
|
228,099
|
|
|
100
|
%
|
|
|
(1)Revenue from the United Kingdom represented 12% and 11% of revenue for the three months ended September 30, 2020 and 2019, respectively, and 12% and 11% of revenue for the nine months ended September 30, 2020, and 2019, respectively. No other foreign country accounted for 10% or more of revenue during the three and nine months ended September 30, 2020 and 2019.
Revenue by type of customer, was as follows (dollars in thousands):
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Business customers
|
|
$
|
87,030
|
|
|
$
|
71,278
|
|
|
$
|
251,072
|
|
|
$
|
194,373
|
|
Individual customers
|
|
12,435
|
|
|
11,342
|
|
|
35,804
|
|
|
33,726
|
|
Total revenue
|
|
$
|
99,465
|
|
|
$
|
82,620
|
|
|
$
|
286,876
|
|
|
$
|
228,099
|
|
Contract Balances
Contract assets represent amounts for which the Company has recognized revenue, pursuant to the Company’s revenue recognition policy, for contracts that have not yet been invoiced to customers where there is a remaining performance obligation, typically for multi-year arrangements. Total contract assets were $2.7 million and $0.8 million as of September 30, 2020 and December 31, 2019, respectively. The change in contract assets reflects the difference in timing between the satisfaction of remaining performance obligations and the Company’s contractual right to bill its 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. The Company recognized revenue that was included in the corresponding deferred revenue balance at the beginning of the period of $86.8 million and $70.9 million for the three months ended September 30, 2020 and 2019, respectively, and $187.7 million and $137.1 million for the nine months ended September 30, 2020 and 2019, respectively.
Remaining Performance Obligations
Remaining performance obligation represents contracted revenue that has not yet been recognized and includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. As of September 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $325.0 million. The Company expects to recognize 71% of the transaction price over the next 12 months. Unbilled portions of the remaining performance obligation are subject to future economic risks including bankruptcies, regulatory changes and other market factors.
Costs to Obtain a Contract
The following table summarizes the activity of the deferred contract acquisition costs (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Beginning balance
|
|
$
|
24,313
|
|
|
$
|
20,212
|
|
Capitalization of contract acquisition costs
|
|
22,491
|
|
|
18,668
|
|
Amortization of deferred contract acquisition costs
|
|
(19,018)
|
|
|
(17,317)
|
|
Ending balance
|
|
$
|
27,786
|
|
|
$
|
21,563
|
|
Note 4. Cash Equivalents and Investments
Cash equivalents, restricted cash equivalents, and investments consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
75,409
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,409
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
24,449
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,449
|
|
U.S. treasury securities
|
|
129,962
|
|
|
9
|
|
|
—
|
|
|
129,971
|
|
Corporate notes and obligations
|
|
141,268
|
|
|
880
|
|
|
(15)
|
|
|
142,133
|
|
Foreign government obligations
|
|
7,076
|
|
|
—
|
|
|
—
|
|
|
7,076
|
|
Certificates of deposit
|
|
448
|
|
|
—
|
|
|
—
|
|
|
448
|
|
Total short-term investments
|
|
$
|
303,203
|
|
|
$
|
889
|
|
|
$
|
(15)
|
|
|
$
|
304,077
|
|
Restricted cash equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
16,768
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,768
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
|
$
|
113,473
|
|
|
$
|
741
|
|
|
$
|
(87)
|
|
|
$
|
114,127
|
|
Certificates of deposit
|
|
496
|
|
|
—
|
|
|
—
|
|
|
496
|
|
Total long-term investments
|
|
$
|
113,969
|
|
|
$
|
741
|
|
|
$
|
(87)
|
|
|
$
|
114,623
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents, restricted cash equivalents, and investments
|
|
$
|
509,349
|
|
|
$
|
1,630
|
|
|
$
|
(102)
|
|
|
$
|
510,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
|
|
|
|
Due within one year
|
|
$
|
303,203
|
|
|
$
|
304,077
|
|
Due between one and two years
|
|
113,969
|
|
|
114,623
|
|
Total investments
|
|
$
|
417,172
|
|
|
$
|
418,700
|
|
The Company reviews the individual securities that have unrealized losses in its investment portfolio on a regular basis to evaluate whether or not any declines in fair value are the result of credit losses. The Company evaluates, among other factors, whether it has the intention to sell any of these investments and whether it is more likely than not that it will be required to sell any of them before recovery of the amortized cost basis. Based on this evaluation, the Company determined that the unrealized losses were primarily related to investments in corporate notes and obligations, and were due to increases in credit spreads and temporary declines in liquidity for the asset class that were not specific to the underlying issuer of the investments. The Company does not intend to sell the investments with unrealized losses and it is not more likely than not that the Company will be required to sell its investments before the recovery of the amortized cost basis. As a result of this evaluation, no credit losses were recorded for investments as of September 30, 2020. The investments with unrealized loss positions have been in an unrealized loss position for less than 12 months.
Note 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 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 was as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
75,409
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,409
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
—
|
|
|
$
|
24,449
|
|
|
$
|
—
|
|
|
$
|
24,449
|
|
U.S. treasury securities
|
|
—
|
|
|
129,971
|
|
|
—
|
|
|
129,971
|
|
Corporate notes and obligations
|
|
—
|
|
|
142,133
|
|
|
—
|
|
|
142,133
|
|
Foreign government obligations
|
|
—
|
|
|
7,076
|
|
|
—
|
|
|
7,076
|
|
Certificates of deposit
|
|
—
|
|
|
448
|
|
|
—
|
|
|
448
|
|
Total short-term investments
|
|
$
|
—
|
|
|
$
|
304,077
|
|
|
$
|
—
|
|
|
$
|
304,077
|
|
Restricted cash equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
16,768
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,768
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
|
$
|
—
|
|
|
$
|
114,127
|
|
|
$
|
—
|
|
|
$
|
114,127
|
|
Certificates of deposit
|
|
—
|
|
|
496
|
|
|
—
|
|
|
496
|
|
Total long-term investments
|
|
$
|
—
|
|
|
$
|
114,623
|
|
|
$
|
—
|
|
|
$
|
114,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
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
|
|
Convertible Senior Notes
As of September 30, 2020, the estimated fair value of the Company’s convertible senior notes, with aggregate principal totaling $593.5 million, was $528.8 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 6. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
16,366
|
|
|
$
|
11,469
|
|
Other current assets
|
|
2,481
|
|
|
2,705
|
|
Prepaid expenses and other current assets
|
|
$
|
18,847
|
|
|
$
|
14,174
|
|
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Accrued compensation
|
|
$
|
30,691
|
|
|
$
|
23,310
|
|
Accrued income and other taxes payable
|
|
6,988
|
|
|
7,116
|
|
Accrued other current liabilities
|
|
9,411
|
|
|
10,277
|
|
Accrued expenses
|
|
$
|
47,090
|
|
|
$
|
40,703
|
|
Note 7. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
Computer equipment
|
|
$
|
7,415
|
|
|
$
|
9,047
|
|
Software
|
|
546
|
|
|
2,047
|
|
Capitalized internal-use software costs
|
|
24,272
|
|
|
23,021
|
|
Furniture and fixtures
|
|
2,732
|
|
|
5,826
|
|
Leasehold improvements
|
|
9,150
|
|
|
9,871
|
|
Construction in progress
|
|
48,019
|
|
|
4,427
|
|
Total property and equipment
|
|
92,134
|
|
|
54,239
|
|
Less: Accumulated depreciation
|
|
(27,076)
|
|
|
(31,343)
|
|
Property and equipment, net
|
|
$
|
65,058
|
|
|
$
|
22,896
|
|
Depreciation expense totaled $3.0 million and $2.4 million for the three months ended September 30, 2020 and 2019, respectively, and $8.9 millions and $7.0 million for the nine months ended September 30, 2020 and 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 including working capital adjustments.
The Company accounted for the transaction as a business combination using the acquisition method of accounting. The Company allocated the purchase price to the tangible and 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.
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, and fair 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. While the Company chose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of management and not those of any third party.
During the year ended December 31, 2019, the Company 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, equity-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 the consolidated results of operations had the acquisition occurred on January 1, 2018, or of future results of operations (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
|
|
|
|
|
Revenue
|
|
$
|
82,620
|
|
|
$
|
231,989
|
|
Net loss
|
|
(45,462)
|
|
|
(125,518)
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.32)
|
|
|
$
|
(0.91)
|
|
Note 9. Intangible Assets
Intangible assets, net are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
|
|
|
|
|
|
Content library:
|
|
|
|
|
|
|
Acquired content library
|
|
$
|
32,835
|
|
|
$
|
32,807
|
|
|
$
|
28
|
|
Course creation costs
|
|
22,585
|
|
|
10,733
|
|
|
11,852
|
|
Total
|
|
$
|
55,420
|
|
|
$
|
43,540
|
|
|
$
|
11,880
|
|
Intangible assets:
|
|
|
|
|
|
|
Technology
|
|
$
|
28,500
|
|
|
$
|
10,644
|
|
|
$
|
17,856
|
|
Trademarks
|
|
120
|
|
|
120
|
|
|
—
|
|
Noncompetition agreements
|
|
320
|
|
|
320
|
|
|
—
|
|
Customer relationships
|
|
3,550
|
|
|
3,029
|
|
|
521
|
|
Domain names
|
|
39
|
|
|
—
|
|
|
39
|
|
Total
|
|
$
|
32,529
|
|
|
$
|
14,113
|
|
|
$
|
18,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Intangible assets are amortized using the straight-line method over the estimated useful lives. Amortization expense of acquired intangible assets was $1.4 million for the three months ended September 30, 2020 and 2019, and $4.2 million and $3.0 million for the nine months ended September 30, 2020 and 2019, respectively. Amortization expense of course creation costs was $0.9 million and $0.7 million for the three months ended September 30, 2020 and 2019, respectively, and $2.5 million and $1.8 million for the nine months ended September 30, 2020 and 2019, respectively.
Based on the recorded content library and intangible assets at September 30, 2020, estimated amortization expense is expected to be as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Amortization
|
|
|
|
2020 (remaining three months)
|
2,286
|
|
2021
|
8,848
|
|
2022
|
7,990
|
|
2023
|
7,330
|
|
2024
|
3,370
|
|
2025
|
433
|
|
Total
|
$
|
30,257
|
|
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”), in a private placement to qualified institutional buyers exempt from registration under the Securities Act. The net proceeds from the issuance of the Notes were $616.7 million after deducting the initial purchasers’ discounts and estimated issuance costs.
The Notes are governed by an indenture (the “Indenture”) between the Company, as the issuer, and U.S. Bank National Association, as trustee. The Notes are Pluralsight, Inc.’s senior unsecured obligations and rank senior in right of payment to any of its indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s unsecured indebtedness then existing and future liabilities that are not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness, to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of its subsidiaries. The Indenture does not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness, or the issuance or repurchase of securities by the Company or any of its subsidiaries. The Notes mature on March 1, 2024 unless earlier repurchased or converted. Interest is payable semi-annually in arrears on March 1 and September 1 of each year.
The Notes have an initial conversion rate of 25.8023 shares of the Company’s Class A common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $38.76 per share of its Class A common
stock and is subject to adjustment if certain events occur. Following certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the Indenture, holders of the Notes may require the Company to repurchase for cash all or a portion of their Notes at a purchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest.
Holders of the Notes may convert all or any portion of their Notes at any time prior to the close of business on December 1, 2023, in integral multiples of $1,000 principal amount, only under the following circumstances:
•During any calendar quarter commencing after the calendar quarter 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 five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price as defined in the Indenture per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day; or
•Upon the occurrence of specified corporate events described in the Indenture. These events include a change in control transaction, or a recapitalization, liquidation, or delisiting of the Company’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 foregoing conditions. Upon conversion, holders will receive cash, shares of the Company’s Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election.
During the three months ended September 30, 2020, the conditions allowing holders of the Notes to convert were not met. The Notes are therefore not currently convertible and are classified as long-term debt.
The Company accounts for the Notes as separate liability and equity components. The Company determined the carrying amount of the liability component as the present value of its cash flows using a discount rate of approximately 5.5% based on comparable debt transactions for similar companies. The estimated interest rate was applied to the Notes, which resulted in a fair value of the liability component of $492.7 million upon issuance, calculated as the present value of future contractual payments based on the $633.5 million aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense over the term of the Notes using the effective interest method. The $140.8 million difference between the gross proceeds received from issuance of the Notes of $633.5 million and the estimated fair value of the liability component represents the equity component, or the conversion option, of the Notes and was recorded in additional paid-in capital. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
The Company 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 condensed consolidated balance sheets.
In September 2019, Pluralsight, Inc. repurchased a total of $40.0 million in aggregate principal of its Notes for approximately $35.0 million in cash. The Company first allocated the cash 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 liability component and the carrying value of the repurchased Notes resulted in a loss on debt extinguishment of $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):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
Principal
|
|
$
|
593,500
|
|
Less: Unamortized debt discount
|
|
(94,362)
|
|
Less: Unamortized issuance costs
|
|
(8,783)
|
|
Net carrying amount
|
|
$
|
490,355
|
|
The net carrying value of the equity component of the Notes was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Contractual interest expense
|
|
$
|
556
|
|
|
$
|
585
|
|
|
$
|
1,669
|
|
|
$
|
1,311
|
|
Amortization of debt issuance costs and discount
|
|
6,853
|
|
|
6,826
|
|
|
20,128
|
|
|
15,120
|
|
Total
|
|
$
|
7,409
|
|
|
$
|
7,411
|
|
|
$
|
21,797
|
|
|
$
|
16,431
|
|
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. As of September 30, 2020, the Capped Calls cover, subject to anti-dilution adjustments, 15,313,665 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 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 leases office space under non-cancellable operating leases with lease terms expiring between 2020 and 2035. 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 Company 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Operating lease expense
|
|
$
|
3,335
|
|
|
$
|
1,570
|
|
|
$
|
7,402
|
|
|
$
|
4,536
|
|
Variable lease expense
|
|
630
|
|
|
97
|
|
|
945
|
|
|
241
|
|
Short-term lease expense
|
|
182
|
|
|
221
|
|
|
640
|
|
|
307
|
|
Total lease expense
|
|
$
|
4,147
|
|
|
$
|
1,888
|
|
|
$
|
8,987
|
|
|
$
|
5,084
|
|
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 September 30, 2020 and 2019 was $1.7 million and $1.4 million, respectively, and $5.2 million and $4.1 million for the nine months ended September 30, 2020 and 2019, respectively, and was included in net cash used in operating activities in the consolidated statements of cash flows.
As of September 30, 2020, the maturities of the Company’s operating lease liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
2020 (remaining three months)
|
$
|
1,508
|
|
2021
|
11,892
|
|
2022
|
11,858
|
|
2023
|
11,370
|
|
2024
|
10,633
|
|
Thereafter
|
100,176
|
|
Total lease payments
|
147,437
|
|
Less: Imputed interest
|
(62,860)
|
|
Lease liabilities
|
$
|
84,577
|
|
As of September 30, 2020, the weighted average remaining lease term is 13.2 years and the weighted average discount rate used to determine operating lease liabilities was 8.3%.
The Company has various sublease agreements with third parties. These subleases have remaining lease terms of up to two years. Sublease income, which is recorded within other income, was $0.1 million during the three months ended September 30, 2020 and 2019.
In August 2018, the Company entered into a non-cancellable lease agreement to rent office space for the Company’s headquarters in Draper, Utah for a period of 15 years. In May 2020, certain construction milestones were met and as a result the lease agreement was amended to establish the rent commencement date and define the basic rent for the lease beginning in July 2020. At the lease commencement date, the Company classified the lease as an operating lease and recorded a lease liability of $70.3 million with a corresponding right-of-use asset and an increase to property and equipment for tenant improvements that were deemed lease incentives. The lease liability was measured using an estimated incremental borrowing rate derived from comparable market data. The lease agreement provides the Company with three extension periods of five years each. The Company did not include these extension periods in the lease term as the extension options are not reasonably certain to be exercised.
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 September 30, 2020 and December 31, 2019, the Company recorded a deposit of $0.7 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.
Note 12. Commitments and Contingencies
Letters of Credit
As of September 30, 2020 and December 31, 2019, the Company had a total of $2.1 million in letters of credit outstanding with financial institutions. These outstanding letters of credit were issued for purposes of securing certain of the Company’s obligations under facility leases.
Other Commitments
The Company has also entered into certain non-cancellable agreements primarily related to cloud infrastructure and software subscriptions in the ordinary course of business. There have been no material changes in the Company’s commitments and contingencies, as disclosed in the Annual Report.
Legal Proceedings
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 was filed in June 2020. The amended complaint names us as defendants, along with certain of the Company’s officers, members of the Board of Directors, and Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC, the lead underwriters from the Company’s March 2019 common stock offering. The Company filed a motion to dismiss the amended complaint on August 14, 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. On May 18, 2020, the Court entered a stipulated order that stays the derivative lawsuit until the class action is dismissed with prejudice, the defendants’ motion to dismiss the class action complaint is denied, or the defendants file an answer to the class action complaint.
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 condition, results of operations, or liquidity.
Warranties and Indemnification
The performance of the Company’s cloud-based technology skills platform is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable. The Company’s contractual arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-party’s intellectual property rights. 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 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 other members of Pluralsight Holdings. As these members exchange
these LLC Units for shares of Class A common stock, these LLC Units are then owned by Pluralsight, Inc. and a portion of the non-controlling interests balance is reclassified to additional paid-in capital. During the three months ended September 30, 2020, the adjustments to the non-controlling interests were primarily related to equity-based compensation and the issuance and 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 September 30, 2020, the non-controlling interests of Pluralsight Holdings owned 17.6% of the outstanding LLC Units, with the remaining 82.4% owned by Pluralsight, Inc. The ownership of the LLC Units is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Units
|
|
Ownership %
|
|
Units
|
|
Ownership %
|
|
|
|
|
|
|
|
|
|
Pluralsight, Inc.’s ownership of LLC Units
|
|
119,381,936
|
|
|
82.4
|
%
|
|
104,083,271
|
|
|
74.3
|
%
|
LLC Units owned by the Continuing Members(1)
|
|
25,421,392
|
|
|
17.6
|
%
|
|
35,936,804
|
|
|
25.7
|
%
|
|
|
144,803,328
|
|
|
100.0
|
%
|
|
140,020,075
|
|
|
100.0
|
%
|
(1)Excludes 688,341 and 1,543,813 LLC Units still subject to time-based vesting requirements as of September 30, 2020 and December 31, 2019, respectively.
Note 14. Equity-Based Compensation
Equity Incentive Plans
In June 2017, Pluralsight Holdings adopted the 2017 Equity Incentive Plan (“2017 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”). 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. The number of shares available for issuance under the 2018 Plan also includes an annual increase on the first day of each fiscal year, 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 administrator. The number of shares available under the 2018 Plan also includes shares under the 2017 Plan that expire, terminate, are forfeited or repurchased by the Company, or are withheld by the Company to cover tax withholding obligations. As of September 30, 2020, a total of 19,937,719 shares were available for issuance under the 2018 Plan.
Stock Options
In connection with the IPO, the Company granted to employees stock options under the 2018 Plan to purchase shares of Class A common stock at an exercise price equal to the IPO price of $15.00 per share. As of September 30, 2020, these options have fully vested.
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 nine months ended September 30, 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
|
|
(458,553)
|
|
|
13.94
|
|
|
|
|
|
Forfeited or cancelled
|
|
(20,581)
|
|
|
6.17
|
|
|
|
|
|
Outstanding as of September 30, 2020
|
|
3,882,584
|
|
|
$
|
14.67
|
|
|
7.6
|
|
$
|
9.6
|
|
Vested and exercisable as of September 30, 2020
|
|
3,821,085
|
|
|
$
|
14.88
|
|
|
7.6
|
|
$
|
8.6
|
|
The total intrinsic value of options exercised during the nine months ended September 30, 2020 was $3.0 million. As of September 30, 2020, the total unrecognized equity-based compensation cost related to the stock options was $1.9 million, which is expected to be recognized over a weighted-average period of 1.6 years.
RSUs
The Company has granted RSUs to employees under the 2018 Plan and previously under the 2017 Plan. RSUs represent the right to receive shares of Pluralsight Inc.’s Class A common stock at a specified future date. Restricted share units of Pluralsight Holdings under the 2017 Plan are subject to both a service condition and a liquidity condition, whereas RSUs under the 2018 Plan are generally subject to service conditions only. The service conditions 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 expiration of the lock-up period following the IPO. RSUs 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 service conditions only and are recognized over the remaining requisite service period using the straight-line attribution method.
Under the 2017 Plan, all restricted share units granted were initially restricted share units of Pluralsight Holdings. In connection with the IPO, all restricted share units were converted into RSUs of Pluralsight, Inc., except for restricted share units of Pluralsight Holdings that 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 nine months ended September 30, 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
|
|
6,833,790
|
|
|
19.17
|
|
Forfeited or cancelled
|
|
(1,012,966)
|
|
|
21.62
|
|
Vested
|
|
(2,595,661)
|
|
|
23.33
|
|
Balance at September 30, 2020
|
|
10,897,201
|
|
|
$
|
20.45
|
|
|
|
|
|
|
Restricted Share Units of Pluralsight Holdings:
|
|
|
|
|
Balance at December 31, 2019
|
|
1,312,500
|
|
|
$
|
8.24
|
|
Vested
|
|
(562,500)
|
|
|
8.24
|
|
Balance at September 30, 2020
|
|
750,000
|
|
|
$
|
8.24
|
|
As of September 30, 2020, the total unrecognized equity-based compensation cost related to the RSUs, including the restricted share units of Pluralsight Holdings, was $179.4 million, which is expected to be recognized over a weighted-average period of 2.9 years.
401(k) Equity Match
In May 2020, the Compensation Committee of the Board of Directors of Pluralsight, Inc. approved the issuance of Class A common shares to pay the Company’s 401(k) matching contributions to employees during the year ended December 31, 2020. The Company's matching contribution is equal to 50% of eligible wages contributed up to a maximum of 6%. As of September 30, 2020, the Company had recorded a matching liability of $1.3 million that is expected to be settled in shares of Class A common stock on a quarterly basis.
Employee Stock Purchase Plan
In May 2018, Pluralsight Inc.’s Board of Directors adopted 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 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 September 30, 2020, the total number of shares available for issuance under the ESPP was 4,386,452.
The ESPP generally provides for consecutive overlapping 24-month offering periods comprised of four six-month purchase periods. The offering periods are scheduled to start on the first trading day on or after May 31 and November 30 of each year.
The 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 $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. 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.
As of September 30, 2020, a total of 1,835,746 shares were issuable to employees based on contribution elections made under the ESPP. As of September 30, 2020, total unrecognized equity-based compensation costs was $14.1 million, which is expected to be recognized over a weighted-average period of 1.5 years.
ESPP employee payroll contributions accrued at September 30, 2020 and December 31, 2019 totaled $5.7 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 period.
Incentive Unit Plan
The Company granted incentive units of Pluralsight Holdings to certain employees and directors prior to its IPO pursuant to the Incentive Unit Plan (“2013 Plan”). In connection with the Reorganization Transactions and 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 unvested LLC Units during the nine months ended September 30, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Units
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
|
|
|
Unvested LLC Units outstanding—December 31, 2019
|
|
1,543,813
|
|
|
$
|
8.72
|
|
Vested
|
|
(855,472)
|
|
|
8.68
|
|
Unvested LLC Units outstanding—September 30, 2020
|
|
688,341
|
|
|
$
|
8.78
|
|
As of September 30, 2020, total unrecognized equity-based compensation related to all unvested LLC Units was $4.7 million, which is expected to be recognized over a weighted-average period of 0.8 years. The total fair value of LLC Units vested during the nine months ended September 30, 2020 was $15.5 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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
312
|
|
|
$
|
138
|
|
|
$
|
878
|
|
|
$
|
355
|
|
Sales and marketing
|
|
10,908
|
|
|
8,739
|
|
|
31,308
|
|
|
22,967
|
|
Technology and content
|
|
6,361
|
|
|
6,666
|
|
|
19,581
|
|
|
15,513
|
|
General and administrative
|
|
6,633
|
|
|
9,114
|
|
|
24,450
|
|
|
28,822
|
|
Total equity-based compensation
|
|
$
|
24,214
|
|
|
$
|
24,657
|
|
|
$
|
76,217
|
|
|
$
|
67,657
|
|
Equity-based compensation costs capitalized as internal-use software was $0.3 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively, and $1.0 million and $0.9 million for the nine months ended September 30, 2020 and 2019, respectively.
Note 15. Income Taxes
Pluralsight, Inc. is 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., on a pro rata 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. The Company is also subject to taxes in foreign jurisdictions.
The tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of its annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period. The quarterly tax provision and estimate of the Company’s annual effective tax rate are subject to variation due to several factors including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how the Company conducts business, and tax law developments.
For the three months ended September 30, 2020 and 2019 the Company’s estimated effective tax rate was (1.4)% and (0.9)%, respectively. For the nine months ended September 30, 2020 and 2019 the Company’s estimated effective tax rate was (0.2)% and (0.6)%, 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 and the domestic valuation allowance. In addition, a portion of the Company’s state valuation allowance was released as a result of the Company meeting the conditions to file a unitary tax return in certain state jurisdictions, resulting in a reduction of income tax expense during the nine months ended September 30, 2020.
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 valuation allowance against substantially all its U.S. deferred tax assets. While the Company believes its current valuation allowance is appropriate, the Company assesses the need for an adjustment to the valuation allowance on a quarterly basis. The assessment is based on estimates of future sources of taxable income for the jurisdictions in which the Company operates and the periods over which deferred tax assets will be realizable. In the event the Company determines that it will be able to realize all or part of its net deferred tax assets in the future, all or part of the valuation allowance will be released in the period in which the Company makes such determination. The release of all or part of the valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which it is released.
Tax Receivable Agreement
On the date of the IPO, the Company entered into a Tax Receivable Agreement (“TRA”) with Continuing Members that provides for a payment to the Continuing Members of 85% of the amount of tax benefits, if any, that Pluralsight, Inc. realizes, or is deemed to realize as a result of redemptions or exchanges of LLC Units.
During the nine months ended September 30, 2020, certain Continuing Members exchanged 11,683,854 LLC Units for shares of Class A common stock. The Company has concluded that, based on applicable accounting standards, it is more-likely-than-not that its deferred tax assets subject to the TRA will not be realized; therefore, the Company has not recorded a TRA liability related to the tax savings it may realize from the utilization of deferred tax assets arising from the exchanges that have occurred through September 30, 2020. The total unrecorded TRA liability as of September 30, 2020 is approximately $333.8 million.
Note 16. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2020
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2019
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2020
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2019
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Numerator:
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Net loss
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$
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(33,771)
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$
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(45,462)
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$
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(121,014)
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$
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(120,110)
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Less: Net loss attributable to non-controlling interests
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(6,410)
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(12,983)
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(28,405)
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(39,429)
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Net loss attributable to Pluralsight, Inc.
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$
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(27,361)
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$
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(32,479)
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$
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(92,609)
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$
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(80,681)
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Denominator:
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Weighted-average shares of Class A common stock outstanding, basic and diluted
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115,196
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101,407
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109,009
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91,741
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Net loss per share:
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Net loss per share, basic and diluted
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$
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(0.24)
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$
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(0.32)
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$
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(0.85)
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$
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(0.88)
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Shares of Class B and Class C common stock do not share in the earnings or losses of Pluralsight and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B and Class C common stock under the two-class method has not been presented.
During the three and nine months ended September 30, 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 outstanding share/unit totals with a potentially dilutive impact (in thousands):
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September 30, 2020
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LLC Units held by Continuing Members
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26,110
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Stock options
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3,883
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RSUs of Pluralsight, Inc.
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10,897
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Restricted Share Units of Pluralsight Holdings
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750
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Purchase rights committed under the ESPP
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1,836
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Total
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43,476
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The Notes will not have an impact on the Company’s diluted earnings per share until the average market share price of Class A common stock exceeds the conversion price of $58.50 per share, as the Company intends and has the ability to settle the principal amount of the Notes in cash upon conversion. The Company is required under the treasury stock method to compute the potentially dilutive shares of common stock related to the Notes for periods it reports net income. However, upon conversion, until the average market price of the Company’s common stock exceeds the cap price of $58.50 per share, exercise of the Capped Calls will mitigate dilution from the Notes from the conversion price up to the cap price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive under the treasury stock method.
Note 17. Related Party Transactions
The Company utilizes an aircraft owned by the Company’s Chief Executive Officer on an as-needed basis. The Company has agreed to reimburse the Chief Executive Officer for use of the private aircraft for business purposes at an hourly rate per flight hour. The reimbursement rate was approved by the Company’s Board of Directors based upon a review of comparable chartered aircraft rates. The Company accrued less than $0.1 million as of September 30, 2020 and approximately $0.3 million as of December 31, 2019 included within accrued expenses on the condensed consolidated balance sheets. A total of $0.5 million and $0.7 million has been paid under the arrangement during the nine months ended September 30, 2020 and 2019, respectively.
Tax Receivable Agreement
On the date of the IPO, the Company entered into a TRA with Continuing Members that provides for a payment to the Continuing Members of 85% of the amount of tax benefits, if any, that Pluralsight, Inc. realizes, or is deemed to realize as a result of redemptions or exchanges of LLC Units. As discussed in Note 15—Income Taxes, no amounts were paid or payable to
Continuing Members under the TRA as it is more-likely-than-not that the Company’s tax benefits obtained from exchanges subject to the TRA will not be realized.
Note 18. Subsequent Events
On October 9, 2020, the Company entered into a Membership Interest Purchase Agreement to acquire DevelopIntelligence, LLC, a provider of strategic skills consulting and virtual instructor-led training. The Company paid preliminary cash consideration of $38.0 million on the closing date. The final consideration is subject to certain revenue-based earnout performance targets during an earn-out period that ends on December 31, 2021. The purchase price is also subject to certain working capital adjustments that are expected to be finalized within 120 days of the closing date.
The Company is evaluating the fair value of the contingent consideration and the estimated fair values of the assets and liabilities acquired. As a result, the Company cannot reasonably estimate all of the effects of the acquisition on its consolidated financial statements at this time.