PROS Holdings, Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
___________________________________________________________________________
FORM 10-Q
___________________________________________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to .
Commission File Number: 001-33554
___________________________________________________________________________
PROS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________________________
| Delaware | 76-0168604 | |||||||
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
| 3200 Kirby Drive, Suite 600 | 77098 | |||||||||||||||||||
| Houston | TX | |||||||||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||||||||
| (713) | 335-5151 | |||||||||||||||||||
| (Registrant's telephone number, including area code) | ||||||||||||||||||||
| (Former address, if changed since last report) | ||||||||||||||||||||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | |||||||||||||||
| Common stock $0.001 par value per share | PRO | New York Stock Exchange | |||||||||||||||
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated Filer | ☐ | ||||||||
| Non-Accelerated Filer | ☐ (do not check if a smaller reporting company) | Smaller Reporting Company | ☐ | ||||||||
| Emerging Growth Company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the registrant's Common Stock, $0.001 par value, was 45,179,193 as of April 27, 2022.
PROS Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended March 31, 2022
Table of Contents
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). All statements in this report other than historical facts are forward-looking and are based on current estimates, assumptions, trends, and projections. Statements which include the words "believes," "seeks," "expects," "may," "should," "intends," "likely," "targets," "plans," "anticipates," "estimates," or the negative version of those words and similar expressions are intended to identify forward-looking statements. Numerous important factors, risks and uncertainties affect our operating results, including, without limitation, those described in our Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q, and could cause our actual results to differ materially, from the results implied by these or any other forward-looking statements made by us or on our behalf. You should pay particular attention to the important risk factors and cautionary statements described in the section of our Annual Report on Form 10-K entitled "Risk Factors" and the section of this Quarterly Report on Form 10-Q entitled "Risk Factors." You should also carefully review the cautionary statements described in the other documents we file with the Securities and Exchange Commission, specifically the Annual Report on Form 10-K, all Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
You should not rely on forward-looking statements as predictions of future events, as we cannot guarantee that future results, levels of activity, performance or achievements will meet expectations. The forward-looking statements made herein are only made as of the date hereof, and we undertake no obligation to publicly update such forward-looking statements for any reason.
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PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROS Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets: | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 217,393 | $ | 227,553 | |||||||
Trade and other receivables, net of allowance of $1,039 and $1,206, respectively | 52,803 | 40,581 | |||||||||
| Deferred costs, current | 5,883 | 5,772 | |||||||||
| Prepaid and other current assets | 10,719 | 9,623 | |||||||||
| Total current assets | 286,798 | 283,529 | |||||||||
| Property and equipment, net | 28,141 | 30,958 | |||||||||
| Operating lease right-of-use assets | 21,534 | 25,732 | |||||||||
| Deferred costs, noncurrent | 9,447 | 9,510 | |||||||||
| Intangibles, net | 24,643 | 27,618 | |||||||||
| Goodwill | 107,929 | 108,133 | |||||||||
| Other assets, noncurrent | 8,119 | 9,003 | |||||||||
| Total assets | $ | 486,611 | $ | 494,483 | |||||||
| Liabilities and Stockholders' (Deficit) Equity: | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and other liabilities | $ | 7,957 | $ | 4,034 | |||||||
| Accrued liabilities | 12,389 | 12,631 | |||||||||
| Accrued payroll and other employee benefits | 18,753 | 31,994 | |||||||||
| Operating lease liabilities, current | 7,510 | 8,457 | |||||||||
| Deferred revenue, current | 117,642 | 97,713 | |||||||||
| Total current liabilities | 164,251 | 154,829 | |||||||||
| Deferred revenue, noncurrent | 11,160 | 8,553 | |||||||||
| Convertible debt, net | 288,660 | 288,287 | |||||||||
| Operating lease liabilities, noncurrent | 34,180 | 38,034 | |||||||||
| Other liabilities, noncurrent | 1,182 | 1,196 | |||||||||
| Total liabilities | 499,433 | 490,899 | |||||||||
| Commitments and contingencies (see Note 10) | |||||||||||
| Stockholders' (deficit) equity: | |||||||||||
Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued | — | — | |||||||||
Common stock, $0.001 par value, 75,000,000 shares authorized; 49,859,907 and 49,201,265 shares issued, respectively; 45,179,184 and 44,520,542 shares outstanding, respectively | 50 | 49 | |||||||||
| Additional paid-in capital | 559,148 | 546,693 | |||||||||
Treasury stock, 4,680,723 common shares, at cost | (29,847) | (29,847) | |||||||||
| Accumulated deficit | (537,292) | (508,652) | |||||||||
| Accumulated other comprehensive loss | (4,881) | (4,659) | |||||||||
| Total stockholders' (deficit) equity | (12,822) | 3,584 | |||||||||
| Total liabilities and stockholders' (deficit) equity | $ | 486,611 | $ | 494,483 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
PROS Holdings, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In thousands, except per share data)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
| Subscription | $ | 48,765 | $ | 42,648 | |||||||
| Maintenance and support | 7,855 | 9,674 | |||||||||
| Total subscription, maintenance and support | 56,620 | 52,322 | |||||||||
| Services | 9,872 | 9,056 | |||||||||
| Total revenue | 66,492 | 61,378 | |||||||||
| Cost of revenue: | |||||||||||
| Subscription | 13,779 | 13,801 | |||||||||
| Maintenance and support | 2,167 | 2,258 | |||||||||
| Total cost of subscription, maintenance and support | 15,946 | 16,059 | |||||||||
| Services | 11,415 | 10,433 | |||||||||
| Total cost of revenue | 27,361 | 26,492 | |||||||||
| Gross profit | 39,131 | 34,886 | |||||||||
| Operating expenses: | |||||||||||
| Selling and marketing | 25,287 | 21,564 | |||||||||
| Research and development | 24,467 | 20,925 | |||||||||
| General and administrative | 14,329 | 12,987 | |||||||||
| Impairment of fixed assets | 1,551 | — | |||||||||
| Loss from operations | (26,503) | (20,590) | |||||||||
| Convertible debt interest and amortization | (1,576) | (1,576) | |||||||||
| Other (expense) income, net | (418) | 286 | |||||||||
| Loss before income tax provision | (28,497) | (21,880) | |||||||||
| Income tax provision | 143 | 149 | |||||||||
| Net loss | $ | (28,640) | $ | (22,029) | |||||||
| Net loss per share: | |||||||||||
| Basic and diluted | $ | (0.64) | $ | (0.50) | |||||||
| Weighted average number of shares: | |||||||||||
| Basic and diluted | 45,085 | 44,245 | |||||||||
| Other comprehensive loss, net of tax: | |||||||||||
| Foreign currency translation adjustment | $ | (222) | $ | (608) | |||||||
| Other comprehensive loss, net of tax | (222) | (608) | |||||||||
| Comprehensive loss | $ | (28,862) | $ | (22,637) | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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PROS Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities: | |||||||||||
| Net loss | $ | (28,640) | $ | (22,029) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 4,647 | 3,068 | |||||||||
| Amortization of debt issuance costs | 373 | 373 | |||||||||
| Share-based compensation | 11,225 | 8,170 | |||||||||
| Provision for doubtful accounts | (91) | (559) | |||||||||
| Impairment of fixed assets | 1,551 | — | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts and unbilled receivables | (12,130) | (3,610) | |||||||||
| Deferred costs | (48) | 867 | |||||||||
| Prepaid expenses and other assets | (262) | (395) | |||||||||
| Operating lease right-of-use assets and liabilities | (739) | (173) | |||||||||
| Accounts payable and other liabilities | 3,903 | 2,012 | |||||||||
| Accrued liabilities | (109) | 3,918 | |||||||||
| Accrued payroll and other employee benefits | (13,246) | (7,573) | |||||||||
| Deferred revenue | 22,552 | 11,502 | |||||||||
| Net cash used in operating activities | (11,014) | (4,429) | |||||||||
| Investing activities: | |||||||||||
| Purchases of property and equipment | (461) | (1,300) | |||||||||
| Investment in equity securities | — | (501) | |||||||||
| Net cash used in investing activities | (461) | (1,801) | |||||||||
| Financing activities: | |||||||||||
| Proceeds from employee stock plans | 1,443 | 1,596 | |||||||||
| Tax withholding related to net share settlement of stock awards | (212) | (352) | |||||||||
| Net cash provided by financing activities | 1,231 | 1,244 | |||||||||
| Effect of foreign currency rates on cash | 84 | (219) | |||||||||
| Net change in cash and cash equivalents | (10,160) | (5,205) | |||||||||
| Cash and cash equivalents: | |||||||||||
| Beginning of period | 227,553 | 329,134 | |||||||||
| End of period | $ | 217,393 | $ | 323,929 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Noncash investing activities: | |||||||||||
| Purchase of property and equipment accrued but not paid | $ | 45 | $ | 328 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
PROS Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity
(In thousands, except share data)
(Unaudited)
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated other comprehensive loss | Total Stockholders’ (Deficit) Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 44,520,542 | $ | 49 | $ | 546,693 | 4,680,723 | $ | (29,847) | $ | (508,652) | $ | (4,659) | $ | 3,584 | |||||||||||||||||||||||||||||||||
| Stock awards net settlement | 609,397 | 1 | (213) | — | — | — | — | (212) | |||||||||||||||||||||||||||||||||||||||
| Proceeds from employee stock plans | 49,245 | — | 1,443 | — | — | — | — | 1,443 | |||||||||||||||||||||||||||||||||||||||
| Noncash share-based compensation | — | — | 11,225 | — | — | — | — | 11,225 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (222) | (222) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (28,640) | — | (28,640) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 45,179,184 | $ | 50 | $ | 559,148 | 4,680,723 | $ | (29,847) | $ | (537,292) | $ | (4,881) | $ | (12,822) | |||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | Accumulated other comprehensive loss | Total Stockholders’ (Deficit) Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 43,461,544 | $ | 48 | $ | 589,040 | 4,680,723 | $ | (29,847) | $ | (438,773) | $ | (3,431) | $ | 117,037 | |||||||||||||||||||||||||||||||||
| Stock awards net settlement | 749,251 | 1 | (353) | — | — | — | — | (352) | |||||||||||||||||||||||||||||||||||||||
| Proceeds from employee stock plans | 41,970 | — | 1,596 | — | — | — | — | 1,596 | |||||||||||||||||||||||||||||||||||||||
| Cumulative effect of adoption of ASU 2020-06 | — | — | (80,098) | — | — | 11,330 | — | (68,768) | |||||||||||||||||||||||||||||||||||||||
| Noncash share-based compensation | — | — | 8,153 | — | — | — | — | 8,153 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (608) | (608) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (22,029) | — | (22,029) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 44,252,765 | $ | 49 | $ | 518,338 | 4,680,723 | $ | (29,847) | $ | (449,472) | $ | (4,039) | $ | 35,029 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
PROS Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Nature of Operations
PROS Holdings, Inc., a Delaware corporation, through its operating subsidiaries (collectively, the "Company"), provides solutions that optimize shopping and selling experiences. PROS solutions leverage artificial intelligence ("AI"), self-learning and automation to ensure that every transactional experience is fast, frictionless and personalized for every shopper, supporting both business-to-business ("B2B") and business-to-consumer ("B2C") companies across industry verticals. Companies can use these selling, pricing, revenue optimization, distribution and retail, and digital offer marketing solutions to assess their market environments in real time to deliver customized prices and offers. The Company's solutions enable buyers to move fluidly across its customers’ direct sales, partner, online, mobile and emerging channels with personalized experiences regardless of which channel buyers choose. The Company's decades of data science and AI expertise are infused into its solutions and are designed to reduce time and complexity through actionable intelligence.
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial reporting and applicable quarterly reporting regulations of the Securities and Exchange Commission ("SEC"). In management's opinion, the accompanying interim unaudited condensed consolidated financial statements include all adjustments necessary for a fair statement of the financial position of the Company as of March 31, 2022, the results of operations for the three months ended March 31, 2022 and 2021, cash flows for the three months ended March 31, 2022 and 2021, and stockholders' (deficit) equity for the three months ended March 31, 2022 and 2021.
Certain prior year amounts have been reclassified for consistency with the current year presentation. Such reclassifications impacted the classification of general and administrative expenses and research and development expenses. These insignificant reclassifications had no effect on the reported results of operations, cash flows, or financial position.
Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with GAAP have been omitted from these interim unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 ("Annual Report") filed with the SEC. The unaudited condensed consolidated balance sheet as of December 31, 2021 was derived from the Company's audited consolidated financial statements but does not include all disclosures required under GAAP.
Risks and uncertainties
Since its initial onset in early 2020, the coronavirus ("COVID-19") pandemic has created significant global uncertainty, and compliance with the various containment measures implemented by governmental authorities has impacted the Company's business, as well as the businesses of its customers, suppliers and other counterparties, and the scope and duration of the outbreak and timeframe for economic recovery is uncertain. As there are no comparable recent events that provide guidance as to the long-term effect of the COVID-19 pandemic, the Company is unable to predict the full impact that COVID-19 will have on its results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures.
Changes in accounting policies
There have been no material changes in the Company’s significant accounting policies and their application as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except for the Company's adoption of certain accounting standards described in more detail under "Recently adopted accounting pronouncements" in this Note 2 below.
8
Fair value measurement
The Company's financial assets that are included in cash and cash equivalents and that are measured at fair value on a recurring basis consisted of $184.3 million and $203.3 million at March 31, 2022 and December 31, 2021, respectively, and were invested in treasury money market funds. The fair value of the treasury money market funds is determined based on quoted market prices, which represents level 1 in the fair value hierarchy as defined by ASC 820.
Trade and other receivables
Trade and other receivables are primarily comprised of trade receivables, net of allowance for doubtful accounts, contract assets and unbilled receivables. The Company records trade accounts receivable for its unconditional rights to consideration arising from the Company's performance under contracts with customers. The Company's standard billing terms are that payment is due upon receipt of invoice, payable generally within thirty to sixty days. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. When developing its estimate of expected credit losses on trade and other receivables, the Company considers the available information relevant to assessing the collectability of cash flows, which includes a combination of both internal and external information relating to past events, current conditions, and future forecasts as well as relevant qualitative and quantitative factors that relate to the environment in which the Company operates.
Contract assets represent conditional rights to consideration that have been recognized as revenue in advance of billing the customer. Unbilled receivables represent unconditional rights to consideration arising from contingent revenue that have been recognized as revenue in advance of billing the customer.
Deferred costs
Sales commissions earned by the Company's sales representatives are considered incremental and recoverable costs of obtaining a customer contract. Sales commissions are deferred and amortized on a straight-line basis over the period of benefit, which the Company has determined to be five to eight years. The Company determined the period of benefit by taking into consideration its customer contracts, expected renewals of those customer contracts (as the Company currently does not pay an incremental sales commission for renewals), the Company's technology and other factors. The Company also defers amounts earned by employees other than sales representatives who earn incentive payments under compensation plans that are also tied to the value of customer contracts acquired. Deferred costs were $15.3 million as of March 31, 2022 and December 31, 2021. Amortization expense for the deferred costs was $1.4 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively. Amortization of deferred costs is included in selling and marketing expense in the accompanying unaudited condensed consolidated statements of comprehensive loss.
Deferred implementation costs
The Company capitalizes certain contract fulfillment costs, including personnel and other costs (such as hosting, employee salaries, benefits and payroll taxes), that are associated with arrangements where professional services are not distinct from other undelivered obligations in its customer contracts. The Company analyzes implementation costs and capitalizes those costs that are directly related to customer contracts, that are expected to be recoverable, and that enhance the resources which will be used to satisfy the undelivered performance obligations in those contracts. Deferred implementation costs are amortized ratably over the remaining contract term once the revenue recognition criteria for the respective performance obligation has been met and revenue recognition commences. Deferred implementation costs were $2.2 million and $2.4 million as of March 31, 2022 and December 31, 2021, respectively. Amortization expense for the deferred implementation costs was $0.3 million for the three months ended March 31, 2022 and 2021. Deferred implementation costs are included in prepaid and other current assets and other assets, noncurrent in the unaudited condensed consolidated balance sheets. Amortization of deferred implementation costs is included in cost of subscription and cost of services revenues in the accompanying unaudited condensed consolidated statements of comprehensive loss.
9
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes comparison of future cash flows expected to be generated by the asset or group of assets with the associated assets’ carrying value. If the carrying value of the asset or group of assets exceeds its expected future cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value. During the quarter ended March 31, 2022, the Company recorded a $1.6 million impairment charge related to fixed assets. The impairment resulted from the Company's changed intentions for these assets in connection with a new agreement with a software vendor. The Company did not record any impairment charges during the three months ended March 31, 2021.
Recently adopted accounting pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options ("Subtopic 470-20") and Derivatives and Hedging - Contracts in an Entity's Own Equity ("Subtopic 815-40"), which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. This new standard is effective for the Company's interim and annual periods beginning January 1, 2022, and earlier adoption is permitted on January 1, 2021. The Company may elect to apply the amendments on a retrospective or modified retrospective basis. The Company early adopted the new standard effective January 1, 2021 on the modified retrospective basis. The adoption decreased additional paid-in capital by $80.1 million related to the equity conversion component of the outstanding convertible notes which was previously separated and recorded in equity, and increased convertible debt, net by $68.8 million related to the removal of the debt discounts and adjustment of debt issuance cost recorded under the previous standard. The net cumulative effect of the adjustments of $11.3 million was recorded as a decrease to the opening balance of the accumulated deficit as of January 1, 2021. The adoption had no impact on the condensed consolidated statements of cash flows.
Recently issued accounting pronouncements not yet adopted
With the exception of the new standard discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2022, as compared to the recent accounting pronouncements described in the Company's Annual Report, that are of significance or potential significance to the Company.
3. Deferred Revenue and Performance Obligations
Deferred Revenue
For the three months ended March 31, 2022 and 2021, the Company recognized approximately $44.3 million and $42.3 million, respectively, of revenue that was included in the deferred revenue balances at the beginning of the respective periods and primarily related to subscription services, maintenance and support, and services.
Performance Obligations
As of March 31, 2022, the Company expects to recognize approximately $433.1 million of revenue from remaining performance obligations. The Company expects, based on the terms of the related, underlying contractual arrangements, to recognize revenue on approximately $201.1 million of these performance obligations over the next 12 months, with the balance recognized thereafter.
10
4. Disaggregation of Revenue
Revenue by Geography
The geographic information in the table below is presented for the three months ended March 31, 2022 and 2021. The Company categorizes geographic revenues based on the location of the customer's headquarters. Because the Company's contracts are predominately denominated in U.S. dollars, it has limited exposure to foreign currency exchange risk as discussed under "Foreign Currency Exchange Risk" of Part I, Item 3 below.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| (in thousands) | Revenue | Percent | Revenue | Percent | |||||||||||||||||||
| United States of America | $ | 23,194 | 35 | % | $ | 20,876 | 34 | % | |||||||||||||||
| Europe | 20,823 | 31 | % | 18,692 | 30 | % | |||||||||||||||||
| The rest of the world | 22,475 | 34 | % | 21,810 | 36 | % | |||||||||||||||||
| Total revenue | $ | 66,492 | 100 | % | $ | 61,378 | 100 | % | |||||||||||||||
5. Business Combination
EveryMundo
On November 30, 2021, the Company acquired EveryMundo LLC ("EveryMundo"), a privately held company based in Miami, Florida, for a cash consideration, net of cash acquired, of approximately $79.5 million and an equity consideration of approximately $10.0 million. Since the equity consideration is contingent on employment with the Company for a two-year period, it was determined, based on accounting guidance, that the related amounts should be treated as post-combination compensation and accordingly are not included as part of the purchase price allocation. EveryMundo is a digital offer marketing pioneer that enables brands to broaden their digital reach and deepen customer engagement, providing greater control over direct and indirect channels they participate in to help create superior brand experiences and foster brand loyalty over time. During the three months ended March 31, 2022, the Company incurred no acquisition-related costs.
The preliminary allocation of the purchase price for EveryMundo is as follows (in thousands):
| Current assets | $ | 2,193 | |||
| Noncurrent assets | 736 | ||||
| Intangibles | 23,300 | ||||
| Goodwill | 58,915 | ||||
| Current liabilities | (4,972) | ||||
| Noncurrent liabilities | (542) | ||||
| Purchase consideration | $ | 79,630 | |||
The following are the identifiable intangible assets acquired (in thousands) with respect to the EveryMundo acquisition, and their respective useful lives:
| Weighted Average Useful Life | |||||||||||
| Amount | (years) | ||||||||||
| Developed technology | $ | 15,700 | 5 | ||||||||
| Customer relationships | 5,500 | 4 | |||||||||
| Trade name | 2,100 | 8 | |||||||||
| Total | $ | 23,300 | |||||||||
The goodwill recognized was primarily attributable to the assembled workforce and expanded market opportunities from integrating EveryMundo's technology into the Company's product portfolio. The goodwill is deductible for U.S. federal income tax purposes.
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The Company made a preliminary determination that $2.8 million of deferred tax asset was assumed on the acquisition date. The deferred tax asset is comprised of excess tax basis in goodwill. A full valuation allowance of $2.8 million was recorded offsetting the deferred tax asset as of the acquisition date.
6. Leases
The Company has operating leases for data centers, computer infrastructure, corporate offices and certain equipment. These leases have remaining lease terms ranging from 1 year to 11 years. Some of these leases include options to extend for up to 15 years, and some include options to terminate within 1 year.
As of March 31, 2022, the Company did not have any finance leases.
Supplemental cash flow information related to leases was as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash paid for operating lease liabilities | $ | 1,842 | $ | 2,461 | |||||||
| Right-of-use asset obtained in exchange for operating lease liability | $ | — | $ | 97 | |||||||
In January 2022, an existing operating lease was modified due to a change in future payments. The result was a decrease in the related right-of-use asset and corresponding lease liability of $2.7 million.
As of March 31, 2022, maturities of lease liabilities were as follows (in thousands):
| Year Ending December 31, | Amount | |||||||
| Remaining 2022 | $ | 7,830 | ||||||
| 2023 | 9,602 | |||||||
| 2024 | 5,328 | |||||||
| 2025 | 4,231 | |||||||
| 2026 | 4,120 | |||||||
| 2027 | 4,043 | |||||||
| Thereafter | 23,686 | |||||||
| Total operating lease payments | 58,840 | |||||||
| Less: Imputed interest | (17,150) | |||||||
| Total operating lease liabilities | $ | 41,690 | ||||||
7. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per share data) | 2022 | 2021 | |||||||||
| Numerator: | |||||||||||
| Net loss | $ | (28,640) | $ | (22,029) | |||||||
| Denominator: | |||||||||||
| Weighted average shares (basic) | 45,085 | 44,245 | |||||||||
| Dilutive effect of potential common shares | — | — | |||||||||
| Weighted average shares (diluted) | 45,085 | 44,245 | |||||||||
| Basic loss per share | $ | (0.64) | $ | (0.50) | |||||||
| Diluted loss per share | $ | (0.64) | $ | (0.50) | |||||||
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Dilutive potential common shares consist of shares issuable upon the settlement of stock appreciation rights ("SARs"), and the vesting of restricted stock units ("RSUs"), market stock units ("MSUs") and equity consideration related to the EveryMundo LLC acquisition. Potential common shares determined to be antidilutive and excluded from diluted weighted average shares outstanding were approximately 2.2 million and 1.2 million for the three months ended March 31, 2022 and 2021, respectively. In addition, potential common shares related to the convertible notes determined to be antidilutive and excluded from diluted weighted average shares outstanding were 5.8 million for the three months ended March 31, 2022 and 2021.
8. Noncash Share-based Compensation
The Company's 2017 Equity Incentive Plan (as amended and restated, the "2017 Stock Plan") has an aggregate authorized limit of 7,650,000 shares for issuance. As of March 31, 2022, 2,993,183 shares remain available for issuance under the 2017 Stock Plan.
The following table presents the number of shares or units outstanding for each award type as of March 31, 2022 and December 31, 2021, respectively, (in thousands):
| Award type | March 31, 2022 | December 31, 2021 | ||||||||||||
| Restricted stock units (time-based) | 2,529 | 2,145 | ||||||||||||
| Restricted stock units (performance-based) | — | 140 | ||||||||||||
| Market stock units | 216 | 126 | ||||||||||||
| EveryMundo Equity consideration | 273 | 273 | ||||||||||||
During the three months ended March 31, 2022, the Company granted 1,147,579 RSUs (time-based) with a weighted average grant-date fair value of $31.34 per share. The Company also granted 116,640 MSUs with a weighted average grant-date fair value of $37.65 to certain executive employees during the three months ended March 31, 2022. These MSUs vest on January 31, 2025 and the actual number of MSUs that will be eligible to vest is based on the total stockholder return of the Company relative to the total stockholder return of the Index over the performance period, as defined by each award's plan documents or individual award agreements. The maximum number of shares issuable upon vesting is 200% of the MSUs initially granted. The Company did not grant any stock options, SARs or performance-based RSUs during the three months ended March 31, 2022.
The assumptions used to value the MSUs granted during the three months ended March 31, 2022 were as follows:
| March 31, 2022 | |||||
| Volatility | 54.50 | % | |||
| Risk-free interest rate | 1.20 | % | |||
| Expected award life in years | 2.97 | ||||
| Dividend yield | — | ||||
Share-based compensation expense is allocated to expense categories on the unaudited condensed consolidated statements of comprehensive loss. The following table summarizes share-based compensation expense included in the Company's unaudited condensed consolidated statements of comprehensive loss for the three months ended March 31, 2022 and 2021:
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Share-based compensation: | |||||||||||
| Cost of revenue | $ | 825 | $ | 826 | |||||||
| Operating expenses: | |||||||||||
| Selling and marketing | 3,240 | 2,224 | |||||||||
| Research and development | 3,713 | 1,826 | |||||||||
| General and administrative | 3,447 | 3,294 | |||||||||
| Total included in operating expenses | 10,400 | 7,344 | |||||||||
| Total share-based compensation expense | $ | 11,225 | $ | 8,170 | |||||||
At March 31, 2022, the Company had an estimated $102.7 million of total unrecognized compensation costs related to share-based compensation arrangements. These costs will be recognized over a weighted average period of 2.9 years.
The Company's Employee Stock Purchase Plan (as amended, the "ESPP") provides for eligible employees to purchase shares on an after-tax basis in an amount between 1% and 10% of their annual pay: (i) on June 30 of each year at a 15% discount of the fair market value of the Company's common stock on January 1 or June 30, whichever is lower, and (ii) on December 31 of each year at a 15% discount of the fair market value of the Company's common stock on July 1 or December 31, whichever is lower. An employee may not purchase more than $5,000 in either of the six-month measurement periods described above or more than $10,000 annually. In May 2021, the Company's stockholders approved an amendment to the ESPP Plan increasing the aggregate amount of shares available for issuance under the ESPP to 1,000,000. During the three months ended March 31, 2022, the Company issued 49,245 shares under the ESPP. As of March 31, 2022, 444,466 shares remain authorized and available for issuance under the ESPP. As of March 31, 2022, the Company held approximately $0.8 million on behalf of employees for future purchases under the ESPP, and this amount was recorded in accrued payroll and other employee benefits in the Company's unaudited condensed consolidated balance sheet.
9. Convertible Senior Notes
The following is a summary of the Company's convertible senior notes as of March 31, 2022 (in thousands):
| Date of Issuance | Unpaid Principal Balance | Net Carrying Amount | Contractual Interest Rates | ||||||||||||||||||||||||||
| Current | Noncurrent | ||||||||||||||||||||||||||||
| 1% Convertible Notes due in 2024 ("2024 Notes") | May 2019 | $ | 143,750 | $ | — | $ | 141,882 | 1% | |||||||||||||||||||||
| 2.25% Convertible Notes due in 2027 ("2027 Notes") | September 2020 | $ | 150,000 | $ | — | $ | 146,778 | 2.25% | |||||||||||||||||||||
The 2027 and 2024 Notes (collectively, the "Notes") are general unsecured obligations and rank senior in right of payment to all of the Company's indebtedness that is expressly subordinated in right of payment to the Notes, rank equally in right of payment with all of the Company's existing and future liabilities that are not so subordinated, are effectively junior to any of the Company's secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally subordinated to all indebtedness and other liabilities of the Company's subsidiaries (including trade payables but excluding intercompany obligations owed to the Company or its subsidiaries).
Interest related to the 2027 Notes is payable semiannually in arrears in cash on March 15 and September 15 of each year, beginning on March 15, 2021. Interest related to the 2024 Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2019. The 2027 Notes mature on September 15, 2027 and the 2024 Notes mature on May 15, 2024, unless redeemed or converted in accordance with their terms prior to such date.
Each $1,000 of principal of the 2027 Notes will initially be convertible into 23.9137 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $41.82 per share. Each $1,000 of principal of the 2024 Notes will initially be convertible into 15.1394 shares of the Company’s common stock, which is equivalent to an initial conversion price of approximately $66.05 per share. The initial conversion price for the 2027 and the 2024 Notes is subject to adjustment upon the occurrence of certain specified events.
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As of March 31, 2022, the 2027 and 2024 Notes are not yet convertible and their remaining term is approximately 65 months and 25 months, respectively.
As of March 31, 2022 and December 31, 2021, the fair value of the principal amount of the Notes in the aggregate was $291.4 million and $299.4 million, respectively. The estimated fair value was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the Company's stock price and interest rates, which represents level 2 in the fair value hierarchy.
Effective January 1, 2021, the Company early adopted ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in an Entity's Own Equity. Upon adoption of the new standard, the Company removed the debt discount and adjusted the debt issuance cost which was previously allocated between the liability and the equity component, resulting in an increase of $68.8 million to convertible debt, net. In addition, the Company recorded a reduction to additional paid-in capital of $80.1 million related to the equity conversion component of the outstanding convertible notes which was previously separated and recorded in equity. The net cumulative impact of the adoption of the standard was recorded as a decrease to accumulated deficit.
The Notes consist of the following (in thousands):
| March 31, 2022 | December 31, 2021 | ||||||||||
| Principal | $ | 293,750 | $ | 293,750 | |||||||
| Less: debt issuance cost, net of amortization | (5,090) | (5,463) | |||||||||
| Net carrying amount | $ | 288,660 | $ | 288,287 | |||||||
The following table sets forth total interest expense recognized related to the Notes (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Coupon interest | $ | 1,203 | $ | 1,203 | |||||||
| Amortization of debt issuance costs | 373 | 373 | |||||||||
| Total | $ | 1,576 | $ | 1,576 | |||||||
Capped Call Transactions
In September 2020 and in May 2019, in connection with the offering of the 2027 and 2024 Notes, respectively, the Company entered into privately negotiated capped call transactions (collectively, the "Capped Call") with certain option counterparties. The Capped Call transactions cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock initially underlying the Notes, at a strike price that corresponds to the initial conversion price of the Notes, also subject to adjustment, and are exercisable upon conversion of the Notes. The Capped Call transactions are intended to reduce potential dilution to the Company’s common stock and/or offset any cash payments the Company will be required to make in excess of the principal amounts upon any conversion of Notes, and to effectively increase the overall conversion price of the 2027 Notes from $41.82 to $78.90 per share, and for the 2024 Notes from $66.05 to $101.62 per share. As the Capped Call transactions meet certain accounting criteria, they are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of the Capped Call was $25.3 million and $16.4 million for the 2027 and 2024 Notes, respectively, and was recorded as part of additional paid-in capital.
10. Commitments and Contingencies
Litigation
In the ordinary course of business, the Company regularly becomes involved in contract and other negotiations and, in more limited circumstances, becomes involved in legal proceedings, claims and litigation. The outcomes of these matters are inherently unpredictable. The Company is not currently involved in any outstanding litigation that it believes, individually or in the aggregate, will have a material adverse effect on its business, financial condition, results of operations or cash flows.
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Purchase commitments
In the ordinary course of business, the Company enters into various purchase commitments for goods and services.
In July 2021, the Company entered into a noncancelable agreement for data subscription services with a five-year term. The purchase commitment as of March 31, 2022 was $4.4 million and the agreement expires in June 2026.
In November 2021, the Company entered into a noncancelable agreement with a computing infrastructure vendor that amended the existing agreement dated March 2019. The amended agreement had purchase commitments of $171.1 million remaining as of March 31, 2022, and expires in November 2026.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “we,” “us,” “PROS” and “our” refer to PROS Holdings, Inc. and all of its subsidiaries that are consolidated in conformity with generally accepted accounting principles in the United States.
This management's discussion and analysis of financial condition and results of operations should be read along with the unaudited condensed consolidated financial statements and unaudited notes to unaudited condensed consolidated financial statements included in Part I, Item 1 ("Interim Condensed Consolidated Financial Statements (Unaudited)"), as well as the audited consolidated financial statements and notes to consolidated financial statements and management's discussion and analysis of financial condition and results of operations set forth in our Annual Report.
Q1 2022 Financial Overview
In the first quarter of 2022, we continued to grow our subscription revenue by enabling our customers to leverage our AI-driven solutions to help them compete in the digital economy. For the three months ended March 31, 2022, our subscription revenue increased 14% as compared to the same period in 2021. Total revenue increased 8% for the three months ended March 31, 2022 as compared to the same period in 2021. Recurring revenue (which consists of subscription revenue and maintenance and support revenue) as a percentage of total revenue accounted for 85% of total revenue for the three months ended March 31, 2022 and 2021.
Our gross revenue retention rates remained consistent at over 93% during the trailing twelve months ended March 31, 2022.
Cash used in operating activities was $11.0 million for the three months ended March 31, 2022, as compared to $4.4 million for the three months ended March 31, 2021. The increase was primarily attributable to a higher annual incentive payment in 2022 as compared to prior year.
Free cash flow is a key metric to assess the strength of our business. We define free cash flow, a non-GAAP financial measure, as net cash provided by (used in) operating activities minus capital expenditures (excluding expenditures for our new headquarters), purchases of other (non-acquisition-related) intangible assets and capitalized internal-use software development costs. We believe free cash flow may be useful to investors and other users of our financial information in evaluating the amount of cash generated by our business operations. Free cash flow used during the three months ended March 31, 2022 was $11.5 million, compared to $4.6 million for the three months ended March 31, 2021. This increase was primarily due to a $6.6 million increase in net cash used in operating activities. The following is a reconciliation of free cash flow to the most comparable GAAP measure, net cash used in operating activities (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net cash used in operating activities | $ | (11,014) | $ | (4,429) | |||||||
| Purchase of property and equipment (excluding new headquarters) | (461) | (203) | |||||||||
| Free Cash Flow | $ | (11,475) | $ | (4,632) | |||||||
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Factors Affecting Our Performance
Key factors and trends that have affected, and we believe will continue to affect, our operating results include:
•COVID-19 Financial Impact and Recovery. COVID-19 has impacted and is anticipated to continue impacting our subscription revenue growth rates adversely due to lower subscription bookings impacted by the pandemic and the lag between subscription bookings and the revenue recognized on those subscription bookings. While our customer base spans a variety of industries and geographies, our customers have been and may continue to be negatively impacted by COVID-19 and its ancillary affects, including inflation, disruptions in supply chains and challenging labor markets. The travel industry was particularly adversely impacted by unprecedented declines in travel demand early in the pandemic which forced airlines to respond by initially significantly reducing capacity and costs, adjusting corporate liquidity and, in certain cases, filing for bankruptcy protection. While the timeline for recovery of the overall travel industry remains fluid and dynamic, with significant geographic variation primarily driven by leisure travel, the airline industry has begun to recover, although not to pre-COVID levels. With recovery of flight schedules and passenger volumes, some of which has been rapid, airlines have faced operational challenges in managing severe fluctuations, including staffing shortages. As a result, airlines and their IT staffs, which face their own staffing challenges, generally de-emphasized certain technology projects to focus on cost reductions and operational stability during the height of the pandemic, and have recently begun to prioritize strategic investments. We expect the ongoing global economic impact of COVID-19 will continue to affect our revenue in 2022, as the continuing impact of COVID-19 and rate of economic recovery remains uncertain and varies across industries and geographies. For a full discussion on the risks and uncertainties to our business associated with COVID-19, please see the "Risk Factors" section in our Annual Report on Form 10-K.
•Buying and Consumer Preferences Driving Technology Adoption. Corporate buyers are increasingly demanding the same type of digital buying experience they enjoy as consumers. Buyers often prefer not to interact with sales representatives as their primary source of research, and increasingly prefer to buy online when they have already decided what to buy. This trend has accelerated as a result of the COVID-19 pandemic. In response, we believe businesses are increasingly modernizing their sales process to compete in digital commerce by adopting technologies which provide fast, frictionless and personalized buying experiences across sales channels. We believe we are uniquely positioned to help power these buying experiences with our AI-powered solutions that enable buyers to move fluidly and with personalized experiences across our customers’ direct sales, online, mobile and partner channels and our digital offer marketing solutions to help drive their customers directly into their direct selling channels. In the airline industry, there is evidence the COVID-19 pandemic is accelerating a long-term trend away from global distribution services and towards direct booking channels, in part due to a significant reduction in business travel. We anticipate airlines continuing to invest in technology, including mobile device-enabled solutions, to enhance their ability to capture a greater percentage of bookings through their own channels such as their websites.
•Future of Work. As the pandemic has brought on systemic changes to historic work habits, we have embraced a hybrid work model with an eye on the future of work. As part of this hybrid model, we emphasize flexibility, including in work location and work schedules, based on a blend of what makes sense for each employee, their team, and our business. In addition, we continue to take an integrated approach to helping our employees manage their work and personal responsibilities, with a strong focus on employee physical and mental health.
•Continued Investments. We are continuing to invest in our business to create awareness for our solutions, expand our customer base and grow our subscription revenues as well as in our people. While we incurred losses in the first quarter of 2022, we believe our market is large and underpenetrated and intend to continue investing to expand our ability to sell and renew our subscription offerings globally. We also plan to continue investing in product development to enhance our existing technologies, including initiatives to accelerate customer time-to-value, improve efficiency, and provide out-of-the-box integration with third-party commerce solutions, and develop new applications and technologies. We have also increased our investments in our people to continue to attract, develop, retain and reward our employees in light of highly competitive labor markets.
•Cloud Migrations. We expect sales of our cloud-based solutions will continue to reduce our future maintenance and support revenue as long-term customers continue to migrate from our legacy licensed solutions to our current cloud solutions.
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Results of Operations
The following table sets forth certain items in our unaudited condensed consolidated statements of comprehensive loss as a percentage of total revenues for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue: | |||||||||||
Subscription | 73 | % | 69 | % | |||||||
Maintenance and support | 12 | 16 | |||||||||
| Total subscription, maintenance and support | 85 | 85 | |||||||||
Services | 15 | 15 | |||||||||
| Total revenue | 100 | 100 | |||||||||
| Cost of revenue: | |||||||||||
Subscription | 21 | 22 | |||||||||
Maintenance and support | 3 | 4 | |||||||||
| Total cost of subscription, maintenance and support | 24 | 26 | |||||||||
Services | 17 | 17 | |||||||||
| Total cost of revenue | 41 | 43 | |||||||||
| Gross profit | 59 | 57 | |||||||||
| Operating Expenses: | |||||||||||
Selling and marketing | 38 | 35 | |||||||||
Research and development | 37 | 34 | |||||||||
General and administrative | 22 | 21 | |||||||||
| Impairment of fixed assets | 2 | — | |||||||||
| Total operating expenses | 99 | 90 | |||||||||
Convertible debt interest and amortization | (2) | (3) | |||||||||
| Other (expense) income net | (1) | — | |||||||||
| Loss before income tax provision | (43) | (36) | |||||||||
Income tax provision | — | — | |||||||||
| Net loss | (43) | % | (36) | % | |||||||
Revenue:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||
Subscription | $ | 48,765 | $ | 42,648 | $ | 6,117 | 14 | % | ||||||||||||||||||
Maintenance and support | 7,855 | 9,674 | (1,819) | (19) | % | |||||||||||||||||||||
| Total subscription, maintenance and support | 56,620 | 52,322 | 4,298 | 8 | % | |||||||||||||||||||||
Services | 9,872 | 9,056 | 816 | 9 | % | |||||||||||||||||||||
| Total revenue | $ | 66,492 | $ | 61,378 | $ | 5,114 | 8 | % | ||||||||||||||||||
Subscription revenue. Subscription revenue increased primarily due to revenue from our acquisition of EveryMundo and an increase in new and existing customer subscription contracts.
Maintenance and support revenue. Maintenance and support revenue decreased primarily as a result of existing maintenance customers migrating to our cloud solutions and to a lesser extent customer maintenance churn. We expect maintenance revenue to continue to decline as we continue to migrate maintenance customers to our cloud solutions.
Services revenue. Services revenue increased primarily as a result of higher sales of professional services related to our subscription contracts and follow-on professional services to existing customers. Services revenue varies from period to period depending on different factors, including the level of professional services required to implement our solutions, the timing of
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services revenue recognition on certain subscription contracts and efficiencies in our solutions implementations requiring less professional services during a particular period.
Cost of revenue and gross profit:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||
Cost of subscription | $ | 13,779 | $ | 13,801 | $ | (22) | — | % | ||||||||||||||||||
Cost of maintenance and support | 2,167 | 2,258 | (91) | (4) | % | |||||||||||||||||||||
| Total cost of subscription, maintenance and support | 15,946 | 16,059 | (113) | (1) | % | |||||||||||||||||||||
Cost of services | 11,415 | 10,433 | 982 | 9 | % | |||||||||||||||||||||
| Total cost of revenue | 27,361 | 26,492 | 869 | 3 | % | |||||||||||||||||||||
| Gross profit | $ | 39,131 | $ | 34,886 | $ | 4,245 | 12 | % | ||||||||||||||||||
Cost of subscription. Cost of subscription overall remained relatively unchanged year over year. Cost of subscription increased $2.2 million primarily due to an increase in intangibles amortization and personnel costs associated with the acquisition of EveryMundo. The increase was offset by lower costs driven by infrastructure cost efficiencies. Our subscription gross profit percentages were 72% and 68% for the three months ended March 31, 2022 and 2021, respectively.
Cost of maintenance and support. Cost of maintenance and support decreased primarily due to a decrease in personnel costs as a result of the need to support a declining maintenance customer base as we migrate customers to our subscription solutions. Maintenance and support gross profit percentages were 72% and 77% for the three months ended March 31, 2022 and 2021, respectively.
Cost of services. Cost of services increased for the three months ended March 31, 2022 primarily due to higher personnel costs to support the increase in our services revenue during the period. Services gross profit percentages were (16)% and (15)% for the three months ended March 31, 2022 and 2021, respectively. Services gross profit percentages vary period to period depending on different factors, including the level of professional services required to implement our solutions, the utilization of our employees and our effective man-day rates.
Operating expenses:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||
| Selling and marketing | $ | 25,287 | $ | 21,564 | $ | 3,723 | 17 | % | ||||||||||||||||||
| Research and development | 24,467 | 20,925 | 3,542 | 17 | % | |||||||||||||||||||||
| General and administrative | 14,329 | 12,987 | 1,342 | 10 | % | |||||||||||||||||||||
| Impairment of fixed assets | 1,551 | — | 1,551 | — | % | |||||||||||||||||||||
Total operating expenses | $ | 65,634 | $ | 55,476 | $ | 10,158 | 18 | % | ||||||||||||||||||
Selling and marketing expenses. Selling and marketing expenses increased primarily as a result of a $2.7 million increase in employee-related costs mainly due to $1.4 million in severance cost primarily related to the separation of our Chief Operations Officer in the first quarter of 2022 and also higher headcount related to our EveryMundo acquisition. In addition, there was an increase in intangible amortization related to the EveryMundo acquisition and higher travel related expenses.
Research and development expenses. Research and development expenses increased primarily due to an increase in employee-related costs due to higher headcount associated with the EveryMundo acquisition as well as an increase in noncash share-based compensation.
General and administrative expenses. General and administrative expenses increased primarily due to an increase in employee-related costs and higher costs associated with our acquisition of EveryMundo.
Impairment of fixed assets. During the quarter ended March 31, 2022, we recorded a $1.6 million impairment charge related to fixed assets. The impairment resulted from changes to our intentions for these assets in connection with a new agreement with a software vendor.
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Non-operating expenses:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||
| Convertible debt interest and amortization | $ | (1,576) | $ | (1,576) | $ | — | — | % | ||||||||||||||||||
| Other (expense) income, net | $ | (418) | $ | 286 | $ | (704) | (246) | % | ||||||||||||||||||
Convertible debt interest and amortization. Convertible debt expense for the three months ended March 31, 2022 and 2021 related to coupon interest and amortization of debt issuance costs attributable to our Notes.
Other (expense) income, net. The change in other (expense) income, net for the three months ended March 31, 2022, primarily related to foreign currency impact during the period.
Income tax provision:
| Three Months Ended March 31, | Variance | |||||||||||||||||||||||||
| (Dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||||||||||||||
| Effective tax rate | (0.5) | % | (0.7) | % | n/a | n/a | ||||||||||||||||||||
| Income tax provision | $ | 143 | $ | 149 | $ | (6) | (4) | % | ||||||||||||||||||
Income tax provision. The tax provision for the three months ended March 31, 2022 included both foreign income and withholding taxes. No tax benefit was recognized on jurisdictions with a projected loss for the year due to the valuation allowances on our deferred tax assets.
Our effective tax rate was (0.5)% and (0.7)% for the three months ended March 31, 2022 and 2021, respectively. The income tax rate varies from the 21% federal statutory rate primarily due to the valuation allowances on our deferred tax assets. While our expected tax rate would be 0% due to the full valuation allowance on our deferred tax assets, the income tax provision and related effective tax rates is due to foreign income and withholding taxes.
Jurisdictions with a projected loss for the year where no tax benefit can be recognized due to the valuation allowances on our deferred tax assets are excluded from the estimated annual federal effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.
Liquidity and Capital Resources
At March 31, 2022, we had $217.4 million of cash and cash equivalents and $122.5 million of working capital as compared to $227.6 million of cash and cash equivalents and $128.7 million of working capital at December 31, 2021.
Our principal sources of liquidity are our cash and cash equivalents. In addition, we could have access to capital markets to supplement our liquidity position. Our material drivers or variants of operating cash flow are net income (loss), noncash expenses (principally share-based compensation, intangible amortization and amortization of debt issuance costs) and the timing of invoicing and cash collections from our customers. Our operating cash flows are also impacted by the timing of payments to our vendors and the payments of other liabilities.
We believe our existing cash and cash equivalents will provide adequate liquidity and capital resources to meet our operational requirements, anticipated capital expenditures and coupon interest payments for our Notes for the next twelve months. Our future working capital requirements depend on many factors, including the operations of our existing business, growth of our customer subscription services, future acquisitions we might undertake, expansion into complementary businesses, timing of adoption and implementation of our solutions and customer churn.
The following table presents key components of our unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021:
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| Three Months Ended March 31, | |||||||||||
| (Dollars in thousands) | 2022 | 2021 | |||||||||
| Net cash used in operating activities | $ | (11,014) | $ | (4,429) | |||||||
| Net cash used in investing activities | (461) | (1,801) | |||||||||
| Net cash provided by financing activities | 1,231 | 1,244 | |||||||||
| Cash and cash equivalents (beginning of period) | 227,553 | 329,134 | |||||||||
| Cash and cash equivalents (end of period) | $ | 217,393 | $ | 323,929 | |||||||
Operating Activities
Net cash used in operating activities for the three months ended March 31, 2022 was $11.0 million. The $6.6 million increase over last year was primarily attributable to a higher annual incentive payment in 2022 as compared to prior year.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2022 was $0.5 million. The decrease from prior year was primarily related to higher capital expenditures in 2021 mainly attributable to the build out of our new headquarters which was committed prior to the pandemic.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2022 was $1.2 million and remained consistent with prior year. It was attributable to proceeds from employee stock plans, partially offset by payment of tax withholdings on vesting of employee share-based awards.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material. We do not have any relationships with unconsolidated entities or financial partnerships, such as variable interest entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commitments
Other than changes described in Note 10 above, there have been no material changes to our contractual obligations and commitments disclosed in our Annual Report.
Credit facility
Our $50 million secured Credit Agreement ("Revolver") with the lenders party thereto and Wells Fargo Bank, National Association as agent for the lenders party thereto expired in March 2022. There were no outstanding borrowings under the Revolver prior to its expiration.
Recent Accounting Pronouncements
See "Recently adopted accounting pronouncements" in Note 2 above for discussion of recent accounting pronouncements including the respective expected dates of adoption.
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Critical accounting policies and estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. Actual results could differ from those estimates. The complexity and judgment required in our estimation process, as well as issues related to the assumptions, risks and uncertainties inherent in determining the nature and timing of satisfaction of performance obligations and determining the standalone selling price of performance obligations, affect the amounts of revenue, expenses, unbilled receivables and deferred revenue. Estimates are also used for, but not limited to, receivables, allowance for doubtful accounts, operating lease right-of-use assets and operating lease liabilities, useful lives of assets, depreciation, income taxes and deferred tax asset valuation, valuation of stock awards, other current liabilities and accrued liabilities. Numerous internal and external factors can affect estimates. Our critical accounting policies related to the estimates and judgments are discussed in our Annual Report under management's discussion and analysis of financial condition and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
Although our contracts are predominately denominated in U.S. dollars, we are exposed to foreign currency exchange risk because we also have some contracts denominated in foreign currencies. The effect of a hypothetical 10% adverse change in exchange rates on our foreign denominated receivables as of March 31, 2022 would result in a loss of approximately $0.9 million. We are also exposed to foreign currency risk due to our operating subsidiaries in France, United Kingdom, Canada, Germany, Ireland, Australia, Bulgaria and United Arab Emirates. A hypothetical 10% adverse change in the value of the U.S. dollar in relation to the euro, which is our single most significant foreign currency exposure, would have decreased revenue for the three months ended March 31, 2022 by approximately $1.0 million. However, due to the relatively low volume of payments made and received through our foreign subsidiaries, we do not believe that we have significant exposure to foreign currency exchange risks. Fluctuations in foreign currency exchange rates could harm our financial results in the future.
We currently do not use derivative financial instruments to mitigate foreign currency exchange risks. We continue to review this matter and may consider hedging certain foreign exchange risks through the use of currency derivatives in future years.
Interest Rate Risk
As of March 31, 2022, we had outstanding principal amounts of $150.0 million and $143.8 million of the 2027 and the 2024 Notes, respectively, which are fixed rate instruments. Therefore, our results of operations are not subject to fluctuations in interest rates. The fair value of the Notes may change when the market price of our stock fluctuates.
We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates due to the short-term nature of our cash equivalents.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of March 31, 2022. Based on our evaluation of our disclosure controls and procedures as of March 31, 2022, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to legal proceedings and claims arising in the ordinary course of business. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A, of our Annual Report.
We are a multinational corporation exposed to risks inherent in international operations.
The majority of our revenues are derived from our customers outside the U.S. To date, the majority of our sales have been denominated in U.S. dollars, although the majority of our expenses that we incur in our international operations are denominated in local currencies. To date, we have not used risk management techniques or "hedged" the risks associated with fluctuations in foreign currency exchange rates. Consequently, our results of operations, cash flows, and financial condition, including our revenue and operating margins, can be subject to losses from fluctuations in foreign currency exchange rates, as well as regulatory, political, social and economic developments or instability in the foreign jurisdictions in which we operate. For additional financial information about geographic areas, see Note 19 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K.
Our operations outside the U.S. are subject to risks inherent in doing business internationally, requiring resources and management attention, and may subject us to new or larger levels of regulatory, economic, foreign currency exchange, tax and political risks. We have customers in over 60 countries internationally, which we service through our operations in the U.S., Australia, Bulgaria, Canada, France, Germany, Ireland, United Arab Emirates, United Kingdom and Singapore. We expect our international operations to continue to grow. In addition to navigating the challenges related to the ongoing COVID-19 pandemic in foreign jurisdictions, we face other risks with respect to our international operations, including:
•economic conditions in various parts of the world, particularly impacts from the COVID-19 pandemic, disruptions in supply chains, turmoil in labor markets and inflation;
•sustained disruption to international travel from the COVID-19 pandemic and variations or mutations thereof as well as any other outbreaks of contagious diseases;
•differing labor and employment regulations, especially where labor laws are generally more advantageous to employees as compared to the U.S.;
•the difficulty of managing and staffing our international operations and the increased travel, infrastructure and legal costs associated with multiple international locations;
•new and different sources of competition;
•compliance with multiple, conflicting, ambiguous or rapidly evolving governmental laws and regulations, including tax, privacy, data protection and sovereignty, cybersecurity, anti-corruption, import/export, antitrust and industry-specific laws and regulations and our ability to identify and respond timely to compliance issues when they occur;
•vetting and monitoring our third-party business partners in new and evolving markets to confirm they maintain standards consistent with our brand and reputation and comply with our Supplier Code of Conduct as applicable;
•less favorable intellectual property laws;
•tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our solutions in certain foreign markets;
•availability of sufficient network connectivity required for certain of our products; and
•difficulties in enforcing contracts and collecting accounts receivable, especially in developing countries.
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In addition, while there has been no material impact on our business to date, we are subject to risks from the direct and indirect impacts from the Russian invasion of Ukraine and the ensuing sanctions. These risks include general geopolitical unrest, turmoil in certain financial markets, instability in the financial system, disruption to domestic and international travel, displacement of persons, disruption of supply chains and routes, including energy supplies, commodity and other price inflation, increased cybersecurity threats and attacks, the possibility of military activity or risk of wider war in countries near or adjacent to Ukraine. For example, in Sofia, Bulgaria, we have marketing, research and development, professional services, customer success, maintenance and support and general and administrative staff, representing approximately 14% of our full-time personnel.
If we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have an ongoing authorization from our board of directors to repurchase up to $15.0 million in shares of our common stock in the open market or through privately negotiated transactions. As of March 31, 2022, $10.0 million remained available for repurchase under the existing repurchase authorization. We did not make any purchases of our common stock under this program for the three months ended March 31, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURE
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| Index to Exhibits | ||||||||||||||||||||||||||
| Provided | Incorporated by Reference | |||||||||||||||||||||||||
| Exhibit No. | Description | Herewith | Form | Filing Date | ||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||
| 32.1* | X | |||||||||||||||||||||||||
| Exhibit No. | Description | |||||||||||||||||||||||||
| 101.INS | XBRL Instance Document. | |||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||||||||||||||||||||
| * | This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Act of 1934, or otherwise subject to the liability of that Section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PROS HOLDINGS, INC. | |||||||||||
| May 3, 2022 | By: | /s/ Andres Reiner | |||||||||
| Andres Reiner | |||||||||||
| President and Chief Executive Officer (Principal Executive Officer) | |||||||||||
| May 3, 2022 | By: | /s/ Stefan Schulz | |||||||||
| Stefan Schulz | |||||||||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||||||
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