Company Quick10K Filing
Hubspot
Price154.21 EPS-1
Shares43 P/E-119
MCap6,559 P/FCF92
Net Debt-233 EBIT-36
TEV6,325 TEV/EBIT-176
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-05
10-Q 2020-06-30 Filed 2020-08-05
10-Q 2020-03-31 Filed 2020-05-06
10-K 2019-12-31 Filed 2020-02-12
10-Q 2019-09-30 Filed 2019-11-05
10-Q 2019-06-30 Filed 2019-08-06
10-Q 2019-03-31 Filed 2019-05-07
10-K 2018-12-31 Filed 2019-02-12
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-01
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-02-13
10-Q 2017-09-30 Filed 2017-11-01
10-Q 2017-06-30 Filed 2017-08-02
10-Q 2017-03-31 Filed 2017-05-02
10-K 2016-12-31 Filed 2017-02-16
10-Q 2016-09-30 Filed 2016-11-02
10-Q 2016-06-30 Filed 2016-08-03
10-Q 2016-03-31 Filed 2016-05-04
10-K 2015-12-31 Filed 2016-02-24
10-Q 2015-09-30 Filed 2015-11-04
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-03-05
10-Q 2014-09-30 Filed 2014-11-13
8-K 2020-11-05 Earnings, Exhibits
8-K 2020-09-15 Amend Bylaw, Exhibits
8-K 2020-08-05
8-K 2020-06-17
8-K 2020-06-04
8-K 2020-06-01
8-K 2020-05-01
8-K 2020-02-12
8-K 2019-11-05
8-K 2019-08-06
8-K 2019-06-05
8-K 2019-05-31
8-K 2019-05-07
8-K 2019-02-13
8-K 2019-02-12
8-K 2018-11-12
8-K 2018-11-07
8-K 2018-08-20
8-K 2018-08-01
8-K 2018-06-13
8-K 2018-06-06
8-K 2018-05-10
8-K 2018-04-23
8-K 2018-02-09

HUBS 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults on Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-3.2 hubs-ex32_103.htm
EX-31.1 hubs-ex311_7.htm
EX-31.2 hubs-ex312_8.htm
EX-32.1 hubs-ex321_6.htm

Hubspot Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
1.51.20.80.50.1-0.22014201620182020
Assets, Equity
0.20.10.10.0-0.0-0.12014201620182020
Rev, G Profit, Net Income
0.40.30.1-0.0-0.2-0.32014201620182020
Ops, Inv, Fin

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2020

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 001-36680

 

HubSpot, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-2632791

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

25 First Street

       Cambridge, Massachusetts02141

              (Address of principal executive offices)            (Zip Code)

(888) 482-7768

(Registrant’s telephone number, including area code)

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, par value $0.001 per share

 

HUBS

 

New York Stock Exchange

 

Indicate by check mark whether the 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 every Interactive Data file required to be submitted 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 such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

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.    YES      NO  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

There were 45,887,624 shares of the registrant’s Common Stock issued and outstanding as of October 30, 2020.

 

 

 


 

HUBSPOT, INC.

Table of Contents

 

Part I — Financial Information

 

 

 

 

Item 1.

 

Unaudited Consolidated Financial Statements:

 

 

 

Unaudited Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

5

 

 

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

6

 

 

Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019

7

 

 

Unaudited Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2020 and 2019

8

 

 

Notes to Unaudited Consolidated Financial Statements

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

33

Item 4.

 

Controls and Procedures

34

 

Part II — Other Information

 

 

 

 

Item 1.

 

Legal Proceedings

35

Item 1A.

 

Risk Factors

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

 

Default Upon Senior Securities

56

Item 4.

 

Mine Safety Disclosures

56

Item 5.

 

Other Information

56

Item 6.

 

Exhibits

57

Signatures

 

 

 

EX-31.1

 

CERTIFICATION OF THE CEO PURSUANT TO SECTION 302

 

EX-31.2

 

CERTIFICATION OF THE CFO PURSUANT TO SECTION 302

 

EX-32.1

 

CERTIFICATION OF THE CEO AND CFO PURSUANT TO SECTION 906

 

 

 

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and these statements involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross margin and operating expenses;

 

maintaining and expanding our customer base and increasing our average subscription revenue per customer;

 

the impact of competition in our industry and innovation by our competitors;

 

our anticipated growth and expectations regarding our ability to manage our future growth;

 

our expectations regarding the potential impact of the COVID-19 pandemic on our business, operations, and the markets in which we and our partners and customers operate;

 

our anticipated areas of investments, including sales and marketing, research and development, customer service and support, data center infrastructure and service capabilities, and expectations relating to such investments;

 

our anticipated use of cash flow from operations and the proceeds from our convertible debt and stock offerings to fund certain growth strategies and to support our business;

 

our predictions about industry and market trends;

 

our ability to anticipate and address the evolution of technology and the technological needs of our customers, to roll-out upgrades to our existing software platform and to develop new and enhanced applications to meet the needs of our customers;

 

our ability to maintain our brand and inbound marketing, selling and servicing thought leadership position;

 

the impact of our corporate culture and our ability to attract, hire and retain necessary qualified employees to expand our operations;

 

the anticipated effect on our business of litigation to which we are or may become a party;

 

our ability to successfully acquire and integrate companies and assets;

 

our plans regarding declaring or paying cash dividends in the foreseeable future; and

 

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

3


 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

In this Quarterly Report on Form 10-Q, the terms “HubSpot,” “we,” “us,” and “our” refer to HubSpot, Inc. and its subsidiaries, unless the context indicates otherwise.

4


 

PART I — Financial Information

 

 

Item 1.

Financial Statements

HubSpot, Inc.

Unaudited Consolidated Balance Sheets

(in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

124,895

 

 

$

269,670

 

Short-term investments

 

 

1,059,615

 

 

 

691,834

 

Accounts receivable — net of allowance for doubtful accounts of $2,525 and $1,584

   at September 30, 2020 and December 31, 2019, respectively

 

 

94,122

 

 

 

92,517

 

Deferred commission expense

 

 

39,666

 

 

 

32,078

 

Prepaid expenses and other current assets

 

 

40,516

 

 

 

23,625

 

Total current assets

 

 

1,358,814

 

 

 

1,109,724

 

Long-term investments

 

 

43,550

 

 

 

53,776

 

Property and equipment, net

 

 

95,352

 

 

 

83,649

 

Capitalized software development costs, net

 

 

22,839

 

 

 

16,793

 

Right-of-use assets

 

 

278,825

 

 

 

234,390

 

Deferred commission expense, net of current portion

 

 

23,712

 

 

 

19,110

 

Other assets

 

 

11,719

 

 

 

9,824

 

Intangible assets, net

 

 

10,013

 

 

 

11,752

 

Goodwill

 

 

30,597

 

 

 

30,250

 

Total assets

 

$

1,875,421

 

 

$

1,569,268

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,116

 

 

$

12,842

 

Accrued compensation costs

 

 

40,079

 

 

 

26,318

 

Accrued expenses and other current liabilities

 

 

31,891

 

 

 

28,686

 

Operating lease liabilities

 

 

30,252

 

 

 

23,613

 

Deferred revenue

 

 

256,034

 

 

 

231,030

 

Total current liabilities

 

 

372,372

 

 

 

322,489

 

Operating lease liabilities, net of current portion

 

 

283,373

 

 

 

244,216

 

Deferred revenue, net of current portion

 

 

3,082

 

 

 

3,058

 

Other long-term liabilities

 

 

9,682

 

 

 

8,983

 

Convertible senior notes

 

 

474,048

 

 

 

340,564

 

Total liabilities

 

 

1,142,557

 

 

 

919,310

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

46

 

 

 

44

 

Additional paid-in capital

 

 

1,198,332

 

 

 

1,048,380

 

Accumulated other comprehensive loss

 

 

2,231

 

 

 

(336

)

Accumulated deficit

 

 

(467,745

)

 

 

(398,130

)

Total stockholders’ equity

 

 

732,864

 

 

 

649,958

 

Total liabilities and stockholders’ equity

 

$

1,875,421

 

 

$

1,569,268

 

 

The accompanying notes are an integral part of the consolidated financial statements.

5


 

HubSpot, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except per share data)

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

$

221,058

 

 

$

167,078

 

 

$

608,702

 

 

$

467,180

 

Professional services and other

 

7,327

 

 

 

6,543

 

 

 

22,259

 

 

 

21,494

 

Total revenue

 

228,385

 

 

 

173,621

 

 

 

630,961

 

 

 

488,674

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

33,181

 

 

 

25,671

 

 

 

93,316

 

 

 

70,550

 

Professional services and other

 

9,422

 

 

 

7,592

 

 

 

26,348

 

 

 

23,433

 

Total cost of revenues

 

42,603

 

 

 

33,263

 

 

 

119,664

 

 

 

93,983

 

Gross profit

 

185,782

 

 

 

140,358

 

 

 

511,297

 

 

 

394,691

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

54,456

 

 

 

39,847

 

 

 

150,026

 

 

 

115,480

 

Sales and marketing

 

119,299

 

 

 

91,283

 

 

 

324,230

 

 

 

250,267

 

General and administrative

 

27,488

 

 

 

23,300

 

 

 

80,228

 

 

 

67,777

 

Total operating expenses

 

201,243

 

 

 

154,430

 

 

 

554,484

 

 

 

433,524

 

Loss from operations

 

(15,461

)

 

 

(14,072

)

 

 

(43,187

)

 

 

(38,833

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

958

 

 

 

5,185

 

 

 

7,150

 

 

 

14,783

 

Interest expense

 

(7,062

)

 

 

(5,760

)

 

 

(29,823

)

 

 

(16,946

)

Other expense

 

(7

)

 

 

(89

)

 

 

(1,152

)

 

 

(773

)

Total other expense

 

(6,111

)

 

 

(664

)

 

 

(23,825

)

 

 

(2,936

)

Loss before income tax expense

 

(21,572

)

 

 

(14,736

)

 

 

(67,012

)

 

 

(41,769

)

Income tax expense

 

(926

)

 

 

(251

)

 

 

(2,603

)

 

 

(1,675

)

Net loss

$

(22,498

)

 

$

(14,987

)

 

$

(69,615

)

 

$

(43,444

)

Net loss per share, basic and diluted

$

(0.49

)

 

$

(0.35

)

 

$

(1.57

)

 

$

(1.04

)

Weighted average common shares used in computing basic

   and diluted net loss per share:

 

45,627

 

 

 

42,531

 

 

 

44,346

 

 

 

41,749

 

 

The accompanying notes are an integral part of the consolidated financial statements.

6


 

HubSpot, Inc.

Unaudited Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss

$

(22,498

)

 

$

(14,987

)

 

$

(69,615

)

 

$

(43,444

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

2,049

 

 

 

(947

)

 

 

2,132

 

 

 

(997

)

Changes in unrealized (loss) gain on investments, net of income taxes of ($15) thousand and ($91) thousand for the three and nine months ended September 30, 2020, and ($12) thousand and $257 thousand for the three and nine months ended September 30, 2019.

 

(279

)

 

 

(203

)

 

 

435

 

 

 

811

 

Comprehensive loss

$

(20,728

)

 

$

(16,137

)

 

$

(67,048

)

 

$

(43,630

)

 

The accompanying notes are an integral part of the consolidated financial statements.

7


 

HubSpot, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(69,615

)

 

$

(43,444

)

Adjustments to reconcile net loss to net cash and cash equivalents provided

   by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

27,067

 

 

 

21,248

 

Stock-based compensation

 

 

90,022

 

 

 

73,659

 

Loss on early extinguishment of 2022 Convertible Notes

 

 

10,493

 

 

 

Repayment of 2022 Convertible Notes attributable to the debt discount

 

 

(48,675

)

 

 

(Benefit) provision for deferred income taxes

 

 

(736

)

 

 

49

 

Amortization of debt discount and issuance costs

 

 

18,188

 

 

 

16,184

 

Accretion of bond discount

 

 

(3,716

)

 

 

(10,889

)

Unrealized currency translation

 

 

(121

)

 

 

(193

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(380

)

 

 

(1,346

)

Prepaid expenses and other assets

 

 

(22,596

)

 

 

(6,217

)

Deferred commission expense

 

 

(11,351

)

 

 

(5,551

)

Right-of-use assets

 

 

22,582

 

 

 

14,310

 

Accounts payable

 

 

3,070

 

 

 

6,195

 

Accrued expenses and other liabilities

 

 

13,780

 

 

 

955

 

Operating lease liabilities

 

 

(21,516

)

 

 

(14,788

)

Deferred revenue

 

 

21,492

 

 

 

20,910

 

Net cash and cash equivalents provided by operating activities

 

 

27,988

 

 

 

71,082

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(1,377,442

)

 

 

(967,994

)

Maturities of investments

 

 

1,013,270

 

 

 

689,614

 

Sale of investments

 

 

10,932

 

 

 

Purchases of property and equipment

 

 

(27,753

)

 

 

(21,197

)

Capitalization of software development costs

 

 

(15,644

)

 

 

(9,139

)

Purchases of strategic investments

 

 

(2,000

)

 

 

(553

)

Net cash and cash equivalents used in investing activities

 

 

(398,637

)

 

 

(309,269

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of 2025 Convertible Notes, net of issuance costs paid of $9.9 million

 

 

450,123

 

 

 

Proceeds from settlement of Convertible Note Hedges related to the 2022 Convertible Notes

 

 

362,492

 

 

 

Payments for settlement of Warrants related to the 2022 Convertible Notes

 

 

(327,543

)

 

 

Repayment of 2022 Convertible Notes attributable to the principal

 

 

(234,366

)

 

 

Payments for Capped Call Options related to the 2025 Convertible Notes

 

 

(50,600

)

 

 

Proceeds from common stock offering, net of offering costs paid of $365

 

 

 

 

 

342,628

 

Employee taxes paid related to the net share settlement of stock-based awards

 

 

(4,637

)

 

 

(4,767

)

Proceeds related to the issuance of common stock under stock plans

 

 

22,256

 

 

 

18,926

 

Repayments of finance lease obligations

 

 

(28

)

 

 

(249

)

Net cash and cash equivalents provided by financing activities

 

 

217,697

 

 

 

356,538

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

2,361

 

 

 

(2,171

)

Net increase in cash, cash equivalents and restricted cash

 

 

(150,591

)

 

 

116,180

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

278,515

 

 

 

117,114

 

Cash, cash equivalents and restricted cash, end of period

 

$

127,924

 

 

$

233,294

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

508

 

 

$

503

 

Cash paid for income taxes

 

$

2,849

 

 

$

2,395

 

Right-of-use assets obtained in exchange for operating lease liabilities

 

$

65,013

 

 

$

81,744

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Capital expenditures incurred but not yet paid

 

$

1,270

 

 

$

1,871

 

Asset retirement obligations

 

$

699

 

 

$

1,106

 

Issuance of common stock for repayment of 2022 Convertible Notes

 

$

330,497

 

 

$

 

 

The accompanying notes are an integral part of the consolidated financial statements.

8


 

HubSpot, Inc.

Notes to Unaudited Consolidated Financial Statements

 

 

1. Organization and Operations

HubSpot, Inc. (the “Company”) provides software and support through its cloud-based customer relationship management, or CRM, platform to help businesses to grow better. The Company’s CRM platform includes marketing, sales, service, and website management products and features tools and integrations that enable businesses to attract, engage, and delight customers throughout the customer lifecycle.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”).  In the opinion of management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2019, and these consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation.   

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2020. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does not include all disclosures required under GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted under the rules and regulations of the SEC.

These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 12, 2020. There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K that have had a material impact on our consolidated financial statements and related notes.

In March 2020, the World Health Organization, or WHO, declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a global pandemic, or pandemic. The Company has assessed the impact of the pandemic, and while the broader implications of the pandemic on the results of operations and overall financial performance remain uncertain, the Company assessed the potential impact on the September 30, 2020 financial statements and determined there were no material adjustments necessary with respect to these consolidated financial statements.

Given that the economic consequences of the pandemic have been exceptionally challenging for many customers, in March 2020, the Company implemented certain changes to pricing and packaging, including reducing prices on certain products and offering certain product functionality free of charge for a limited time. The Company also paid certain Solutions Partners six months of commissions in advance of them being earned.  While revenue, customer retention, and earnings are relatively predictable under a subscription-based business model, the potential effect of the pandemic will not be fully reflected in the results of operations and overall financial performance of the Company until future periods given the current macro-economic uncertainty.

In March 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law by the United States. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants, and investments. In June 2020, the Jobs Support Scheme (“JSS”) was announced by the Singapore government to provide support to employers and help enterprises retain their local employees during the pandemic. The CARES Act and the JSS did not have a material impact with respect to these consolidated financial statements.

Recent Accounting Pronouncements

Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.

9


 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under previous guidance, Step 2 of the goodwill impairment test required entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value was recognized as goodwill impairment. Under the new guidance, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The guidance was adopted effective January 1, 2020 and did not have a material impact on the consolidated financial statements.

In June 2016, the FASB issued guidance that introduces a new methodology for accounting for credit losses on financial instruments. The guidance establishes a new forward-looking "expected loss model" that requires entities to estimate current expected credit losses on accounts receivable and financial instruments by using all practical and relevant information. The guidance was adopted effective January 1, 2020 and did not have a material impact on the consolidated financial statements.

In December 2019, the FASB issued guidance simplifying the accounting for incomes taxes by removing (i) the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, (ii) the exception to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, and (iii) the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The guidance also improves consistent application of and simplifies GAAP for other areas of Topic 740, Income Taxes. The guidance was adopted effective January 1, 2020, using a prospective approach and did not have a material impact on the consolidated financial statements.

In August 2020, the FASB issued guidance simplifying the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being bifurcated from the host contract and separately recognized as compared with current GAAP. In addition, it eliminates the treasury stock method for calculating diluted earnings per share for convertible instruments and requires the use of the if-converted method. The new standard is effective beginning in January 2022, with early adoption permitted. The Company is currently evaluating the impact of adoption of the standard on its consolidated financial statements.

 

2. Revenues

 

Disaggregation of Revenue

The Company provides disaggregation of revenue based on geographic region (Note 14) and based on the subscription versus professional services and other classification on the consolidated statements of operations as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Deferred Revenue and Deferred Commission Expense

Amounts that have been invoiced are recorded in accounts receivable and deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion is recorded as long-term deferred revenue. Deferred revenue during the nine months ended September 30, 2020 increased by $25.0 million resulting from $656.0 million of additional invoicing and was offset by revenue recognized of $631.0 million during the same period. $135.2 million of revenue was recognized during the three month period ended September 30, 2020 that was included in deferred revenue at the beginning of the period. $215.5 million of revenue was recognized during the nine month period ended September 30, 2020 that was included in deferred revenue at the beginning of the period. As of September 30, 2020, approximately $214.3 million of revenue is expected to be recognized from remaining performance obligations for contracts with original performance obligations that exceed one year. The Company expects to recognize revenue on approximately 93% of these remaining performance obligations over the next 24 months, with the balance recognized thereafter.  

 

Additional contract liabilities of $1.5 million and $1.4 million were included in accrued expenses and other current liabilities on the consolidated balance sheet as of September 30, 2020 and December 31, 2019.

The incremental direct costs of obtaining a contract, which primarily consist of sales commissions paid for new subscription contracts, are deferred and amortized on a straight-line basis over a period of approximately one to three years.  The one to three-year period has been determined by taking into consideration the type of product sold, the commitment term of the customer contract, the nature of the Company’s technology development life-cycle, and an estimated customer relationship period.  Sales commissions for upgrade contracts are deferred and amortized on a straight-line basis over the remaining estimated customer relationship period of the related customer.  Deferred commission expense that will be recorded as expense during the succeeding 12-month period is recorded as current deferred commission expense, and the remaining portion is recorded as long-term deferred commission expense.

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Deferred commission expense during the three months ended September 30, 2020 increased by $6.4 million as a result of deferring incremental costs of obtaining a contract of $17.5 million and was offset by amortization of $11.1 million during the same period. Deferred commission expense during the nine months ended September 30, 2020 increased by $12.2 million as a result of deferring incremental costs of obtaining a contract of $44.1 million and was offset by amortization of $31.9 million during the same period.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future collection. The probability of future collection is based on specific considerations of historical loss patterns and an assessment of the continuation of such patterns based on past collection trends and known or anticipated future economic events that may impact collectability. The pandemic has added uncertainty to the collectability of certain receivables, particularly in industries hard hit by the pandemic. As a result, the Company recorded an incremental reserve associated with the pandemic during the nine months ended September 30, 2020.

The following is a roll-forward of the Company’s allowance for doubtful accounts:

 

(in thousands)

 

Balance at December 31, 2019

$

1,584

 

Provision

 

7,205

 

Write-offs, net of recoveries

 

(6,264

)

Balance at September 30, 2020

$

2,525

 

3. Leases

During the nine months ended September 30, 2020, the lease term began or was extended for various leases of office spaces globally. All leases, ranging from approximately 1 year to approximately 10 years, exclusive of renewal options, were determined to be operating leases with total estimated aggregate base rent payments of approximately $76.8 million. The Company recorded $65.3 million of right-of-use assets and $65.1 million of lease liabilities for these leases during the period upon the lease commencement or extensions.

The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of operating lease payments. To determine the estimated incremental borrowing rate, the Company uses publicly available credit ratings for peer companies. The Company estimates the incremental borrowing rate using yields for maturities that are in line with the duration of the lease payments. The weighted average discount rate for operating leases as of September 30, 2020 is 5.2%.

Operating lease costs were $11.9 million for the three months ended September 30, 2020, $32.6 million for the nine months ended September 30, 2020, $9.6 million for the three months ended September 30, 2019, and $25.1 million for the nine months ended September 30, 2019.

The Company leases its office facilities under non-cancelable operating leases. Unused spaces are generally subleased to third parties. Operating sublease income generated under all operating lease agreements for the three and nine months ended September 30, 2020 and 2019 are as follows:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(in thousands)

 

 

(in thousands)

 

Operating sublease income

 

$

1,112

 

 

$

563

 

 

$

3,840

 

 

$

1,694

 

 

Cash payments related to our operating lease liabilities were $11.6 million for the three months ended September 30, 2020, $31.4 million for the nine months ended September 30, 2020, $8.3 million for the three months ended September 30, 2019 and $23.0 million for the nine months ended September 30, 2019.

 

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4. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock units (“RSUs”), shares issued pursuant to the Employee Stock Purchase Plan (“ESPP”), the Warrants (defined below), the Conversion Option of the 2022 Notes, and the Conversion Option of the 2025 Notes (the “Conversion Options”) (Note 9) are considered to be potential common stock equivalents.

A reconciliation of the denominator used in the calculation of basic and diluted net loss per share is as follows:

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

 

2019

 

 

 

2020