10-Q 1 pro-20220630.htm 10-Q pro-20220630
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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 June 30, 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
___________________________________________________________________________ 
pro-20220630_g1.jpg
PROS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________________________ 
Delaware76-0168604
(State of Incorporation)(I.R.S. Employer Identification No.)
3200 Kirby Drive, Suite 60077098
HoustonTX
(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 classTrading symbol(s)Name of each exchange on which registered
Common stock $0.001 par value per sharePRONew 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 filerAccelerated 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 45,305,508 as of July 25, 2022.


PROS Holdings, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 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.
                        3

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) 
June 30, 2022December 31, 2021
Assets:
Current assets:
Cash and cash equivalents$215,178 $227,553 
Trade and other receivables, net of allowance of $1,044 and $1,206, respectively
34,415 40,581 
Deferred costs, current5,961 5,772 
Prepaid and other current assets11,935 9,623 
Total current assets267,489 283,529 
Property and equipment, net27,341 30,958 
Operating lease right-of-use assets20,195 25,732 
Deferred costs, noncurrent9,189 9,510 
Intangibles, net22,046 27,618 
Goodwill107,334 108,133 
Other assets, noncurrent8,156 9,003 
Total assets$461,750 $494,483 
Liabilities and Stockholders' (Deficit) Equity:
Current liabilities:
Accounts payable and other liabilities$5,978 $4,034 
Accrued liabilities12,697 12,631 
Accrued payroll and other employee benefits22,862 31,994 
Operating lease liabilities, current7,393 8,457 
Deferred revenue, current108,207 97,713 
Total current liabilities157,137 154,829 
Deferred revenue, noncurrent7,278 8,553 
Convertible debt, net289,033 288,287 
Operating lease liabilities, noncurrent32,327 38,034 
Other liabilities, noncurrent1,065 1,196 
Total liabilities486,840 490,899 
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; 49,928,002
and 49,201,265 shares issued, respectively; 45,247,279 and 44,520,542 shares outstanding, respectively
50 49 
Additional paid-in capital569,914 546,693 
Treasury stock, 4,680,723 common shares, at cost
(29,847)(29,847)
Accumulated deficit(559,698)(508,652)
Accumulated other comprehensive loss(5,509)(4,659)
Total stockholders' (deficit) equity(25,090)3,584 
Total liabilities and stockholders' (deficit) equity$461,750 $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 June 30,Six Months Ended June 30,
 2022202120222021
Revenue:
Subscription$50,386 $44,224 $99,151 $86,872 
Maintenance and support7,249 8,570 15,104 18,244 
Total subscription, maintenance and support57,635 52,794 114,255 105,116 
Services10,727 9,607 20,599 18,663 
Total revenue68,362 62,401 134,854 123,779 
Cost of revenue:
Subscription13,746 13,589 27,525 27,390 
Maintenance and support1,988 2,157 4,155 4,415 
Total cost of subscription, maintenance and support15,734 15,746 31,680 31,805 
Services11,907 10,658 23,322 21,091 
Total cost of revenue27,641 26,404 55,002 52,896 
Gross profit40,721 35,997 79,852 70,883 
Operating expenses:
Selling and marketing24,020 21,190 49,307 42,754 
Research and development23,401 20,454 47,868 41,379 
General and administrative13,837 10,659 28,166 23,646 
Impairment of fixed assets  1,551  
Loss from operations(20,537)(16,306)(47,040)(36,896)
Convertible debt interest and amortization(1,576)(1,576)(3,152)(3,152)
Other (expense) income, net(2)4 (420)290 
Loss before income tax provision(22,115)(17,878)(50,612)(39,758)
Income tax provision291 168 434 317 
Net loss$(22,406)$(18,046)$(51,046)$(40,075)
Net loss per share:
Basic and diluted$(0.50)$(0.41)$(1.13)$(0.90)
Weighted average number of shares:
Basic and diluted45,222 44,321 45,154 44,283 
Other comprehensive loss, net of tax:
Foreign currency translation adjustment$(628)$157 $(850)$(451)
Other comprehensive (loss) income, net of tax(628)157 (850)(451)
Comprehensive loss $(23,034)$(17,889)$(51,896)$(40,526)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

PROS Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Six Months Ended June 30,
 20222021
Operating activities:
Net loss$(51,046)$(40,075)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization8,448 6,092 
Amortization of debt issuance costs746 746 
Share-based compensation21,991 16,776 
Provision for doubtful accounts(300)(1,690)
Impairment of fixed assets1,551  
Changes in operating assets and liabilities:
Accounts and unbilled receivables6,441 9,919 
Deferred costs132 1,409 
Prepaid expenses and other assets(1,395)1,095 
Operating lease right-of-use assets and liabilities(1,117)26 
Accounts payable and other liabilities1,629 899 
Accrued liabilities(68)(201)
Accrued payroll and other employee benefits(9,144)(2,975)
Deferred revenue9,187 (1,435)
Net cash used in operating activities(12,945)(9,414)
Investing activities:
Purchases of property and equipment(769)(2,085)
Investment in equity securities(169)(501)
Net cash used in investing activities(938)(2,586)
Financing activities:
Proceeds from employee stock plans1,443 1,596 
Tax withholding related to net share settlement of stock awards(212)(352)
Net cash provided by financing activities1,231 1,244 
Effect of foreign currency rates on cash277 (52)
Net change in cash and cash equivalents(12,375)(10,808)
Cash and cash equivalents:
Beginning of period227,553 329,134 
End of period$215,178 $318,326 
Supplemental disclosure of cash flow information:
Noncash investing activities:
Purchase of property and equipment accrued but not paid$140 $335 
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 June 30, 2022
Common StockAdditional Paid-In CapitalTreasury StockAccumulated
Deficit
Accumulated other comprehensive lossTotal Stockholders’
(Deficit) Equity
SharesAmountSharesAmount
Balance at March 31, 202245,179,184 $50 $559,148 4,680,723 $(29,847)$(537,292)$(4,881)$(12,822)
Stock awards net settlement68,095 — — — — — — — 
Proceeds from employee stock plans— — — — — — — — 
Noncash share-based compensation— — 10,766 — — — — 10,766 
Other comprehensive loss— — — — — — (628)(628)
Net loss— — — — — (22,406)— (22,406)
Balance at June 30, 202245,247,279 $50 $569,914 4,680,723 $(29,847)$(559,698)$(5,509)$(25,090)

Three Months Ended June 30, 2021
 Common StockAdditional Paid-In CapitalTreasury StockAccumulated
Deficit
Accumulated other comprehensive lossTotal Stockholders’
(Deficit) Equity
 SharesAmountSharesAmount
Balance at March 31, 202144,252,765 $49 $518,338 4,680,723 $(29,847)$(449,472)$(4,039)$35,029 
Stock awards net settlement86,917 — — — — — — — 
Noncash share-based compensation— — 8,588 — — — — 8,588 
Other comprehensive loss— — — — — — 157 157 
Net loss— — — — — (18,046)— (18,046)
Balance at June 30, 202144,339,682 $49 $526,926 4,680,723 $(29,847)$(467,518)$(3,882)$25,728 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.













7

PROS Holdings, Inc.
Condensed Consolidated Statements of Stockholders’ (Deficit) Equity (Continued)
(In thousands, except share data)
(Unaudited) 
Six Months Ended June 30, 2022
Common StockAdditional Paid-In CapitalTreasury StockAccumulated
Deficit
Accumulated other comprehensive lossTotal Stockholders’
(Deficit) Equity
SharesAmountSharesAmount
Balance at December 31, 202144,520,542 $49 $546,693 4,680,723 $(29,847)$(508,652)$(4,659)$3,584 
Stock awards net settlement677,492 1 (213)— — — — (212)
Proceeds from employee stock plans49,245 — 1,443 — — — — 1,443 
Noncash share-based compensation— — 21,991 — — — — 21,991 
Other comprehensive loss— — — — — — (850)(850)
Net loss— — — — — (51,046)— (51,046)
Balance at June 30, 202245,247,279 $50 $569,914 4,680,723 $(29,847)$(559,698)$(5,509)$(25,090)

Six Months Ended June 30, 2021
 Common StockAdditional Paid-In CapitalTreasury StockAccumulated
Deficit
Accumulated other comprehensive lossTotal Stockholders’
(Deficit) Equity
 SharesAmountSharesAmount
Balance at December 31, 202043,461,544 $48 $589,040 4,680,723 $(29,847)$(438,773)$(3,431)$117,037 
Stock awards net settlement836,168 1 (353)— — — — (352)
Proceeds from employee stock plans41,970 — 1,596 — — — — 1,596 
Cumulative effect of adoption of ASU 2020-06— — (80,098)— — 11,330 — (68,768)
Noncash share-based compensation— — 16,741 — — — — 16,741 
Other comprehensive loss— — — — — — (451)(451)
Net loss— — — — — (40,075)— (40,075)
Balance at June 30, 202144,339,682 $49 $526,926 4,680,723 $(29,847)$(467,518)$(3,882)$25,728 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

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 June 30, 2022, the results of operations for the three and six months ended June 30, 2022 and 2021, cash flows for the six months ended June 30, 2022 and 2021, and stockholders' (deficit) equity for the three and six months ended June 30, 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.
    
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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 $179.0 million and $203.3 million at June 30, 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 also tied to the value of customer contracts acquired. Deferred costs were $15.2 million and $15.3 million as of June 30, 2022 and December 31, 2021, respectively. Amortization expense for the deferred costs was $1.4 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively, and $2.9 million and $3.1 million for the six months ended June 30, 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 expected to be recoverable 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 $2.0 million and $2.4 million as of June 30, 2022 and December 31, 2021, respectively. Amortization expense for the deferred implementation costs was $0.3 million for both the three months ended June 30, 2022 and 2021, and $0.6 million for both the six months ended June 30, 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.

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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 three and six months ended June 30, 2022, the Company recorded zero and $1.6 million, respectively, of 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 and six months ended June 30, 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 six months ended June 30, 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 June 30, 2022 and 2021, the Company recognized approximately $48.6 million and $45.3 million, respectively, and for the six months ended June 30, 2022 and 2021, the Company recognized approximately $71.2 million and $70.3 million, respectively, of revenue that was included in the deferred revenue balances at the beginning of the respective periods and primarily related to subscription, maintenance and support, and services.

    Performance Obligations

     As of June 30, 2022, the Company expects to recognize approximately $434.9 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 $197.4 million of these performance obligations over the next 12 months, with the balance recognized thereafter.

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4. Disaggregation of Revenue

    Revenue by Geography

    The geographic information in the table below is presented for the three and six months ended June 30, 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 June 30,Six Months Ended June 30,
 2022202120222021
(in thousands)RevenuePercentRevenuePercentRevenuePercentRevenuePercent
United States of America$23,908 35 %$21,875 35 %$47,102 35 %$42,751 35 %
Europe20,865 30 %18,562 30 %41,688 31 %37,254 30 %
The rest of the world23,589 35 %21,964 35 %46,064 34 %43,774 35 %
      Total revenue$68,362 100 %$62,401 100 %$134,854 100 %$123,779 100 %

5. Business Combination

EveryMundo

On November 30, 2021, the Company acquired EveryMundo LLC ("EveryMundo"), a privately held company based in Miami, Florida, for 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 certain employee' continued employment with the Company for a two-year period, it was determined, based on accounting guidance, 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.

The preliminary allocation of the purchase price for EveryMundo is as follows (in thousands):
    
Current assets$2,193 
Noncurrent assets736 
Intangibles23,300 
Goodwill58,915 
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 relationships5,500 4
Trade name2,100 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 June 30, 2022, the Company did not have any finance leases.

    Supplemental cash flow information related to leases was as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Cash paid for operating lease liabilities$2,353 $1,917 $4,195 $4,378 
Right-of-use asset obtained in exchange for operating lease liability$243 $194 $243 $291 

    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 June 30, 2022, maturities of lease liabilities were as follows (in thousands):
Year Ending December 31,Amount
Remaining 2022$5,168 
20239,618 
20245,260 
20254,211 
20264,109 
20274,043 
Thereafter23,685 
Total operating lease payments56,094 
Less: Imputed interest(16,374)
Total operating lease liabilities$39,720 

7. Earnings per Share

    The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2022 and 2021:
 Three Months Ended June 30,Six Months Ended June 30,
(in thousands, except per share data)2022202120222021
Numerator:
Net loss$(22,406)$(18,046)$(51,046)$(40,075)
Denominator:
Weighted average shares (basic)45,222 44,321 45,154 44,283 
Dilutive effect of potential common shares    
Weighted average shares (diluted)45,222 44,321 45,154 44,283 
Basic loss per share$(0.50)$(0.41)$(1.13)$(0.90)
Diluted loss per share$(0.50)$(0.41)$(1.13)$(0.90)
    
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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 2.4 million and 1.2 million, for the three months ended June 30, 2022 and 2021, respectively, and 2.6 million and 1.3 million for the six months ended June 30, 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 and six months ended June 30, 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 June 30, 2022, 2,829,815 shares remain available for issuance under the 2017 Stock Plan.
    
    The following table presents the number of shares or units outstanding for each award type as of June 30, 2022 and December 31, 2021, respectively, (in thousands): 
Award typeJune 30, 2022December 31, 2021
Restricted stock units (time-based)2,624 2,145 
Restricted stock units (performance-based) 140 
Market stock units216 126 
EveryMundo Equity consideration273 273 

During the three months ended June 30, 2022, the Company granted 205,642 RSUs (time-based) with a weighted average grant-date fair value of $24.05 per share.

During the six months ended June 30, 2022, the Company granted 1,353,221 RSUs (time-based) with a weighted average grant-date fair value of $30.23 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 six months ended June 30, 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 and six months ended June 30, 2022.

The assumptions used to value the MSUs granted during the six months ended June 30, 2022 were as follows:
June 30, 2022
Volatility54.50 %
Risk-free interest rate1.20 %
Expected award life in years2.97
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 and six months ended June 30, 2022 and 2021:
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 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Share-based compensation:
Cost of revenue$1,006 $976 $1,831 $1,802 
Operating expenses:
Selling and marketing3,276 2,510 6,516 4,734 
Research and development2,899 2,117 6,612 3,943 
General and administrative3,585 3,003 7,032 6,297 
Total included in operating expenses9,760 7,630 20,160 14,974 
Total share-based compensation expense$10,766 $8,606 $21,991 $16,776 
    
    At June 30, 2022, the Company had an estimated $94.7 million of total unrecognized compensation costs related to share-based compensation arrangements. These costs will be recognized over a weighted average period of 2.8 years.

    The Company's Employee Stock Purchase Plan (as amended, the "ESPP") provides for eligible employees to purchase shares on an after-tax basis in an amount between 1% and 10% of their annual pay: (i) on June 30 of each year at a 15% discount of the fair market value of the Company's common stock on January 1 or June 30, whichever is lower, and (ii) on December 31 of each year at a 15% discount of the fair market value of the Company's common stock on July 1 or December 31, whichever is lower. An employee may not purchase more than $5,000 in either of the six-month measurement periods described above or more than $10,000 annually. In May 2021, the Company's stockholders approved an amendment to the ESPP Plan increasing the aggregate amount of shares available for issuance under the ESPP to 1,000,000. During the three and six months ended June 30, 2022, the Company issued zero and 49,245 shares under the ESPP, respectively. As of June 30, 2022, 444,466 shares remain authorized and available for issuance under the ESPP. As of June 30, 2022, the Company held approximately $1.3 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 June 30, 2022 (in thousands):
Date of IssuanceUnpaid Principal BalanceNet Carrying AmountContractual Interest Rates
CurrentNoncurrent
1% Convertible Notes due in 2024 ("2024 Notes") May 2019 $143,750 $ $142,106 1%
2.25% Convertible Notes due in 2027 ("2027 Notes")September 2020$150,000 $ $146,927 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 June 30, 2022, the 2027 and 2024 Notes are not yet convertible and their remaining term is approximately 62 months and 22 months, respectively.

As of June 30, 2022 and December 31, 2021, the fair value of the principal amount of the Notes in the aggregate was $266.7 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):
June 30, 2022December 31, 2021
Principal$293,750 $293,750 
Less: debt issuance cost, net of amortization(4,717)(5,463)
Net carrying amount$289,033 $288,287 

The following table sets forth total interest expense recognized related to the Notes (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Coupon interest$1,203 $1,203 $2,406 $2,406 
Amortization of debt issuance costs373 373 746 746 
Total$1,576 $1,576 $3,152 $3,152 

    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 June 30, 2022 was $4.3 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 $166.1 million remaining as of June 30, 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.

Q2 2022 Financial Overview

In the second quarter of 2022, we continued to grow our subscription revenue. For the three and six months ended June 30, 2022, our subscription revenue increased 14% as compared to the same periods in 2021. Total revenue increased 10% and 9% for the three and six months ended June 30, 2022, respectively, as compared to the same periods in 2021. Recurring revenue (which consists of subscription revenue and maintenance and support revenue) as a percentage of total revenue accounted for 84% and 85% of total revenue for the three and six months ended June 30, 2022, respectively, and 85% of total revenue for the three and six months ended June 30, 2021.

Our gross revenue retention rates remained consistent above 93% during the trailing twelve months ended June 30, 2022.

Cash used in operating activities was $12.9 million for the six months ended June 30, 2022, as compared to $9.4 million for the six months ended June 30, 2021. The increase was primarily attributable to a higher annual incentive payment in 2022 as compared to prior year, partially offset by strong collections during the period.

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 June 30, 2022 was $2.2 million, compared to $5.7 million for the three months ended June 30, 2021. This decrease was primarily due to strong collections during the period. Free cash flow used during the six months ended June 30, 2022 was $13.7 million, compared to $10.4 million for the six months ended June 30, 2021. This increase was primarily due to a higher annual incentive payment in 2022 as compared to prior year, partially offset by strong collections during the period. The following is a reconciliation of free cash flow to the most comparable GAAP measure, net cash used in operating activities (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Net cash used in operating activities$(1,931)$(4,985)$(12,945)$(9,414)
Purchase of property and equipment (excluding new headquarters)(308)(741)(769)(944)
Free Cash Flow$(2,239)$(5,726)$(13,714)$(10,358)
    
Factors Affecting Our Performance

    Key factors and trends that have affected, and we believe will continue to affect, our operating results include:

Macroeconomic Environment. We believe that the combination of supply chain disruptions from the pandemic, tight labor markets, pricing volatility, inflation, the Russia-Ukraine conflict, rising interest rates, and other macroeconomic conditions will put pressure on corporate growth initiatives and increase near term focus on profitability. Despite this challenging macro environment, we remain confident in our ability to continue to help optimize shopping and selling experiences for our customers across a wide variety of industries. For example, pricing volatility and inflation are catalysts for demand for our price management and optimization solutions, while concurrently uncertain macroeconomic and industry conditions in countries and regions in which we operate create a challenging selling environment for large enterprise technology deployment. COVID-19 impacted and is anticipated to continue impacting our subscription revenue growth rates adversely due to lower subscription bookings during the pandemic and the lag
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between subscription bookings and the revenue recognized on those subscription bookings. Although the pandemic reduced our revenue growth rates compared to pre-pandemic growth rates and is affecting our 2022 revenue, we continue to grow our subscription revenue and expect total revenue growth in 2022. However, the continuing impact of COVID-19 and rate of economic recovery remains uncertain and varies across industries and geographies. While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of these macroeconomic events on our business, results of operations, cash flows and overall financial position, particularly in the long term, remain uncertain. For a full discussion on the risks and uncertainties to our business, please see the "Risk Factors" section in our Annual Report on Form 10-K.