Published: 2022-10-06 00:00:00 ET

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Company Overview - Progress Software Corporation ("Progress," the "Company," "we," "us," or "our") is dedicated to propelling business forward in a technology-driven world. Progress helps businesses drive faster cycles of innovation, fuel momentum and accelerate their path to success. As the trusted provider of the best products to develop, deploy and manage high-impact applications, Progress enables customers to develop the applications and experiences the need, deploy where and how they want and manage it all safely and securely. Hundreds of thousands of enterprises, including 1,700 software companies and 3.5 million developers depend on Progress to achieve their goals—with confidence.

Our products are generally sold as perpetual licenses, but certain products also use term licensing models and our cloud-based offerings use a subscription-based model. More than half of our worldwide license revenue is realized through relationships with indirect channel partners (principally independent software vendors), original equipment manufacturers ("OEMs"), distributors and value-added resellers. Independent software vendors develop and market applications using our technology and resell our products in conjunction with sales of their own products that incorporate our technology. OEMs are companies that embed our products into their own software products or devices. Value-added resellers are companies that add features or services to our product, then resell it as an integrated product or complete "turn-key" solution.

We operate in North and Latin America (the "Americas"); Europe, the Middle East and Africa ("EMEA"); and the Asia Pacific region, through local subsidiaries as well as independent distributors.

Basis of Presentation and Significant Accounting Policies - We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements and these unaudited financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2021, as filed with the SEC on January 27, 2022, as amended by a Form 10-K/A filed on March 30, 2022 (together, the "2021 10-K").

We made no material changes in the application of our significant accounting policies that were disclosed in our 2021 10-K. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our 2021 10-K, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, management evaluates its estimates and records changes in estimates in the period in which they become known. These estimates are based on historical data and experience, as well as various other assumptions that management believes to be reasonable under the circumstances. The most significant estimates relate to: the timing and amount of revenue recognition, including the determination of the nature and timing of the satisfaction of performance obligations, the standalone selling price of performance obligations, and the transaction price allocated to performance obligations; the realization of tax assets and estimates of tax liabilities; fair values of investments in marketable securities; intangible assets and goodwill valuations; the recognition and disclosure of contingent liabilities; the collectability of accounts receivable; and assumptions used to determine the fair value of stock-based compensation. Actual results could differ from those estimates.

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Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Income Taxes

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 updates specific areas of ASC 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. The Company adopted this standard effective December 1, 2021. The adoption of this standard did not have a material effect on the Company's condensed consolidated financial position and results of operations.

Convertible Debt

On December 1, 2021, we early adopted Accounting Standards Update No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06") on a modified retrospective basis. Under ASU 2020-06, we no longer separate the convertible senior notes into liability and equity components. We recognized the cumulative effect of initially applying this new standard as of December 1, 2021, as an adjustment to the December 1, 2021 opening balance of retained earnings. The conversion option that was previously accounted for in equity under the cash conversion model was recombined into the convertible debt outstanding, and as a result, additional paid in capital and the related unamortized debt discount on the convertible senior notes were reduced. The removal of the remaining debt discount recorded for this previous separation has the effect of increasing our net debt balance. We recorded a $47.5 million decrease to additional paid-in capital, a $56.0 million decrease to debt discount, a $4.9 million increase to retained earnings, and a $13.4 million decrease to long-term deferred tax liabilities. There was no impact to the Company’s statements of cash flows as the result of the adoption of ASU 2020-06. The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods. See Note 8: Debt for additional information regarding the terms of the Convertible Senior Notes (the "Notes").

The new standard requires the use of the "if-converted" method to calculate the diluted earnings per common share. Refer to Note 16: Earnings Per Share for effect of the convertible notes on diluted earnings per common share.

A summary of our cash, cash equivalents and available-for-sale investments at August 31, 2022 is as follows (in thousands):

 

			Amortized Cost Basis						Unrealized Gains						Unrealized Losses						Fair Value
Cash			$	197,777					$	—					$	—					$	197,777
Money market funds			26,338						—						—						26,338
U.S. treasury bonds			750						—						(1)						749
Total			$	224,865					$	—					$	(1)					$	224,864

A summary of our cash, cash equivalents and available-for-sale investments at November 30, 2021 is as follows (in thousands):

 

			Amortized Cost Basis						Unrealized Gains						Unrealized Losses						Fair Value
Cash			$	130,371					$	—					$	—					$	130,371
Money market funds			25,035						—						—						25,035
U.S. treasury bonds			748						9						—						757
Corporate bonds			1,203						7						—						1,210
Total			$	157,357					$	16					$	—					$	157,373

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Such amounts are classified on our condensed consolidated balance sheets as follows (in thousands):

 

			August 31, 2022												November 30, 2021
			Cash and Equivalents						Short-Term Investments						Cash and Equivalents						Short-Term Investments
Cash			$	197,777					$	—					$	130,371					$	—
Money market funds			26,338						—						25,035						—
U.S. treasury bonds			—						749						—						757
Corporate bonds			—						—						—						1,210
Total			$	224,115					$	749					$	155,406					$	1,967

The fair value of debt securities by contractual maturity due in one year or less was $0.7 million and $2.0 million as of August 31, 2022 and November 30, 2021, respectively. There were no debt securities by contractual maturity due after one year as of August 31, 2022 or November 30, 2021.

 

We did not hold any investments with continuous unrealized losses as of August 31, 2022 or November 30, 2021.

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Cash Flow Hedge

On July 9, 2019, we entered into an interest rate swap contract with an initial notional amount of $150.0 million to manage the variability of cash flows associated with approximately one-half of our variable rate debt. The contract matures on April 30, 2024 and requires periodic interest rate settlements. Under this interest rate swap contract, we receive a floating rate based on the greater of 1-month LIBOR or 0.00%, and pay a fixed rate of 1.855% on the outstanding notional amount.

We have designated the interest rate swap as a cash flow hedge and assess the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the interest rate swap is highly effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivative are included as a component of other comprehensive loss on our condensed consolidated balance sheets. Although we have determined at the onset of the hedge that the interest rate swap will be a highly effective hedge throughout the term of the contract, any portion of the fair value swap subsequently determined to be ineffective will be recognized in earnings. On January 25, 2022, we amended our prior credit facility (see Note 8: Debt). We reassessed the hedge in connection with the debt amendment and determined that it is still highly effective. As of August 31, 2022, the fair value of the hedge was a gain of $3.3 million, which was included in other assets on our condensed consolidated balance sheets.

The following table presents our interest rate swap contract where the notional amount reflects the quarterly amortization of the interest rate swap, which is equal to approximately one-half of the corresponding reduction in the balance of our term loan as we make scheduled principal payments. The fair value of the derivative represents the discounted value of the expected future discounted cash flows for the interest rate swap, based on the amortization schedule and the current forward curve for the remaining term of the contract, as of the date of each reporting period (in thousands):

			August 31, 2022												November 30, 2021
			Notional Value						Fair Value						Notional Value						Fair Value
Interest rate swap contracts designated as cash flow hedges			$	123,750					$	3,346					$	133,125					$	(3,078)

Forward Contracts

We generally use forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on intercompany accounts receivable and loans receivable denominated in certain foreign currencies. We generally do not hedge the net assets of our international subsidiaries.

All forward contracts are recorded at fair value on the consolidated balance sheets at the end of each reporting period and generally expire between 30 days and 2 years from the date the contract was entered. At August 31, 2022, $4.3 million and $0.1 million was recorded in other noncurrent liabilities and other current assets on our condensed consolidated balance sheets. At November 30, 2021, $0.3 million and $0.1 million were recorded in other noncurrent liabilities and other accrued liabilities, respectively, on our condensed consolidated balance sheets.

In the three and nine months ended August 31, 2022, realized and unrealized losses of $5.4 million and $9.0 million, respectively, from our forward contracts were recognized in foreign currency gain (loss), net, on our condensed consolidated statements of operations. In the three and nine month ended August 31, 2021, realized and unrealized losses of $2.3 million and realized and unrealized gains of $0.4 million, respectively, from our forward contracts were recognized in foreign currency gain (loss), net, on our condensed consolidated statements of operations. These gains and losses were substantially offset by realized and unrealized gains and losses in the offsetting positions.

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The table below details outstanding foreign currency forward contracts where the notional amount is determined using contract exchange rates (in thousands):

 

			August 31, 2022												November 30, 2021
			Notional Value						Fair Value						Notional Value						Fair Value
Forward contracts to sell U.S. dollars			$	81,089					$	(4,211)					$	79,777					$	(371)
Forward contracts to purchase U.S. dollars			618						4						119						(1)
Total			$	81,707					$	(4,207)					$	79,896					$	(372)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at August 31, 2022 (in thousands):

 

									Fair Value Measurements Using
			Total Fair Value						Level 1						Level 2						Level 3
Assets
Money market funds			$	26,338					$	26,338					$	—					$	—
U.S. treasury bonds			749						—						749						—
Interest rate swap			3,346						—						3,346						—
Liabilities
Foreign exchange derivatives			$	(4,207)					$	—					$	(4,207)					$	—

The following table details the fair value measurements within the fair value hierarchy of our financial assets and liabilities at November 30, 2021 (in thousands):

 

									Fair Value Measurements Using
			Total Fair Value						Level 1						Level 2						Level 3
Assets
Money market funds			$	25,035					$	25,035					$	—					$	—
U.S. treasury bonds			757						—						757						—
Corporate bonds			1,210						—						1,210						—
Liabilities
Foreign exchange derivatives			(372)						—						(372)						—
Interest rate swap			$	(3,078)					$	—					$	(3,078)					$	—

When developing fair value estimates, we maximize the use of observable inputs and minimize the use of unobservable inputs. When available, we use quoted market prices to measure fair value. The valuation technique used to measure fair value for our Level 1 and Level 2 assets is a market approach, using prices and other relevant information generated by market transactions involving identical or comparable assets. If market prices are not available, the fair value measurement is based on models that use primarily market-based parameters including yield curves, volatilities, credit ratings and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.

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Fair Value of the Convertible Senior Notes

The Notes’ fair value, inclusive of the conversion feature embedded in the Notes, was $364.1 million as of August 31, 2022. The fair value was determined based on the Notes’ quoted price in an over-the-counter market on the last trading day of the reporting period and classified within Level 1 in the fair value hierarchy. See Note 8: Debt for additional information.

The components of inventories were as follows (in thousands):

			August 31, 2022						November 30, 2021
Finished goods			$	1,773					$	1,631
Purchased parts and fabricated assemblies			2,867						1,920
Total			$	4,640					$	3,551

At August 31, 2022 and November 30, 2021, the inventories balances of $4.6 million and $3.6 million were recorded in other current assets on the condensed consolidated balance sheets.

Intangible Assets

Intangible assets are comprised of the following significant classes (in thousands):

 

			August 31, 2022																		November 30, 2021
			Gross Carrying Amount						Accumulated Amortization						Net Book Value						Gross Carrying Amount						Accumulated Amortization						Net Book Value
Purchased technology			$	212,700					$	(145,389)					$	67,311					$	212,700					$	(128,797)					$	83,903
Customer-related			306,308						(152,864)						153,444						306,308						(119,357)						186,951
Trademarks and trade names			37,611						(24,930)						12,681						37,611						(21,556)						16,055
Non-compete agreement			2,000						(2,000)						—						2,000						(1,724)						276
Total			$	558,619					$	(325,183)					$	233,436					$	558,619					$	(271,434)					$	287,185

In the three and nine months ended August 31, 2022, amortization expense related to intangible assets was $17.3 million and $51.9 million, respectively. In the three and nine months ended August 31, 2021, amortization expense related to intangible assets was $11.6 million and $33.6 million, respectively.

Future amortization expense for intangible assets as of August 31, 2022, is as follows (in thousands):

 

Remainder of 2022			$	17,177
2023			68,895
2024			56,079
2025			45,569
2026			35,968
Thereafter			9,748
Total			$	233,436

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Goodwill

Changes in the carrying amount of goodwill in the nine months ended August 31, 2022 are as follows (in thousands):

Balance, November 30, 2021			$	671,152
Measurement period adjustments			1,752
Translation adjustments			(3)
Balance, August 31, 2022			$	672,901

Kemp Acquisition

On November 1, 2021, we completed the acquisition of the parent company of Kemp Technologies, Inc. (“Kemp”), which is described in greater detail in our 2021 10-K. The acquisition was completed for a base purchase price of $258.0 million (subject to certain customary adjustments) in cash.

The acquisition consideration for Kemp has been preliminarily allocated to Kemp’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as we obtain additional information for those estimates during the measurement period (up to one year from the acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill.

We recorded measurement period adjustments based on our ongoing valuation and purchase price allocation procedures. We are still finalizing the valuation and purchase price allocation as it relates to the net working capital amount in the table below.

The allocation of the purchase price is as follows (in thousands):

			Initial Purchase Price Allocation						Measurement Period Adjustments						Adjusted Purchase Price Allocation						Life
Net working capital			$	27,075					$	(772)					$	26,303
Property, plant and equipment			803						(8)						795
Purchased technology			39,400						—						39,400						5 years
Trade name			7,200						—						7,200						5 years
Customer relationships			75,500						—						75,500						5 years
Other assets			170						27						197
Other noncurrent liabilities			(604)						(1,133)						(1,737)
Deferred taxes			(23,187)						—						(23,187)
Deferred revenue			(29,997)						—						(29,997)
Goodwill			179,521						1,752						181,273
Net assets acquired			$	275,881					$	(134)					$	275,747

The fair value of the intangible assets was estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition, technology obsolescence, and revenue growth projections. Based on the preliminary valuation, the acquired intangible assets are comprised of customer relationships of approximately $75.5 million, existing technology of approximately $39.4 million, and trade names of approximately $7.2 million.

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Tangible assets acquired and assumed liabilities were recorded at fair value. We determined the acquisition date deferred revenue balance based on our assessment of the individual contracts acquired. A significant portion of the deferred revenue is expected to be recognized in the 12 months following the acquisition.

We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $181.3 million of goodwill, which is not deductible for tax purposes.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) and certain acquisition restructuring and related charges are not included as a component of consideration transferred but are required to be expensed as incurred. During the three and nine months ended August 31, 2022, we incurred approximately $0.1 million and $0.9 million of acquisition-related costs, which are included in acquisition-related expenses on our consolidated statement of operations.

We determined that disclosing the amount of Kemp related earnings included in the consolidated statements of operations is impracticable, as certain operations of Kemp were integrated into the operations of the Company from the date of acquisition.

Pro Forma Information

The following pro forma financial information presents the combined results of operations of Progress and Kemp as if the acquisition had occurred on December 1, 2019, after giving effect to certain pro forma adjustments. The pro forma adjustments reflected herein include only those adjustments that are directly attributable to the Kemp acquisition and factually supportable. These pro forma adjustments include: (i) an increase in revenue from Kemp as a result of the application of Topic 606 to recognize and measure contract assets and contract liabilities in the business combination, (ii) a net increase in amortization expense to record amortization expense relating to the $122.1 million of acquired identifiable intangible assets, (iii) a decrease in interest expense to remove the interest expense associated with Kemp’s debt obligations, and (iv) the income tax effect of the adjustments made at the statutory tax rate of the U.S. (approximately 24.5%).

The pro forma financial information does not reflect any adjustments for anticipated expense savings resulting from the acquisition and is not necessarily indicative of the operating results that would have actually occurred had the transaction been consummated on December 1, 2019. These results are prepared in accordance with ASC 606.

(in thousands, except per share data)			Pro Forma Three Months Ended August 31, 2021
Revenue			$	163,735
Net income			$	30,420
Net income per basic share			$	0.70
Net income per diluted share			$	0.68

(in thousands, except per share data)			Pro Forma Nine Months Ended August 31, 2021
Revenue			$	438,372
Net income			$	59,883
Net income per basic share			$	1.36
Net income per diluted share			$	1.34

Chef Acquisition

On October 5, 2020, we completed the acquisition of Chef Software Inc. (“Chef”), which is described in greater detail in our 2021 10-K. The acquisition was completed for a base purchase price of $220.0 million (subject to certain customary adjustments) in cash. We funded the acquisition through a combination of existing cash resources and by drawing down $98.5 million from our then-existing revolving credit facility. Refer to Note 8: Debt for further information.

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The acquisition considerations for Chef has been allocated to Chef’s tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill.

We recorded measurement period adjustments in accordance with FASB’s guidance regarding business combinations in the third and fourth quarters of fiscal year 2021 based on our valuation and purchase price allocation procedures. The measurement period adjustments were completed during the fourth quarter of fiscal year 2021.

The allocation of the purchase price is as follows (in thousands):

			Initial Purchase Price Allocation						Measurement Period Adjustments						Final Purchase Price Allocation						Life
Net working capital			$	52,330					$	147					$	52,477
Property, plant and equipment			498						—						498
Purchased technology			38,300						—						38,300						5 years
Trade name			5,700						—						5,700						5 years
Customer relationships			97,300						—						97,300						7 years
Other assets			122						—						122
Other noncurrent liabilities			(841)						—						(841)
Lease liabilities, net			(1,810)						—						(1,810)
Deferred taxes			(7,817)						126						(7,691)
Deferred revenue			(12,525)						—						(12,525)
Goodwill			59,858						(273)						59,585
Net assets acquired			$	231,115					$	—					$	231,115

The fair value of the intangible assets was estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to value the acquisition, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted average cost of capital. The valuation assumptions take into consideration our estimates of customer attrition, technology obsolescence, and revenue growth projections.

Tangible assets acquired and assumed liabilities were recorded at fair value. The valuation of the assumed deferred revenue was based on our contractual commitment to provide post-contract customer support to Chef customers and future contractual performance obligations under existing hosting arrangements. The fair value of this assumed liability was based on the estimated cost plus a reasonable margin to fulfill these service obligations. A significant portion of the deferred revenue was expected to be recognized in the 12 months following the acquisition.

We recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. We believe that the investment value of the future enhancement of our product and solution offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $59.6 million of goodwill, which is not deductible for tax purposes.

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) and certain acquisition restructuring and related charges are not included as a component of consideration transferred but are required to be expensed as incurred. During the three and nine months ended August 31, 2022, we incurred approximately $0.1 million and $0.2 million of acquisition-related costs, which are included in acquisition-related expenses on our consolidated statement of operations.

The operations of Chef were included in our operating results beginning on the date of acquisition. We determined that disclosing the amount of Chef related earnings included in the consolidated statements of operations is impracticable, as certain operations of Chef were integrated into the operations of the Company from the date of acquisition.

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As of August 31, 2022, future maturities of the Company's long-term debt were as follows:

(In thousands)			2026 Notes						Revolving Credit Facility						Total
Remainder of 2022			$	—					$	1,719					$	1,719
2023			—						6,875						6,875
2024			—						13,750						13,750
2025			—						20,625						20,625
2026			—						20,625						20,625
2027			360,000						206,250						566,250
Total face value of long-term debt			360,000						269,844						629,844
Unamortized discount and issuance costs			(7,892)						(2,831)						(10,723)
Less current portion of long-term debt, net			—						(6,234)						(6,234)
Long-term debt			$	352,108					$	260,779					$	612,887

Notes Payable

Convertible Senior Notes and Capped Calls

In April 2021, the Company issued, in a private placement to certain initial purchasers in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act in transactions not involving any public offering, for resale by the initial purchasers to persons whom the initial purchasers believe are qualified institutional buyers pursuant to Rule144A under the Securities Act, the Notes with an aggregate principal amount of $325.0 million, due April 15, 2026, unless earlier repurchased, redeemed or converted. The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes, including acquisitions. There are no required principal payments prior to maturity. In addition, the Company also granted the initial purchasers of the Notes an option to purchase up to an additional $50.0 million aggregate principal amount of the Notes, for settlement within a 13-day period beginning on, and including, April 13, 2021, of which $35.0 million of additional Notes were purchased for total proceeds of $360.0 million. The Notes bear interest at an annual rate of 1%, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2021. The Company incurred approximately $10.8 million in issuance cost for the issuance of the Notes. During the nine months ended August 31, 2022, the Company did not enter into any new or amended Notes.

Conversion Rights

The Company will satisfy its conversion obligations by paying cash up to the aggregate principal amount of Notes to be converted, by issuing shares of its common stock or a combination of cash and shares of its common stock, at its election. The initial conversion rate is 17.4525 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of approximately $57.30 per share of common stock. The conversion rate will be adjusted upon the occurrence of certain events, including spin-offs, tender offers, exchange offers, make-whole fundamental change and certain stockholder distributions.

Repurchase Rights

On or after April 20, 2024, and on or before the 50th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes, subject to the partial redemption limitation, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price per share of the Company’s common stock exceeded 130% of the conversion price on; (i) each of at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice and (ii) the trading day immediately before the date the Company sends such notice. Pursuant to the partial redemption limitation, the Company may not elect to redeem less than all of the outstanding Notes unless at least $100.0 million aggregate principal amount of Notes are outstanding and not subject to redemption as of the time it sends the related redemption notice.

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If certain corporate events that constitute a “fundamental change” (as described below) occur at any time, holders may, subject to certain exceptions, require the Company to purchase their Notes in whole or in part for cash at a price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. A fundamental change relates to events such as business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock.

Capped Call Transactions

On April 8, 2021, in connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with one or more of the initial purchasers and/or their respective affiliates and/or other financial institutions. The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, approximately 6.3 million shares (representing the number of shares of common stock initially underlying the Notes) of the Company’s common stock. The Capped Call Transactions are generally expected to reduce potential dilution to our common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions will initially be $89.88 per share of common stock, which represents a premium of 100% over the last reported sale price of the common stock of $44.94 per share on April 8, 2021 and is subject to certain adjustments under the terms of the Capped Call Transactions. The cost of the purchased capped calls of $43.1 million was recorded as a reduction to additional paid-in-capital.

We elected to integrate the capped call options with the applicable Notes for federal income tax purposes pursuant to applicable U.S. Treasury Regulations. Accordingly, the $43.1 million gross cost of the purchased capped calls will be deductible for income tax purposes as original discount interest over the term of the Notes. We recorded deferred tax assets of $10.6 million with respect to the capped calls which represents the tax benefit of these deductions with an offsetting entry to additional paid-in capital.

Accounting for the Notes

In accounting for the transaction, prior to the adoption of ASU 2020-06 on December 1, 2021, the Notes were separated into liability and equity components.

•The conversion option of the Notes does not require bifurcation as an embedded derivative.

•The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, referred to as the debt discount, is amortized as interest expense over the Notes’ contractual term - at an effective interest rate of 5.7%.

•The equity component, which represents the difference between the gross proceeds and the initial liability component, was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The Company incurred issuance costs of $10.8 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components prior to the adoption of ASU 2020-06.

•Issuance costs attributable to the liability component of $8.9 million are recorded as an offset to the Notes’ principal balance. They are amortized as interest expense using the effective interest method over the contractual term of the Notes.

•Issuance costs attributable to the equity component of $1.9 million are recorded as an offset to the equity component in additional paid-in capital and are not amortized.

Upon adoption of ASU 2020-06 on December 1, 2021, the Company reversed the separation of the debt and equity components and accounted for the Notes wholly as debt. The Company also reversed the amortization of the debt discount that was due to the equity component, with a cumulative adjustment to retained earnings on the adoption date. Further, the Company reversed the allocation of the issuance costs to the equity component and accounted for the entire amount as debt issuance cost that will be amortized as interest expense over the remaining term at an effective interest rate of 1.63% with a cumulative adjustment to retained earnings on the adoption date.

Refer to Note 1, Basis of Presentation for further details on the impact of adoption.

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Interest expense related to the Notes:

			Three Months Ended												Nine Months Ended
(In thousands)			August 31, 2022						August 31, 2021						August 31, 2022						August 31, 2021
Contractual interest expense (1% coupon)			$	900					$	900					$	2,690					$	1,370
Amortization of debt discount and issuance costs			541						3,260						1,595						4,942
			$	1,441					$	4,160					$	4,285					$	6,312

After the adoption of ASU 2020-06, the effective interest rate for the Notes is 1.63%. Prior to adoption of ASU 2020-06, the effective interest rate for the Notes was 5.71%.

Credit Facility

On January 25, 2022, the Company entered into an amended and restated credit agreement (the "Credit Agreement"), which provides for a $275.0 million secured term loan and a $300.0 million secured revolving line of credit. The revolving credit facility may be increased, and new term loan commitments may be entered into, by up to an additional amount up to the sum of (A) the greater of (x) $260.0 million and (y) 100% of Consolidated EBITDA (as defined in the Credit Agreement) and (B) an unlimited additional amount subject to pro forma compliance with a Consolidated Senior Secured Net Leverage Ratio of no greater than 3.75 to 1.00 if the existing or additional lenders are willing to make such increased commitments. The revolving line of credit has sublimits for swing line loans up to $25.0 million and for the issuance of standby letters of credit in a face amount up to $25.0 million. This new credit facility replaces our prior secured credit facility dated April 30, 2019.

The amount of the term loan outstanding under our prior secured credit facility was incorporated into the amended and restated credit facility.

Interest rates for the Credit Agreement are determined by reference to a term benchmark rate or a base rate at our option and would range from 1.00% to 2.00% above the term benchmark rate or would range from 0.00% to 1.00% above the defined base rate for base rate borrowings, in each case based upon our leverage ratio. Additionally, we may borrow certain foreign currencies at rates set in the same range above the respective term benchmark rates for those currencies, based on our leverage ratio. We will incur a quarterly commitment fee on the undrawn portion of the revolving credit facility, ranging from 0.125% to 0.275% per annum, based upon our leverage ratio. At closing of the revolving credit facility, the applicable interest rate and commitment fee are at the third lowest rate in each range.

The Credit Agreement matures on the earlier of (i) January 25, 2027, and (ii) the date that is 181 days prior to the maturity date of our Notes subject to certain conditions as set forth in the Credit Agreement, including the repayment of the Notes, the refinancing of the Notes including a maturity date that is at least 181 days after January 25, 2027 and compliance with a liquidity test when all amounts outstanding will be due and payable in full. The revolving line of credit does not require amortization of principal. The outstanding balance of the term loan as of August 31, 2022 was $269.8 million, with $6.9 million due in the next 12 months. The term loan requires repayment of principal at the end of each fiscal quarter, beginning with the fiscal quarter ended February 28, 2022. The principal repayment amounts are in accordance with the following schedule: (i) eight payments of $1.7 million each, (ii) four payments of $3.4 million each, (iii) eight payments of $5.2 million each, and (iv) the last payment is of the remaining principal amount. Any amounts outstanding under the term loan thereafter would be due on the maturity date. The term loan may be prepaid before maturity in whole or in part at our option without penalty or premium. As of August 31, 2022, the carrying value of the term loan approximates the fair value, based on Level 2 inputs (observable market prices in less than active markets), as the interest rate is variable over the selected interest period and is similar to current rates at which we can borrow funds. The interest rate as of August 31, 2022 was 3.81%.

Costs incurred to obtain our long-term debt of $3.2 million, including $1.1 million of unamortized debt issuance costs related to the previous credit agreement, are recorded as debt issuance costs as a direct deduction from the carrying value of the long-term debt liability on our condensed consolidated balance sheets as of August 31, 2022. These costs are being amortized over the term of the Credit Agreement using the effective interest rate method. Amortization expense related to the debt issuance costs was $0.2 million and $0.1 million, for the three months ended August 31, 2022 and August 31, 2021, respectively. Amortization expense related to the debt issuance costs was $0.5 million and $0.4 million for the nine months ended August 31, 2022 and August 31, 2021, respectively. These amounts are recorded in interest expense on our condensed consolidated statements of operations.

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The Company has operating leases for administrative, product development, and sales and marketing facilities, vehicles, and equipment under various non-cancelable lease agreements. The Company’s leases have remaining lease terms ranging from 1 year to 8 years. The Company’s lease terms may include options to extend or terminate the lease where it is reasonably certain that the Company will exercise those options. The Company considers several economic factors when making the determination as to whether the Company will exercise options to extend or terminate the lease, including but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a particular lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Consideration in the contract is comprised of any fixed payments and variable payments that depend on an index or rate. Payments in the Company's operating lease arrangements primarily consist of base office rent. The Company makes variable payments on certain of its leases related to taxes, insurance, common area maintenance, and utilities, among other things.

The components of operating lease cost for the three and nine months ended August 31, 2022 were as follows (in thousands):

			Three Months Ended						Nine Months Ended
			August 31, 2022						August 31, 2022
Lease costs under long-term operating leases			$	1,760					$	5,344
Lease costs under short-term operating leases			19						50
Variable lease cost under short-term and long-term operating leases(1)			143						437
Total operating lease cost			$	1,922					$	5,831

(1) Lease costs that are not fixed at lease commencement.

The components of operations lease cost for the three and nine months ended August 31, 2021 were as follows (in thousands):

			Three Months Ended						Nine Months Ended
			August 31, 2021						August 31, 2021
Lease costs under long-term operating leases			$	1,991					$	6,135
Lease costs under short-term operating leases			3						22
Variable lease cost under short-term and long-term operating leases(1)			130						280
Operating lease right-of-use asset impairment			—						36
Total operating lease cost			$	2,124					$	6,473

(1) Lease costs that are not fixed at lease commencement.

The table below presents supplemental cash flow information related to leases during the nine months ended August 31, 2022 and August 31, 2021 (in thousands):

			Nine Months Ended
			August 31, 2022						August 31, 2021
Cash paid for leases			$	6,481					$	6,440
Right-of-use assets recognized for new leases and amendments (non-cash)			$	343					$	3,222

Weighted average remaining lease term in years and weighted average discount rate are as follows:

			August 31, 2022						November 30, 2021
Weighted average remaining lease term in years			3.54						4.15
Weighted average discount rate			2.7		%				2.6		%

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Future payments under non-cancellable leases are as follows (in thousands):

			August 31, 2022
Remainder of 2022			$	2,100
2023			7,823
2024			7,444
2025			4,867
2026			1,781
Thereafter			1,300
Total lease payments			25,315
Less imputed interest(1)			(1,210)
Present value of lease liabilities			$	24,105

(1) Lease liabilities are measured at the present value of the remaining lease payments using a discount rate determined at lease commencement unless the discount rate is updated as a result of a lease reassessment event.

Stock-based compensation expense reflects the fair value of stock-based awards, less the present value of expected dividends when applicable, measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using the current market price of the stock, the Black-Scholes option valuation model, or the Monte Carlo Simulation valuation model.

In 2020, 2021 and 2022, we granted performance-based restricted stock units that include two performance metrics under our Long-Term Incentive Plan ("LTIP") where the performance measurement period is three years. Vesting of the LTIP awards on the 2020 plan is based on the following: (i) 50% is based on our level of attainment of specified total stockholder return ("TSR") targets relative to the percentage appreciation of a specified index of companies for the respective three-year periods, and (ii) 50% is based on achievement of a three-year cumulative performance condition (operating income). For the 2021 and 2022 plan, the vesting terms were changed to the following: (i) 25% is based on our level of attainment of specified TSR targets relative to the percentage appreciation of a specified index of companies for the respective three-year periods, and (ii) 75% is based on achievement of a three-year cumulative operating income. In order to estimate the fair value of such awards, we used a Monte Carlo Simulation valuation model for the market condition portion of the award, and used the closing price of our common stock on the date of grant for the portion related to the performance condition.

The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. We recognize stock-based compensation expense related to options and restricted stock units on a straight-line basis over the service period of the award, which is generally 4 years for options and 3 years for restricted stock units. We recognize stock-based compensation expense related to our employee stock purchase plan using an accelerated attribution method.

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The following table provides the classification of stock-based compensation as reflected on our condensed consolidated statements of operations (in thousands): 

			Three Months Ended												Nine Months Ended
			August 31, 2022						August 31, 2021						August 31, 2022						August 31, 2021
Cost of maintenance and services			$	527					$	374					$	1,410					$	1,234
Sales and marketing			1,331						1,424						3,423						4,679
Product development			2,586						1,848						7,548						6,179
General and administrative			4,195						3,193						13,729						9,893
Total stock-based compensation			$	8,639					$	6,839					$	26,110					$	21,985

The following table summarizes the changes in accumulated balances of other comprehensive loss during the nine months ended August 31, 2022 (in thousands):

			Foreign Currency Translation Adjustment						Unrealized Losses on Investments						Unrealized (Losses) Gains on Hedging Activity						Accumulated Other Comprehensive Loss
Balance, December 1, 2021			$	(30,055)					$	(49)					$	(2,339)					$	(32,443)
Other comprehensive (loss) income before reclassifications, net of tax			(10,955)						(13)						4,882						(6,086)
Balance, August 31, 2022			$	(41,010)					$	(62)					$	2,543					$	(38,529)

The tax effect on accumulated unrealized losses and gains on investments and hedging activity was $0.9 million and $0.7 million as of August 31, 2022 and November 30, 2021, respectively.

Timing of Revenue Recognition

Our revenues are derived from licensing our products, and from related services, which consist of maintenance, hosting services, and consulting and education. Information relating to revenue from external customers by revenue type is as follows (in thousands):

 

			Three Months Ended												Nine Months Ended
(In thousands)			August 31, 2022						August 31, 2021						August 31, 2022						August 31, 2021
Performance obligations transferred at a point in time:
Software licenses			$	47,618					$	51,930					$	135,182					$	115,354
Performance obligations transferred over time:
Maintenance			91,043						82,875						272,337						239,921
Services			12,556						12,612						37,367						35,910
Total revenue			$	151,217					$	147,417					$	444,886					$	391,185

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Geographic Revenue

In the following table, revenue attributed to North America includes sales to customers in the U.S. and sales to certain multinational organizations. Revenue from EMEA, Latin America and the Asia Pacific region includes sales to customers in each region plus sales from the U.S. to distributors in these regions. Information relating to revenue from external customers from different geographical areas is as follows (in thousands):

 

			Three Months Ended												Nine Months Ended
(In thousands)			August 31, 2022						August 31, 2021						August 31, 2022						August 31, 2021
North America			$	84,826					$	93,880					$	248,313					$	236,479
EMEA			52,670						40,999						156,006						122,560
Latin America			4,577						5,298						13,138						12,544
Asia Pacific			9,144						7,240						27,429						19,602
Total revenue			$	151,217					$	147,417					$	444,886					$	391,185

No single customer, partner, or country outside of the U.S. has accounted for more than 10% of our total revenue for the three and nine months ended August 31, 2022 and August 31, 2021.

Contract Balances

Unbilled Receivables and Contract Assets

The timing of revenue recognition may differ from the timing of customer invoicing. When revenue is recognized prior to invoicing and the right to the amount due from customers is conditioned only on the passage of time, we record an unbilled receivable on our condensed consolidated balance sheets. Our multi-year term license arrangements, which are typically billed annually, result in revenue recognition in advance of invoicing and the recognition of unbilled receivables.

As of August 31, 2022, invoicing of our long-term unbilled receivables is expected to occur as follows (in thousands):

2023			$	4,246
2024			11,390
2025			7,137
2026			3,199
Total			$	25,972

Contract assets, which arise when revenue is recognized prior to invoicing and the right to the amount due from customers is conditioned on something other than the passage of time, such as the completion of a related performance obligation, were $2.4 million as of August 31, 2022 and $5.0 million as of November 30, 2021. These amounts are included in unbilled receivables or long-term unbilled receivables on our condensed consolidated balance sheets.

Deferred Revenue

Deferred revenue is recorded when revenue is recognized subsequent to customer invoicing. Our deferred revenue balance is primarily made up of deferred maintenance.

As of August 31, 2022, the changes in deferred revenue were as follows (in thousands):

Balance, December 1, 2021			$	252,380
Billings and other			443,627
Revenue recognized			(444,886)
Balance, August 31, 2022			$	251,121

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As

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of August 31, 2022, transaction price allocated to remaining performance obligations was $256 million. We expect to recognize approximately 78% of the revenue within the next year and the remainder thereafter.

Deferred Contract Costs

Certain of our sales incentive programs meet the requirements to be capitalized. Depending upon the sales incentive program and the related revenue arrangement, such capitalized costs are amortized over the longer of (i) the product life, which is generally three to five years; or (ii) the term of the related revenue contract. We determined that a three to five year product life represents the period of benefit that we receive from these incremental costs based on both qualitative and quantitative factors, which include customer contracts, industry norms, and product upgrades. Total deferred contract costs were $8.2 million and $7.9 million as of August 31, 2022 and November 30, 2021, respectively, and are included in other current assets and other assets on our condensed consolidated balance sheets. Amortization of deferred contract costs is included in sales and marketing expense on our condensed consolidated statement of operations and was minimal in all periods presented.

The following table provides a summary of activity for our restructuring actions, which are detailed further below (in thousands):

			Excess Facilities and Other Costs						Employee Severance and Related Benefits						Total
Balance, December 1, 2021			$	4,483					$	1,889					$	6,372
Costs incurred			319						465						784
Cash disbursements			(772)						(2,247)						(3,019)
Translation adjustments and other			—						(1)						(1)
Balance, August 31, 2022			$	4,030					$	106					$	4,136

During the fourth quarter of fiscal year 2021, we restructured our operations in connection with the acquisition of Kemp. Refer to Note 7: Business Combinations for further discussion. This restructuring resulted in a reduction in redundant positions, primarily within the administrative functions of Kemp.

For the three and nine months ended August 31, 2022, we incurred expenses of $0.1 million and $0.5 million, respectively, related to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations.

A summary of activity for this restructuring action is as follows (in thousands):

			Excess Facilities and Other Costs						Employee Severance and Related Benefits						Total
Balance, December 1, 2021			$	—					$	1,882					$	1,882
Costs incurred			—						465						465
Cash disbursements			—						(2,240)						(2,240)
Translation adjustments and other			—						(1)						(1)
Balance, August 31, 2022			$	—					$	106					$	106

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2022. Accordingly, the balance of the restructuring liability of $0.1 million is included in other accrued liabilities on the consolidated balance sheet at August 31, 2022.

We expect to incur additional expenses as part of this action related to employee costs during fiscal year 2022, but we do not expect these costs to be material.

During the fourth quarter of fiscal year 2020, we restructured our operations in connection with the acquisition of Chef. Refer to Note 7: Business Combinations for further discussion. This restructuring resulted in a reduction in redundant positions, primarily within administrative functions of Chef.

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For the three and nine months ended August 31, 2022, we incurred expenses of $0.2 million and $0.3 million, respectively, related to this restructuring. The expenses are recorded as restructuring expenses in the consolidated statements of operations.

A summary of activity for this restructuring action is as follows (in thousands):

			Excess Facilities and Other Costs						Employee Severance and Related Benefits						Total
Balance, December 1, 2021			$	4,483					$	7					$	4,490
Costs incurred			319						—						319
Cash disbursements			(772)						(7)						(779)
Balance, August 31, 2022			$	4,030					$	—					$	4,030

Cash disbursements for expenses incurred to date under this restructuring are expected to be made through fiscal year 2027. Accordingly, $1.0 million and $3.0 million of the total restructuring liability of $4.0 million is included in short-term and long-term lease liabilities, respectively, on the consolidated balance sheet at August 31, 2022. We do not expect to incur additional material expenses as part of this action.

Our income tax provision for the third quarter of fiscal years 2022 and 2021 reflects our estimate of the effective tax rates expected to be applicable for the full fiscal years, adjusted for any discrete events, which are recorded in the period in which they occur. The estimates are reevaluated each quarter based on our estimated tax expense for the full fiscal year.

Our effective tax rate was 21% in the third fiscal quarter of 2022, compared to 22% in the third fiscal quarter of 2021.There were no significant discrete tax items in the third fiscal quarter of either 2022 or 2021.

Our federal income tax returns have been examined or are closed by statute for all years prior to fiscal year 2018. Our state income tax returns have been examined or are closed by statute for all years prior to fiscal year 2017.

Tax authorities for certain non-U.S. jurisdictions are also examining returns. With some exceptions, we are generally not subject to tax examinations in non-U.S. jurisdictions for years prior to fiscal year 2016 because they are closed by statute.

We compute basic earnings per share using the weighted average number of common shares outstanding. We compute diluted earnings per share using the weighted average number of common shares outstanding plus the effect of outstanding dilutive stock options, restricted stock units and deferred stock units, using the treasury stock method. The following table sets forth the calculation of basic and diluted earnings per share on an interim basis (in thousands, except per share data):

			Three Months Ended												Nine Months Ended
			August 31, 2022						August 31, 2021						August 31, 2022						August 31, 2021
Net income			$	21,797					$	30,976					$	71,361					$	63,494
Weighted average shares outstanding			43,211						43,762						43,589						43,896
Basic earnings per common share			$	0.50					$	0.71					$	1.64					$	1.45
Diluted earnings per common share:
Net income			$	21,797					$	30,976					$	71,361					$	63,494
Weighted average shares outstanding			43,211						43,762						43,589						43,896
Effect of dilution from common stock equivalents			724						740						710						646
Diluted weighted average shares outstanding			43,935						44,502						44,299						44,542
Diluted earnings per share			$	0.50					$	0.70					$	1.61					$	1.43

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We excluded stock awards representing approximately 1,777,000 and 1,739,000 shares of common stock from the calculation of diluted earnings per share in the three and nine months ended August 31, 2022, respectively, as these awards were anti-dilutive. In the three and nine months ended August 31, 2021, we excluded stock awards representing 1,250,000 shares and 1,241,000 shares of common stock, respectively, from the calculation of diluted earnings per share as they were anti-dilutive.

As a result of our adoption of ASU 2020-06 on December 1, 2021, the dilutive impact of the Notes on our calculation of diluted earnings per share is considered using the if-converted method. However, because the principal amount of the Notes must be settled in cash, the dilutive impact of applying the if-converted method is limited to the in-the-money portion, if any, of the Notes. During the three and nine months ended August 31, 2022, we did not include the Notes in our diluted earnings per share calculation because the conversion feature in the Notes was out of the money. For periods prior to our December 1, 2021 adoption of ASU 2020-06, we applied the treasury stock method to account for the dilutive impact of the Notes for diluted earnings per share purposes.

Operating segments are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance. Our CODM is our Chief Executive Officer.

We operate as one operating segment: software products to develop, deploy, and manage high-impact business applications. Our CODM evaluates financial information on a consolidated basis. As we operate as one operating segment, the required financial segment information can be found in the condensed consolidated financial statements.

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