10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on February 3, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-39010
(Exact name of Registrant as specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (617 ) 530-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) |
Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||||||||
☒ | 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 registrant had 282,593,803 shares of common stock outstanding as of February 1, 2021.
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNATRACE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, 2020 | March 31, 2020 | ||||||||||
(unaudited) | |||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net | |||||||||||
Deferred commissions, current | |||||||||||
Prepaid expenses and other current assets | |||||||||||
Total current assets | |||||||||||
Property and equipment, net | |||||||||||
Operating lease right-of-use asset, net | — | ||||||||||
Goodwill | |||||||||||
Other intangible assets, net | |||||||||||
Deferred tax assets, net | |||||||||||
Deferred commissions, non-current | |||||||||||
Other assets | |||||||||||
Total assets | $ | $ | |||||||||
Liabilities and shareholders' equity | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | $ | |||||||||
Accrued expenses, current | |||||||||||
Deferred revenue, current | |||||||||||
Operating lease liabilities, current | — | ||||||||||
Total current liabilities | |||||||||||
Deferred revenue, non-current | |||||||||||
Accrued expenses, non-current | |||||||||||
Operating lease liabilities, non-current | — | ||||||||||
Long-term debt | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies (Note 10) | |||||||||||
Shareholders' equity: | |||||||||||
Common shares, $ |
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Additional paid-in capital | |||||||||||
Accumulated deficit | ( |
( |
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Accumulated other comprehensive loss | ( |
( |
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Total shareholders' equity | |||||||||||
Total liabilities and shareholders' equity | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited – In thousands, except per share data)
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Revenue: | |||||||||||||||||||||||
Subscription | $ | $ | $ | $ | |||||||||||||||||||
License | |||||||||||||||||||||||
Service | |||||||||||||||||||||||
Total revenue | |||||||||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||
Cost of subscription | |||||||||||||||||||||||
Cost of service | |||||||||||||||||||||||
Amortization of acquired technology | |||||||||||||||||||||||
Total cost of revenue | |||||||||||||||||||||||
Gross profit | |||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Research and development | |||||||||||||||||||||||
Sales and marketing | |||||||||||||||||||||||
General and administrative | |||||||||||||||||||||||
Amortization of other intangibles | |||||||||||||||||||||||
Restructuring and other | ( |
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Total operating expenses | |||||||||||||||||||||||
Income (loss) from operations | ( |
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Interest expense, net | ( |
( |
( |
( |
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Other income, net | |||||||||||||||||||||||
Income (loss) before income taxes | ( |
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Income tax (expense) benefit |
( |
( |
( |
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Net income (loss) | $ | $ | $ | $ | ( |
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Net income (loss) per share: | |||||||||||||||||||||||
Basic |
$ | $ | $ | $ | ( |
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Diluted |
$ | $ | $ | $ | ( |
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Weighted average shares outstanding: | |||||||||||||||||||||||
Basic |
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Diluted |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited - In thousands)
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Net income (loss) | $ | $ | $ | $ | ( |
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Other comprehensive (loss) income | |||||||||||||||||||||||
Foreign currency translation adjustment | ( |
( |
( |
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Change of ownership interest in subsidiary | |||||||||||||||||||||||
Total other comprehensive (loss) income | ( |
( |
( |
||||||||||||||||||||
Comprehensive income (loss) | $ | $ | ( |
$ | $ | ( |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY / MEMBER’S DEFICIT
(Unaudited - In thousands)
Three Months Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||
Common Shares | Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Shareholders' Equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance, September 30, 2020 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Foreign currency translation | ( |
( |
|||||||||||||||||||||||||||||||||
Restricted stock units vested | — | — | |||||||||||||||||||||||||||||||||
Restricted stock awards forfeited | ( |
— | — | ||||||||||||||||||||||||||||||||
Issuance of common stock related to employee stock purchase plan | — | ||||||||||||||||||||||||||||||||||
Exercise of stock options | — | ||||||||||||||||||||||||||||||||||
Share-based compensation | |||||||||||||||||||||||||||||||||||
Equity repurchases | ( |
( |
|||||||||||||||||||||||||||||||||
Net income | |||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | ( |
$ | ( |
$ |
Three Months Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||
Common Shares | Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Shareholders’ Equity |
|||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Foreign currency translation | ( |
( |
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Restricted stock units vested | — | — | |||||||||||||||||||||||||||||||||
Restricted stock awards forfeited | ( |
— | — | ||||||||||||||||||||||||||||||||
Share-based compensation | |||||||||||||||||||||||||||||||||||
Equity repurchases | ( |
( |
|||||||||||||||||||||||||||||||||
Net income | |||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | ( |
$ | ( |
$ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY / MEMBER’S DEFICIT
(Unaudited - In thousands)
Nine Months Ended December 31, 2020 | |||||||||||||||||||||||||||||||||||
Common Shares | Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Shareholders' Equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Foreign currency translation | ( |
( |
|||||||||||||||||||||||||||||||||
Restricted stock units vested | — | — | |||||||||||||||||||||||||||||||||
Restricted stock awards forfeited | ( |
— | — | ||||||||||||||||||||||||||||||||
Issuance of common stock related to employee stock purchase plan | — | ||||||||||||||||||||||||||||||||||
Exercise of stock options | — | ||||||||||||||||||||||||||||||||||
Share-based compensation | |||||||||||||||||||||||||||||||||||
Equity repurchases | ( |
( |
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Cumulative effects adjustment for adoption |
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Net income | |||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | ( |
$ | ( |
$ |
Nine Months Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||
Common Shares | Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Shareholders’ Equity /Member’s Deficit |
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Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | $ | $ | ( |
$ | ( |
$ | ( |
$ | ( |
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Foreign currency translation | |||||||||||||||||||||||||||||||||||
Reclassification of related party payable upon reorganization | |||||||||||||||||||||||||||||||||||
Issuance of common stock in connection with initial public offering, net of underwriters' discounts and commissions and issuance costs | |||||||||||||||||||||||||||||||||||
Effect of reorganization | |||||||||||||||||||||||||||||||||||
Contribution for taxes associated with reorganization | |||||||||||||||||||||||||||||||||||
Restricted stock units vested | — | — | |||||||||||||||||||||||||||||||||
Restricted stock awards forfeited | ( |
— | |||||||||||||||||||||||||||||||||
Share-based compensation | |||||||||||||||||||||||||||||||||||
Equity repurchases | ( |
( |
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Net loss | ( |
( |
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Balance, December 31, 2019 | $ | $ | $ | ( |
$ | ( |
$ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DYNATRACE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited – In thousands)
Nine Months Ended December 31, | |||||||||||
2020 | 2019 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | $ | ( |
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Adjustments to reconcile net income (loss) to cash provided by (used in) operations: |
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Depreciation |
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Amortization |
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Share-based compensation |
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Deferred income taxes |
( |
( |
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Other |
( |
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Net change in operating assets and liabilities: |
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Accounts receivable |
( |
( |
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Deferred commissions |
( |
( |
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Prepaid expenses and other assets |
( |
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Accounts payable and accrued expenses |
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Operating leases, net |
— | ||||||||||
Deferred revenue |
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Net cash provided by (used in) operating activities |
( |
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Cash flows from investing activities: | |||||||||||
Purchase of property and equipment |
( |
( |
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Capitalized software additions |
( |
( |
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Net cash used in investing activities |
( |
( |
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Cash flows from financing activities: | |||||||||||
Proceeds from initial public offering, net of underwriters' discounts and commissions |
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Settlement of deferred offering costs |
( |
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Repayment of term loans |
( |
( |
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Contribution for tax associated with reorganization | |||||||||||
Proceeds from employee stock purchase plan |
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Proceeds from exercise of stock options | |||||||||||
Equity repurchases |
( |
( |
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Installments related to acquisition |
( |
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Net cash (used in) provided by financing activities |
( |
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Effect of exchange rates on cash and cash equivalents | ( |
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Net increase in cash and cash equivalents | |||||||||||
Cash and cash equivalents, beginning of period | |||||||||||
Cash and cash equivalents, end of period | $ | $ | |||||||||
Supplemental cash flow data: | |||||||||||
Cash paid for interest | $ | $ | |||||||||
Cash (received from) paid for tax | $ | ( |
$ | ||||||||
Non-cash financing activities: | |||||||||||
Reclassification of related party payable upon reorganization | $ | $ | ( |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
DYNATRACE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of the Business
Business
Dynatrace, Inc. (“Dynatrace”, or the “Company”) offers a software intelligence platform, purpose-built for multicloud environments. The Company’s all-in-one intelligence platform is designed to address the growing complexity faced by technology and digital business teams as these enterprises further embrace the cloud to effect their digital transformation. The Company’s platform does so by utilizing artificial intelligence at its core and continuous automation to provide answers, not just data, about the performance of applications, the underlying hybrid cloud infrastructure, and the experience of its customers’ users. The Company designed its software intelligence platform to allow its customers to modernize and automate IT operations, develop and release high quality software faster, and improve user experiences for better business outcomes.
Thoma Bravo (“TB”), a private equity investment firm, completed its acquisition of Compuware Corporation on December 15, 2014. Following the acquisition, Compuware Corporation was restructured following which Compuware Parent, LLC became the owner of Dynatrace Holding Corporation (“DHC”), under which the Compuware and Dynatrace businesses were separated, establishing Dynatrace as a standalone business. Following the corporate reorganization described below, Dynatrace became wholly owned by Dynatrace, Inc. (formerly Dynatrace Holdings LLC).
Fiscal year
2. Significant Accounting Policies
Basis of presentation and consolidation
Prior to July 30, 2019, Dynatrace Holdings LLC, a Delaware limited liability company, was an indirect equity holder of DHC that indirectly and wholly owned Dynatrace, LLC. On July 31, 2019, Dynatrace Holdings LLC (i) converted into a Delaware corporation with the name Dynatrace, Inc. and (ii) through a series of corporate reorganization steps, became the parent company of DHC. Additionally, as part of the reorganization, two wholly owned subsidiaries of DHC, Compuware Corporation (“Compuware”) and SIGOS LLC (“SIGOS”), were spun out from the corporate structure to the DHC shareholders. As a result of these transactions, DHC is a wholly owned indirect subsidiary of Dynatrace, Inc. These reorganization steps are collectively referred to as the “reorganization.” In connection with the reorganization, the equity holders of Compuware Parent, LLC received 222,021,708 units of Dynatrace Holdings LLC in exchange for their equity interests in Compuware Parent, LLC based on the fair value of a unit of Dynatrace Holdings LLC on July 30, 2019, which was determined to be $16.00 per unit by a committee of the board of managers of Dynatrace Holdings LLC, and all of the outstanding units of Dynatrace Holdings LLC then converted into shares of Dynatrace, Inc. Additionally, 19,525,510 units of Dynatrace Holdings LLC were issued upon exchange of Dynatrace, LLC Management Incentive Units (“MIUs”) and Appreciation Units (“AUs”) for a total of 241,547,218 outstanding units in Dynatrace Holdings LLC immediately prior to the closing of the Company’s initial public offering (“IPO”).
The reorganization was completed between entities that have been under common control since December 15, 2014. Therefore, these condensed consolidated financial statements retroactively reflect DHC and Dynatrace, Inc. on a consolidated basis for the periods presented. The spin-offs of Compuware Corporation and SIGOS LLC from DHC have been accounted for retroactively as a change in reporting entity and accordingly, these condensed consolidated financial statements exclude their accounts and results.
8
Initial Public Offering
On August 1, 2019, the Company completed its initial public offering, in which it sold and issued 38,873,174 shares of common stock, inclusive of the underwriters’ option to purchase additional shares that was exercised in full, at an issue price of $16.00 per share. The Company received a total of $622.0 million in gross proceeds from the offering, or approximately $585.3 million in net proceeds after deducting approximately $36.7 million for underwriting discounts, commissions and offering-related expenses.
Prior to the closing of the IPO, the 241,547,218 outstanding units of Dynatrace Holdings LLC were converted on a one -for-one basis into shares of common stock in accordance with the terms of the certificate of incorporation.
Follow-on offerings by selling stockholders
On June 5, 2020, the Company completed a follow-on offering for the sale of 34,500,000 shares of common stock by selling stockholders, inclusive of the underwriters’ option to purchase additional shares that was exercised in full, at an offering price of $35.00 per share. The Company did not receive any proceeds from the sale of common stock by the selling stockholders.
On August 5, 2020, the Company completed a follow-on offering for the sale of 25,000,000 shares of common stock by selling stockholders at an offering price of $41.10 per share. The Company did not receive any proceeds from the sale of common stock by the selling stockholders.
Unaudited interim consolidated financial information
The accompanying interim condensed consolidated balance sheet as of December 31, 2020 and the interim condensed consolidated statements of operations, statements of comprehensive income (loss), and statements of shareholders’ equity / member’s deficit for the three and nine months ended December 31, 2020 and 2019, statements of cash flows for the nine months ended December 31, 2020 and 2019, and the related disclosures, are unaudited. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and includes all normal and recurring adjustments necessary for the fair presentation of the Company’s financial position as of December 31, 2020, its results of operations for the three and nine months ended December 31, 2020 and 2019, and its cash flows for the nine months ended December 31, 2020 and 2019 in accordance with U.S. GAAP. The results for the three and nine months ended December 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020 (“Annual Report”).
Use of estimates
The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management periodically evaluates such estimates and assumptions for continued reasonableness. In particular, the Company makes estimates with respect to the stand-alone selling price for each distinct performance obligation in customer contracts with multiple performance obligations, the uncollectible accounts receivable, the fair value of tangible and intangible assets acquired, valuation of long-lived assets, the period of benefit for deferred commissions and material rights, equity-based compensation expense, income taxes, and the determination of the incremental borrowing rate used for operating lease liabilities, among other things. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.
In March 2020, the World Health Organization declared the recent outbreak of the novel coronavirus disease, or COVID-19, a global pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and impact on the Company’s customers and its sales cycles, which are uncertain and cannot be predicted. As of the date of the condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments or a revision of the carrying value of the Company’s assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our condensed consolidated financial statements.
9
Significant accounting policies
The Company’s significant accounting policies are discussed in Note 2, “Significant Accounting Policies” in the Company’s Annual Report. There have been no changes to the Company’s significant accounting policies described in the Company’s Annual Report that have had a material impact on its condensed consolidated financial statements and related notes except for updates resulting from the adoption of Topic 842, as discussed below.
Leases
Leases arise from contractual obligations that convey the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At the inception of the contract, the Company determines if an arrangement contains a lease based on whether there is an identified asset and whether the Company controls the use of the identified asset. The Company also determines the classification of that lease, between financing and operating, at the lease commencement date. The Company accounts for and allocates consideration to the lease and non-lease components as a single lease component.
A right-of-use asset represents the Company's right to use an underlying asset and a lease liability represents the Company's obligation to make payments during the lease term. Right-of-use assets are recorded and recognized at commencement for the lease liability amount, adjusted for initial direct costs incurred and lease incentives received. Lease liabilities are recorded at the present value of the future lease payments over the lease term at commencement. The discount rate used to determine the present value is the incremental borrowing rate unless the interest rate implicit in the lease is readily determinable. As the implicit rate for the operating leases is generally not determinable, the Company uses an incremental borrowing rate as the discount rate at the lease commencement date to determine the present value of lease payments. The Company determines the discount rate of the leases by considering various factors, such as the credit rating, interest rates of similar debt instruments of entities with comparable credit ratings, jurisdictions, and the lease term.
The Company’s operating leases typically include non-lease components such as common-area maintenance costs, utilities, and other maintenance costs. The Company has elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments.
The Company's lease terms may include options to extend or terminate the lease. The Company generally uses the base, non-cancelable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that the Company will exercise those options. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company's right-of-use assets are included in “Operating lease right-of-use asset, net” and the current and non-current portions of the lease liabilities are included in “Operating lease liabilities, current” and “Operating lease liabilities, non-current,” respectively, on the condensed consolidated balance sheets. The Company does not record leases with terms of 12 months or less on the condensed consolidated balance sheets. Lease expense is recognized on a straight-line basis over the expected lease term.
Reclassification
Certain reclassifications of prior period amounts have been made in the Company’s condensed consolidated statements of cash flows to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The amendments supersede current lease requirements in Topic 840 which require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. This new guidance is effective for public companies for annual reporting periods beginning after December 15, 2018, and interim periods within those periods, except for certain emerging growth companies and smaller reporting companies who may elect to adopt the standard for annual reporting periods beginning after December 15, 2020.
The Company early adopted the new standard as of April 1, 2020 and recognized a cumulative-effect adjustment to the opening balance of accumulated deficit as of the adoption date. The Company elected the optional transition approach to not apply Topic 842 in the comparative periods presented. The Company elected the package of practical expedients to not 1) reassess whether any expired or existing contracts are considered or contain leases; (2) reassess the lease classification for any expired or existing leases; and (3) reassess the initial direct costs for any existing leases. The adoption of Topic 842 resulted in the recognition of total right-of-use assets of $50.6 million, total lease liabilities of $50.7 million, and a cumulative effect adjustment to accumulated deficit of $0.3 million as of the adoption date, with the most significant impact related to the office space leases. Additionally, the Company derecognized $3.3
10
million in deferred rent upon adoption of this standard which was offset against the right-of-use asset. The adoption of Topic 842 did not have a material impact to the consolidated statements of operations or consolidated statements of cash flows.
The Company has updated the accounting policies, systems, processes and internal controls, and have allocated internal and external resources to assist during the implementation efforts.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. ASU 2016-13 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, except for emerging growth companies who may elect to adopt the standard for annual reporting periods beginning after December 15, 2022. The Company expects to adopt the standard on a modified retrospective basis during the fourth quarter of fiscal 2021 and does not expect the standard to have a material effect on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset. ASU 2018-15 is effective for annual periods, and interim periods within those years, beginning after December 15, 2019, except for emerging growth companies who may elect to adopt the standard for annual reporting periods beginning after December 15, 2020, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company expects to adopt the standard on a prospective basis during the fourth quarter of fiscal 2021 and does not expect the standard to have a material effect on its condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 is effective for annual periods, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the effects the standard will have on its condensed consolidated financial statements.
3. Revenue Recognition
Disaggregation of revenue
The following table is a summary of the Company’s total revenues by geographic region (in thousands, except percentages):
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||||||||||||
North America | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
Europe, Middle East and Africa | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
Asia Pacific | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
Latin America | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
Total revenue | $ | $ | $ | $ |
For the three and nine months ended December 31, 2020 and 2019, the United States was the only country that represented more than 10% of the Company’s revenues in any period, constituting $94.2 million and 51 %, and $77.7 million and 54 % of total revenue during the three months ended December 31, 2020 and 2019, respectively, and $263.3 million and 52 %, and $218.1 million and 55 % of total revenue for the nine months ended December 31, 2020 and 2019, respectively.
Deferred revenue
Revenues recognized from amounts included in deferred revenue as of March 31, 2020 were $123.7 million and $407.0 million during the three and nine months ended December 31, 2020, respectively. Revenues recognized from amounts included in deferred revenue as of March 31, 2019 were $60.7 million and $235.0 million during the three and nine months ended December 31, 2019, respectively.
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Remaining performance obligations
As of December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,050.6 million, which consists of both billed consideration in the amount of $471.9 million and unbilled consideration in the amount of $578.7 million that the Company expects to recognize as subscription and service revenue. The Company expects to recognize 58 % of this amount as revenue over the next twelve months and the remainder thereafter.
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consists of the following (in thousands):
December 31, 2020 | March 31, 2020 | ||||||||||
Prepaid expenses | $ | $ | |||||||||
Income taxes refundable | |||||||||||
Other | |||||||||||
Prepaid expenses and other current assets | $ | $ |
5. Goodwill and Other Intangible Assets, Net
Changes in the carrying amount of goodwill on a consolidated basis for the nine months ended December 31, 2020 consists of the following (in thousands):
December 31, 2020 | |||||
Balance, beginning of period | $ | ||||
Foreign currency impact
|
|||||
Balance, end of period | $ |
Intangible assets, net excluding goodwill consists of the following (in thousands):
Weighted Average Useful Life (in months) |
|||||||||||||||||
December 31, 2020 | March 31, 2020 | ||||||||||||||||
Capitalized software | $ | $ | |||||||||||||||
Customer relationships | |||||||||||||||||
Trademarks and tradenames | |||||||||||||||||
Total intangible assets | |||||||||||||||||
Less: accumulated amortization | ( |
( |
|||||||||||||||
Total intangible assets, net | $ | $ |
6. Income Taxes
The Company computes its interim provision for income taxes by applying the estimated annual effective tax rate to income (loss) from operations and adjusts the provision for discrete tax items occurring in the period. The Company’s effective tax rate for the three months ended December 31, 2020 was 21 % compared to negative 8 % for the three months ended December 31, 2019. The Company’s effective tax rate for the nine months ended December 31, 2020 was 22 % compared to negative 112 % for the nine months ending December 31, 2019. The effective tax rate for both the three and nine months ended December 31, 2019 differed substantially from the U.S. statutory rate due to significant taxes on the Company’s reorganization transactions.
Based on the Company’s review of both positive and negative evidence regarding the realizability of deferred tax assets at December 31, 2020, a valuation allowance continues to be recorded against certain deferred tax assets based upon the conclusion that it was more likely than not that these assets would not be realized. The valuation allowance at December 31, 2020 relates primarily to share-based compensation, capitalized development costs, and foreign tax credits.
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Other Matters
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted. The Company previously reviewed the CARES Act in the U.S. and determined that there was no significant impact on the Company’s tax provision. The Company continues to analyze these legislative developments and believes they have not had a material impact on the Company’s provision for income taxes for the three and nine months ended December 31, 2020.
The Company files its Federal and state income tax returns related to its fiscal year ended March 31, 2020 during the quarter ended March 31, 2021. Given the number of estimates and the size of the original tax, it is possible that changes in these estimates could result in a reduction of the Company’s income tax for the returns filed during the quarter ended March 31, 2021.
7. Accrued Expenses
Accrued expenses, current consists of the following (in thousands):
December 31, 2020 | March 31, 2020 | ||||||||||
Accrued employee - related expenses | $ | $ | |||||||||
Accrued tax liabilities | |||||||||||
Accrued restructuring | |||||||||||
Accrued professional fees | |||||||||||
Income taxes payable | |||||||||||
Other | |||||||||||
Total accrued expenses, current | $ | $ |
8. Long-term Debt
Long-term debt consists of the following (in thousands, except percentages):
December 31, 2020 | March 31, 2020 | ||||||||||||||||||||||
Amount | Effective Rate | Amount | Effective Rate | ||||||||||||||||||||
First Lien Term Loan | $ | % | $ | % | |||||||||||||||||||
Revolving credit facility | |||||||||||||||||||||||
Total principal | |||||||||||||||||||||||
Unamortized discount and debt issuance costs | ( |
( |
|||||||||||||||||||||
Total debt | |||||||||||||||||||||||
Less: Current portion of long-term debt | |||||||||||||||||||||||
Long-term debt | $ | $ |
First lien credit facilities
The Company’s First Lien Credit Agreement, as amended, provides for a term loan facility, or the First Lien Term Loan, in an aggregate principal amount of $950.0 million and a senior secured revolving credit facility, or the Revolving Facility, in an aggregate amount of $60.0 million. The Revolving Facility includes a $25.0 million letter of credit sub-facility. The First Lien Term Loan and Revolving Facility mature on August 23, 2025 and August 23, 2023, respectively. As of December 31, 2020 and March 31, 2020, there were $15.8 million and $15.3 million letters of credit issued, respectively. The Company had $44.2 million and $44.7 million of availability under the Revolving Facility as of December 31, 2020 and March 31, 2020, respectively.
Borrowings under the First Lien Term Loan and the Revolving Facility currently bear interest, at the Company’s election, at either (i) the Alternative Base Rate, as defined per the credit agreement, plus 1.25 % per annum, or (ii) LIBOR plus 2.25 % per annum. The Company has satisfied all required principal payments under the First Lien Term Loan and the remainder is due at maturity. Interest payments are due quarterly, or more frequently, based on the terms of the credit agreement.
The Company incurs fees with respect to the Revolving Facility, including (i) a commitment fee of 0.25 % per annum of unused commitments under the Revolving Facility, (ii) facility fees equal to the applicable margin in effect for Eurodollar Rate Loans, as defined per the credit agreement, times the average daily stated amount of letters of credit, (iii) a fronting fee equal to either (a) 0.125 % per annum on the stated amount of each letter of credit or (b) such other rate per annum as agreed to by the parties subject to the letters of credit, and (iv) customary administrative fees.
All of the indebtedness under the First Lien Credit Agreement is and will be guaranteed by the Company’s existing and future material domestic subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors. The First Lien
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9. Leases
The Company leases office space under non-cancelable operating leases which expire at various dates from fiscal 2021 to 2032. As of December 31, 2020, the weighted average remaining lease term was 5.7 years and the weighted average discount rate was 7.6 %. The Company does not have any finance leases as of December 31, 2020.
The Company also has subleases of former offices which expire at various dates from fiscal 2021 to fiscal 2025. Sublease income from operating leases, which is recorded as a reduction of rental expense, was $1.0 million and $1.2 million for the three months ended December 31, 2020 and 2019, respectively, and $3.3 million and $3.4 million for the nine months ended December 31, 2020 and 2019, respectively.
The following table presents information about leases on the condensed consolidated statements of operations (in thousands):
Three Months Ended December 31, 2020 | Nine Months Ended December 31, 2020 | |||||||||||||
Operating lease expense (1)
|
$ | $ | ||||||||||||
Short-term lease expense | $ | $ | ||||||||||||
Variable lease expense | $ | $ |
_________________
(1) Presented gross of sublease income.
The following table presents supplemental cash flow information about the Company’s leases (in thousands):
Nine Months Ended December 31, 2020 | ||||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | |||||||
Operating lease assets obtained in exchange for new operating lease liabilities (1)
|
$ |
_________________
(1) Includes the impact of new leases as well as remeasurements and modifications of existing leases.
As of December 31, 2020, remaining maturities of lease liabilities were as follows (in thousands):
Fiscal Years Ending March 31, | Amount | |||||||
2021 | $ | |||||||
2022 | ||||||||
2023 | ||||||||
2024 | ||||||||
2025 | ||||||||
Thereafter | ||||||||
Total operating lease payments (1)
|
||||||||
Less: imputed interest | ( |
|||||||
Total operating lease liabilities | $ |
_________________
(1) Presented gross of sublease income.
As of December 31, 2020, the Company had commitments of $8.1 million for operating leases that have not yet commenced, and therefore are not included in the right-of-use assets or operating lease liabilities. These operating leases are expected to commence during the fiscal years ended March 31, 2021 and March 31, 2022, with lease terms ranging from 1 to 10 years.
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As previously disclosed in the Company’s Annual Report, and under previous lease accounting standard ASC 840, the aggregate future non-cancelable minimum rental payments on its operating leases, as of March 31, 2020, were as follows (in thousands):
Fiscal Years Ending March 31, | Amount | |||||||
2021 | $ | |||||||
2022 | ||||||||
2023 | ||||||||
2024 | ||||||||
2025 | ||||||||
Thereafter | ||||||||
Total future contractual payments (1)
|
$ |
_________________
(1) Presented gross of sublease income.
Under ASC 840, total rent expense under operating leases during the three and nine months ended December 31, 2019 were $3.5 million and $10.2 million, respectively.
10. Commitments and Contingencies
Legal matters
From time to time, the Company may be a party to lawsuits and legal proceedings arising in the ordinary course of business. In the opinion of the Company’s management, these matters, individually and in the aggregate, will not have a material adverse effect on the financial condition and results of the future operations of the Company.
11. Share-based Compensation
Management Incentive Unit Plan
Under the Management Incentive Unit Plan (the “MIU Plan”), Compuware Parent LLC’s board of managers had authorized the issuance of MIUs and AUs to certain executive officers and key employees. The MIUs and AUs consisted of two types of units which were classified as performance-vested units and time-vested units.
In connection with the reorganization transactions described in Note 2, outstanding awards granted under the MIU Plan were converted into shares of common stock, restricted stock, and restricted stock units which were granted under the 2019 Plan (as defined below). Upon conversion, the MIUs and AUs were modified and ceased to be classified as liability awards. This modification impacted 306 participants and resulted in the recognition of incremental share-based compensation expense of $145.3 million to record the liability awards at fair value immediately prior to the modification during the nine months ended December 31, 2019. Upon modification, the liability balance of $278.2 million related to these MIUs and AUs was reclassified into additional paid-in capital.
2019 Equity Incentive Plan
In July 2019, the Company’s board of directors (the “Board”), upon the recommendation of the compensation committee of the board of directors, adopted the 2019 Equity Incentive Plan, or the 2019 Plan, which was subsequently approved by the Company’s shareholders.
The Company initially reserved 52,000,000 shares of common stock, or the Initial Limit, for the issuance of awards under the 2019 Plan. The 2019 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each April 1, beginning on April 1, 2020, by 4 % of the outstanding number of shares of the Company’s common stock on the immediately preceding March 31 or such lesser number determined by the compensation committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Company’s capitalization. As of December 31, 2020, 29,969,596 shares of common stock were available for future issuance under the 2019 Plan.
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Stock options
The following table summarizes activity for stock options during the period ended December 31, 2020:
Number of Options |
Weighted Average
Exercise Price
|
Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
(in thousands) | (per share) | (years) | (in thousands) | ||||||||||||||||||||
Balance, March 31, 2020 | $ | $ | |||||||||||||||||||||
Granted | |||||||||||||||||||||||
Exercised | ( |
||||||||||||||||||||||
Forfeited | ( |
||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | |||||||||||||||||||||
Options vested and exercisable at December 31, 2020 | $ | $ |
As of December 31, 2020, the total unrecognized compensation expense related to non-vested stock options is $53.8 million and is expected to be recognized over a weighted average period of 2.9 years. The Company recognized $4.5 million and $2.7 million of share-based compensation expense related to stock options for the three months ended December 31, 2020 and 2019, respectively, and $12.3 million and $4.5 million of share-based compensation expense related to stock options for the nine months ended December 31, 2020 and 2019, respectively.
Restricted shares and units
During the first nine months of fiscal 2021, the Company granted an aggregate of 1,285,474 restricted stock units to certain key employees and non-employee directors. The total grants consisted of: (i) 1,250,474 time-based restricted stock units that vest 25 % one year after the grant date and the remaining 75 % vest ratably on a quarterly basis over 3 years and (ii) 35,000 time-based restricted shares that vest on August 25, 2021 or at the annual shareholder meeting, if earlier.
The following table provides a summary of the changes in the number of restricted shares for the period ended December 31, 2020:
Number of Shares of Restricted Stock Awards |
Weighted Average
Grant Date Fair Value
|
Number of Restricted Stock Units | Weighted Average Grant Date Fair Value |
||||||||||||||||||||
(in thousands) | (per share) | (in thousands) | (per share) | ||||||||||||||||||||
Balance, March 31, 2020 | $ | $ | |||||||||||||||||||||
Granted | |||||||||||||||||||||||
Vested | ( |
( |
|||||||||||||||||||||
Forfeited | ( |
( |
|||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | |||||||||||||||||||||
As of December 31, 2020, the total unrecognized compensation expense related to unvested restricted stock is $11.4 million and is expected to be recognized over a weighted average period of 1.3 years. As of December 31, 2020, the total unrecognized compensation expense related to unvested restricted stock units is $66.5 million and is expected to be recognized over a weighted average period of 2.8 years. The Company recognized $9.6 million and $10.6 million of share-based compensation expense related to restricted shares and units for the three months ended December 31, 2020 and 2019, respectively, and $28.3 million and $18.3 million of share-based compensation expense related to restricted shares and units for the nine months ended December 31, 2020 and 2019, respectively.
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Employee Stock Purchase Plan
In July 2019, the board of directors adopted, and the Company’s shareholders approved, the 2019 Employee Stock Purchase Plan (“ESPP”). The Company expects to offer, sell and issue shares of common stock under this ESPP from time to time based on various factors and conditions, although the Company is under no obligation to sell any shares under this ESPP. The ESPP provides for 85 % of the lesser of (1) the fair market value of the Company’s common stock on the offering date or (2) the fair market value of the Company’s common stock on the purchase date. For the nine months ended December 31, 2020, 330,738 shares of common stock were purchased under the ESPP. As of December 31, 2020, 8,727,792 shares of common stock were available for future issuance under the ESPP. -month offering periods beginning May 15 and November 15 of each year, and each offering period will consist of -month purchase periods. On each purchase date, eligible employees will purchase shares of the Company’s common stock at a price per share equal to
As of December 31, 2020, there was approximately $1.7 million of unrecognized share-based compensation related to the ESPP that is expected to be recognized over the remaining term of the current offering period. The Company recognized $1.5 million and $0.2 million of share-based compensation expense related to the ESPP for the three months ended December 31, 2020 and 2019, respectively, and $2.5 million and $0.2 million of share-based compensation expense related to the ESPP for the nine months ended December 31, 2020 and 2019, respectively.
Share-based compensation
The following table summarizes the components of total share-based compensation expense included in the condensed consolidated financial statements for each period presented (in thousands):
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
Research and development | |||||||||||||||||||||||
Sales and marketing | |||||||||||||||||||||||
General and administrative | |||||||||||||||||||||||
Total share-based compensation expense | $ | $ | $ | $ |
12. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing the net income (loss) for the period by the weighted-average number of common shares outstanding during the period, without consideration of potentially dilutive securities. Diluted net income (loss) per share includes the dilutive effect of common share equivalents and is calculated using the weighted-average number of common shares and the common share equivalents outstanding during the reporting period. An anti-dilutive impact is an increase in net income per share or a reduction in net loss per share resulting from the conversion, exercise, or contingent issuance of certain securities.
On August 1, 2019, the Company completed its IPO in which the Company issued and sold 38,873,174 shares of common stock at a price to the public of $16.00 per share. These shares are included in the common stock outstanding as of that date.
For the three and nine months ended December 31, 2019, basic and diluted net income (loss) per share have been retrospectively adjusted to reflect the conversion of equity in connection with the reorganization transactions described in Note 2. Basic and diluted net income (loss) per share was derived from a unit conversion factor of $16.00 per share as determined by the board of managers of Dynatrace Holdings LLC on July 30, 2019.
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The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||
2020 | 2019 |