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prgs-20220831

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 August 31, 2022


☐			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: 0-19417

PROGRESS SOFTWARE CORPORATION

(Exact name of registrant as specified in its charter)


Delaware						04-2746201
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

15 Wayside Road, Suite 400

Burlington, Massachusetts 01803

(Address of principal executive offices) (Zip code)

(781) 280-4000

(Registrant’s telephone number, including area code)

Not applicable

(Former name or former address, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	PRGS	The Nasdaq Stock Market LLC

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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of September 27, 2022, there were 42,998,323 shares of the registrant’s common stock, $.01 par value per share, outstanding.

PROGRESS SOFTWARE CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2022

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of August 31, 2022 and November 30, 2021	3
	Condensed Consolidated Statements of Operations for the three and nine months ended August 31, 2022 and 2021	4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended August 31, 2022 and 2021	5
	Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended August 31, 2022 and 2021	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended August 31, 2022 and 2021	8
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6.	Exhibits	45

	Signatures	46

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets


(In thousands, except share data)	August 31, 2022		November 30, 2021
Assets
Current assets:
Cash and cash equivalents	$	224,115	$	155,406
Short-term investments	749		1,967
Total cash, cash equivalents and short-term investments	224,864		157,373
Accounts receivable (less allowances of $1,150 and $634, respectively)	82,258		99,815
Unbilled receivables and contract assets	27,847		25,816
Other current assets	29,465		39,549
Assets held for sale	—		15,255
Total current assets	364,434		337,808
Long-term unbilled receivables and contract assets	25,972		17,464
Property and equipment, net	13,409		14,345
Intangible assets, net	233,436		287,185
Goodwill	672,901		671,152
Right-of-use lease assets	18,950		25,253
Deferred tax assets	5,735		1,415
Other assets	11,455		8,915
Total assets	$	1,346,292	$	1,363,537
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt, net	$	6,234	$	25,767
Accounts payable	7,717		9,683
Accrued compensation and related taxes	35,887		47,116
Dividends payable to stockholders	8,099		7,925
Short-term operating lease liabilities	7,443		7,926
Other accrued liabilities	16,878		19,491
Short-term deferred revenue	197,425		205,021
Total current liabilities	279,683		322,929
Long-term debt, net	260,779		239,992
Convertible senior notes, net	352,108		294,535
Long-term operating lease liabilities	16,662		23,130
Long-term deferred revenue	53,696		47,359
Deferred tax liabilities	5,712		14,163
Other noncurrent liabilities	10,679		8,940
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value; authorized, 10,000,000 shares; issued, none	—		—
Common stock, $0.01 par value, and additional paid-in capital; authorized, 200,000,000 shares; issued and outstanding, 42,998,323 shares in 2022 and 44,146,193 shares in 2021	430		441
Additional paid-in capital	318,559		354,235
Retained earnings	86,513		90,256
Accumulated other comprehensive loss	(38,529)		(32,443)
Total stockholders’ equity	366,973		412,489
Total liabilities and stockholders’ equity	$	1,346,292	$	1,363,537

See notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Operations


	Three Months Ended				Nine Months Ended
(In thousands, except per share data)	August 31, 2022		August 31, 2021		August 31, 2022		August 31, 2021
Revenue:
Software licenses	$	47,618	$	51,930	$	135,182	$	115,354
Maintenance and services	103,599		95,487		309,704		275,831
Total revenue	151,217		147,417		444,886		391,185
Costs of revenue:
Cost of software licenses	2,477		1,574		7,669		3,763
Cost of maintenance and services	15,761		14,895		46,707		42,887
Amortization of acquired intangibles	5,558		3,599		16,589		10,719
Total costs of revenue	23,796		20,068		70,965		57,369
Gross profit	127,421		127,349		373,921		333,816
Operating expenses:
Sales and marketing	34,595		29,737		100,768		88,468
Product development	28,650		25,616		85,966		76,579
General and administrative	20,141		16,451		56,339		46,335
Amortization of acquired intangibles	11,716		7,978		35,330		22,836
Restructuring expenses	130		40		784		1,133
Acquisition-related expenses	168		1,481		3,816		2,721
Gain on sale of assets held for sale	—		—		(10,770)		—
Total operating expenses	95,400		81,303		272,233		238,072
Income from operations	32,021		46,046		101,688		95,744
Other (expense) income:
Interest expense	(4,009)		(6,510)		(11,368)		(13,625)
Interest income and other, net	247		99		991		222
Foreign currency gain (loss), net	(577)		(128)		(832)		(1,006)
Total other expense, net	(4,339)		(6,539)		(11,209)		(14,409)
Income before income taxes	27,682		39,507		90,479		81,335
Provision for income taxes	5,885		8,531		19,118		17,841
Net income	$	21,797	$	30,976	$	71,361	$	63,494
Earnings per share:
Basic	$	0.50	$	0.71	$	1.64	$	1.45
Diluted	$	0.50	$	0.70	$	1.61	$	1.43
Weighted average shares outstanding:
Basic	43,211		43,762		43,589		43,896
Diluted	43,935		44,502		44,299		44,542

Cash dividends declared per common share	$	0.175	$	0.175	$	0.525	$	0.525

See notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Comprehensive Income


	Three Months Ended				Nine Months Ended
(In thousands)	August 31, 2022		August 31, 2021		August 31, 2022		August 31, 2021
Net income	$	21,797	$	30,976	$	71,361	$	63,494
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(7,632)		(2,179)		(10,955)		922
Unrealized gain on hedging activity, net of tax provision of $377 and $1,542 for the third quarter and first nine months of 2022, respectively and net of tax provision of $155 and $502 for the third quarter and first nine months of 2021, respectively	1,191		479		4,882		1,551
Unrealized loss on investments, net of tax of $0 and a tax benefit of $4 for the third quarter and first nine months of 2022 and net of tax benefit of $4 and $16 for the third quarter and first nine months of 2021, respectively	(1)		(15)		(13)		(54)
Total other comprehensive (loss) income, net of tax	(6,442)		(1,715)		(6,086)		2,419
Comprehensive income	$	15,355	$	29,261	$	65,275	$	65,913

See notes to unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Stockholders’ Equity


	Nine Months Ended August 31, 2022
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
(in thousands)	Number of Shares	Amount
Balance, December 1, 2021	44,146	$	441	$	354,235	$	90,256	$	(32,443)	$	412,489
Cumulative effect of adoption of ASU 2020-06	—	—		(47,456)		4,893		—		(42,563)
Issuance of stock under employee stock purchase plan	246	2		7,235		—		—		7,237
Exercise of stock options	78	1		2,878		—		—		2,879
Vesting of restricted stock units and release of deferred stock units	188	2		(2)		—		—		—
Withholding tax payments related to net issuance of RSUs	—	—		(5,405)		—		—		(5,405)
Stock-based compensation	—	—		26,110		—		—		26,110
Dividends declared	—	—		—		(23,525)		—		(23,525)
Treasury stock repurchases and retirements	(1,660)	(16)		(19,036)		(56,472)		—		(75,524)
Net income	—	—		—		71,361		—		71,361
Other comprehensive loss	—	—		—		—		(6,086)		(6,086)
Balance, August 31, 2022	42,998	$	430	$	318,559	$	86,513	$	(38,529)	$	366,973


	Three Months Ended August 31, 2022
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
(in thousands)	Number of Shares	Amount
Balance, June 1, 2022	43,454	$	435	$	309,913	$	93,885	$	(32,087)	$	372,146
Issuance of stock under employee stock purchase plan	68	—		2,024		—		—		2,024
Exercise of stock options	18	—		643		—		—		643
Stock-based compensation	—	—		8,639		—		—		8,639
Dividends declared	—	—		—		(7,783)		—		(7,783)
Treasury stock repurchases and retirements	(542)	(5)		(2,660)		(21,386)		—		(24,051)
Net income	—	—		—		21,797		—		21,797
Other comprehensive loss	—	—		—		—		(6,442)		(6,442)
Balance, August 31, 2022	42,998	$	430	$	318,559	$	86,513	$	(38,529)	$	366,973


	Nine Months Ended August 31, 2021
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
(in thousands)	Number of Shares	Amount
Balance, December 1, 2020	44,241	$	442	$	305,802	$	72,547	$	(32,778)	$	346,013
Issuance of stock under employee stock purchase plan	212	2		5,924		—		—		5,926
Exercise of stock options	87	1		2,840		—		—		2,841
Vesting of restricted stock units and release of deferred stock units	100	1		(1)		—		—		—
Withholding tax payments related to net issuance of RSUs	—	—		(2,398)		—		—		(2,398)
Stock-based compensation	—	—		21,985		—		—		21,985
Equity components of Notes, net of issuance costs and tax	—	—		47,456		—		—		47,456
Purchase of capped calls, net of tax	—	—		(32,507)		—		—		(32,507)
Dividends declared	—	—		—		(23,456)		—		(23,456)
Treasury stock repurchases and retirements	(797)	(8)		(5,862)		(29,130)		—		(35,000)
Net income	—	—		—		63,494		—		63,494
Other comprehensive income	—	—		—		—		2,419		2,419
Balance, August 31, 2021	43,843	$	438	$	343,239	$	83,455	$	(30,359)	$	396,773


	Three Months Ended August 31, 2021
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
(in thousands)	Number of Shares	Amount
Balance, June 1, 2021	43,745	$	437	$	333,627	$	60,301	$	(28,644)	$	365,721
Issuance of stock under employee stock purchase plan	67	1		1,885		—		—		1,886
Exercise of stock options	31	—		1,009		—		—		1,009
Withholding tax payments related to net issuance of RSUs	—	—		(25)		—		—		(25)
Stock-based compensation	—	—		6,839		—		—		6,839
Equity components of Notes, net of issuance costs and tax	—	—		(341)		—		—		(341)
Purchase of capped calls, net of tax	—	—		245		—		—		245
Dividends declared	—	—		—		(7,822)		—		(7,822)
Net income	—	—		—		30,976		—		30,976
Other comprehensive loss	—	—		—		—		(1,715)		(1,715)
Balance, August 31, 2021	43,843	$	438	$	343,239	$	83,455	$	(30,359)	$	396,773

Condensed Consolidated Statements of Cash Flows


	Nine Months Ended
(In thousands)	August 31, 2022		August 31, 2021
Cash flows from operating activities:
Net income	$	71,361	$	63,494
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	3,682		4,147
Amortization of acquired intangibles and other	52,545		33,988
Amortization of debt discount and issuance costs on Notes	1,595		4,942
Stock-based compensation	26,110		21,985
Non-cash lease expense	5,919		6,095
Gain on sale of assets held for sale	(10,770)		—
Deferred income taxes	(286)		(1,596)
Allowances for bad debt and sales credits	710		(370)
Changes in operating assets and liabilities:
Accounts receivable	2,858		(1,319)
Other assets	11,174		2,590
Inventories	(1,264)		—
Accounts payable and accrued liabilities	(10,055)		(5,994)
Lease liabilities	(6,481)		(6,440)
Income taxes payable	(748)		3,079
Deferred revenue	5,673		10,001
Net cash flows from operating activities	152,023		134,602
Cash flows from investing activities:
Sales and maturities of investments	1,200		4,150
Purchases of property and equipment	(3,086)		(2,741)
Proceeds from sale of long-lived assets, net	25,998		—
Decrease in escrow receivable and other	134		2,330
Net cash flows from investing activities	24,246		3,739
Cash flows (used in) from financing activities:
Proceeds from stock-based compensation plans	10,384		9,247
Payments for taxes related to net share settlements of equity awards	(5,405)		(2,398)
Repurchases of common stock	(75,524)		(35,000)
Proceeds from issuance of senior convertible notes, net of issuance costs of $9.9 million	—		350,100
Purchase of capped calls	—		(43,056)
Dividend payments to stockholders	(23,351)		(23,372)
Proceeds from the issuance of debt	7,474		—
Payment of principal on long-term debt	(5,154)		(111,669)
Payment of debt issuance costs	(1,957)		(904)
Net cash flows (used in) from financing activities	(93,533)		142,948
Effect of exchange rate changes on cash	(14,027)		616
Net increase in cash and cash equivalents	68,709		281,905
Cash and cash equivalents, beginning of period	155,406		97,990
Cash and cash equivalents, end of period	$	224,115	$	379,895

Condensed Consolidated Statements of Cash Flows, continued


	Nine Months Ended
	August 31, 2022		August 31, 2021
Supplemental disclosure:
Cash paid for income taxes, net of refunds of $920 in 2022 and $807 in 2021	$	8,954	$	9,920
Cash paid for interest	$	5,470	$	6,564
Non-cash investing and financing activities:
Total fair value of restricted stock awards, restricted stock units and deferred stock units on date vested	$	18,204	$	8,779
Dividends declared	$	8,099	$	7,988

See notes to unaudited condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

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.

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.

Note 2: Cash, Cash Equivalents and Investments

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

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.

Note 3: Derivative Instruments

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.

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)

Note 4: Fair Value Measurements

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.

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.

Note 5: Inventories

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.

Note 6: Intangible Assets and Goodwill

Intangible Assets

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