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Section 1: 10-Q (10-Q)

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Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017

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: 001-35198
Pandora Media, Inc.
(Exact name of registrant as specified in its charter)
Delaware
94-3352630
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2101 Webster Street, Suite 1650
Oakland, CA
94612
(Address of principal executive offices)
(Zip Code)
(510) 451-4100
(Registrant’s telephone number, including area code)

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 x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Emerging growth company o
 
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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
The number of shares of registrant’s common stock outstanding as of October 31, 2017 was: 248,782,017.

 

Table of Contents

Pandora Media, Inc.
 
FORM 10-Q Quarterly Report
 
Table of Contents
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements

Pandora Media, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts) (unaudited)
 
As of December 31,
2016
 
As of September 30,
2017
Assets
 
 
 
Current assets
 

 
 

Cash and cash equivalents
$
199,944

 
$
493,181

Short-term investments
37,109

 
6,249

Accounts receivable, net of allowance of $3,633 at December 31, 2016 and $5,854 at September 30, 2017
309,267

 
312,277

Prepaid content acquisition costs
46,310

 
80,152

Prepaid expenses and other current assets
33,191

 
20,294

Total current assets
625,821

 
912,153

Convertible promissory note receivable

 
34,132

Long-term investments
6,252

 

Property and equipment, net
124,088

 
117,700

Goodwill
306,691

 
71,243

Intangible assets, net
90,425

 
21,304

Other long-term assets
31,533

 
8,999

Total assets
$
1,184,810

 
$
1,165,531

Liabilities, redeemable convertible preferred stock and stockholders’ equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
15,224

 
$
8,444

Accrued liabilities
35,465

 
33,180

Accrued content acquisition costs
93,723

 
99,798

Accrued compensation
60,353

 
42,753

Deferred revenue
28,359

 
33,977

Other current liabilities
20,993

 

Total current liabilities
254,117

 
218,152

Long-term debt, net
342,247

 
267,396

Other long-term liabilities
34,187

 
27,068

Total liabilities
630,551

 
512,616

Redeemable convertible preferred stock: 480,000 shares issued and outstanding at September 30, 2017

 
483,588

Stockholders’ equity
 

 
 

Common stock: 235,162,757 shares issued and outstanding at December 31, 2016 and 248,681,713 at September 30, 2017
24

 
25

Additional paid-in capital
1,264,693

 
1,387,957

Accumulated deficit
(709,636
)
 
(1,217,283
)
Accumulated other comprehensive loss
(822
)
 
(1,372
)
Total stockholders’ equity
554,259

 
169,327

Total liabilities, redeemable convertible preferred stock and stockholders’ equity
$
1,184,810

 
$
1,165,531

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

3

Table of Contents

Pandora Media, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2017
 
2016
 
2017
Revenue
 
 
 
 
 
 
 
Advertising
$
273,716

 
$
275,741

 
$
759,150

 
$
777,253

Subscription and other
56,100

 
84,414

 
165,957

 
218,192

Ticketing service
22,085

 
18,484

 
67,121

 
76,032

Total revenue
351,901

 
378,639

 
992,228

 
1,071,477

Cost of revenue
 
 
 
 


 


Cost of revenue—Content acquisition costs
174,334

 
204,222

 
522,231

 
587,517

Cost of revenue—Other
25,896

 
27,287

 
72,197

 
80,259

Cost of revenue—Ticketing service
15,318

 
11,269

 
45,223

 
50,397

Total cost of revenue
215,548

 
242,778

 
639,651

 
718,173

Gross profit
136,353

 
135,861

 
352,577

 
353,304

Operating expenses
 
 
 
 


 


Product development
33,560

 
39,469

 
102,731

 
120,290

Sales and marketing
116,091

 
107,588

 
357,113

 
378,581

General and administrative
41,909

 
48,171

 
129,193

 
150,650

Goodwill impairment

 

 

 
131,997

Contract termination (benefit) fees

 
(423
)
 

 
23,044

Total operating expenses
191,560

 
194,805

 
589,037

 
804,562

Loss from operations
(55,207
)
 
(58,944
)
 
(236,460
)
 
(451,258
)
Interest expense
(6,494
)
 
(7,592
)
 
(18,916
)
 
(22,377
)
Other income, net
579

 
559

 
1,696

 
866

Total other expense, net
(5,915
)
 
(7,033
)
 
(17,220
)
 
(21,511
)
Loss before (provision for) benefit from income taxes
(61,122
)
 
(65,977
)
 
(253,680
)
 
(472,769
)
(Provision for) benefit from income taxes
(412
)
 
(266
)
 
711

 
(877
)
Net loss
(61,534
)
 
(66,243
)
 
(252,969
)
 
(473,646
)
Net loss available to common stockholders
$
(61,534
)

$
(84,562
)

$
(252,969
)

$
(506,493
)
Basic and diluted net loss per common share
$
(0.27
)
 
$
(0.34
)
 
$
(1.10
)
 
$
(2.10
)
Weighted-average basic and diluted common shares
232,139

 
245,810

 
229,524

 
241,579

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


4

Table of Contents

Pandora Media, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2017
 
2016
 
2017
Net loss
$
(61,534
)
 
$
(66,243
)
 
$
(252,969
)
 
$
(473,646
)
Change in foreign currency translation adjustment
(129
)
 
(729
)
 
(417
)
 
(600
)
Change in net unrealized loss on marketable securities
(45
)
 
8

 
348

 
50

Other comprehensive loss
(174
)
 
(721
)
 
(69
)
 
(550
)
Total comprehensive loss
$
(61,708
)
 
$
(66,964
)
 
$
(253,038
)
 
$
(474,196
)
 
The accompanying notes are an integral part of the condensed consolidated financial statements.


5

Table of Contents

Pandora Media, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands) (unaudited)
 
Nine months ended 
 September 30,
 
2016
 
2017
Operating activities
 

 
 

Net loss
$
(252,969
)
 
$
(473,646
)
Adjustments to reconcile net loss to net cash used in operating activities
 

 
 

Goodwill impairment

 
131,997

Loss on sales of subsidiaries

 
9,459

Depreciation and amortization
43,480

 
49,121

Stock-based compensation
103,841

 
98,327

Amortization of premium on investments, net
339

 
78

Accretion of discount on convertible promissory note receivable

 
(171
)
Other operating activities
269

 
290

Amortization of debt discount
13,587

 
14,934

Interest income

 
(258
)
Provision for bad debt
2,615

 
10,851

Changes in operating assets and liabilities
 

 
 
Accounts receivable
(8,338
)
 
(11,294
)
Prepaid content acquisition costs
(100,524
)
 
(33,842
)
Prepaid expenses and other assets
(12,655
)
 
(17,955
)
Accounts payable, accrued and other current liabilities
(4,990
)
 
(257
)
Accrued content acquisition costs
8,875

 
6,063

Accrued compensation
10,370

 
(12,646
)
Other long-term liabilities
598

 
(532
)
Deferred revenue
12,032

 
5,618

Reimbursement of cost of leasehold improvements
4,397

 
5,236

Net cash used in operating activities
(179,073
)
 
(218,627
)
Investing activities
 

 
 

Purchases of property and equipment
(46,400
)
 
(12,861
)
Internal-use software costs
(22,339
)
 
(13,948
)
Changes in restricted cash
(250
)
 
(642
)
Purchases of investments
(12,413
)
 

Proceeds from maturities of investments
34,816

 
37,084

Proceeds from sales of investments
3,507

 

Proceeds from sales of subsidiaries, net of cash

 
125,430

Payments related to acquisitions, net of cash acquired
(676
)
 

Net cash (used in) provided by investing activities
(43,755
)
 
135,063

Financing activities
 
 
 
Proceeds from issuance of redeemable convertible preferred stock

 
480,000

Payments of issuance costs
(32
)
 
(29,284
)
Repayment of debt arrangements

 
(90,000
)
Borrowings under debt arrangements
90,000

 

Proceeds from employee stock purchase plan
6,395

 
8,012

Proceeds from exercise of stock options
3,011

 
7,836

Tax payments from net share settlements of restricted stock units
(3,126
)
 

Net cash provided by financing activities
96,248

 
376,564

Effect of exchange rate changes on cash and cash equivalents
(392
)
 
237

Net (decrease) increase in cash and cash equivalents
(126,972
)
 
293,237

Cash and cash equivalents at beginning of period
334,667

 
199,944

Cash and cash equivalents at end of period
$
207,695

 
$
493,181

Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for interest
$
3,336

 
$
5,791

Purchases of property and equipment recorded in accounts payable and accrued liabilities
$
8,321

 
$
2,294

Accretion of preferred stock issuance costs
$

 
$
29,259

Stock dividend payable to preferred stockholders
$

 
$
3,588

Fair value of convertible promissory note receivable received as partial consideration for sale of subsidiary
$

 
$
36,203

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

6

Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements
(unaudited)


1.                       Description of Business and Basis of Presentation
 
Pandora—Internet Radio and On-Demand Music Services

Pandora is the world’s most powerful music discovery platform, offering a personalized experience for each of our listeners wherever and whenever they want to listen to music—whether through earbuds, car speakers or live on stage. Pandora is available as an ad-supported service, a radio subscription service called Pandora Plus and an on-demand subscription service called Pandora Premium. The majority of our listener hours occur on mobile devices, with the majority of our revenue generated from advertising on our ad-supported service on these devices. We offer both local and national advertisers the opportunity to deliver targeted messages to our listeners using a combination of audio, display and video advertisements. We also generate revenue from subscriptions to Pandora Plus and Pandora Premium. We were incorporated as a California corporation in January 2000 and reincorporated as a Delaware corporation in December 2010. Our principal operations are located in the United States and the United Kingdom.

Ticketing Service

We completed the sale of Ticketfly on September 1, 2017. Prior to the date of disposition, we operated our ticketing service through our former subsidiary Ticketfly, a leading live events technology company that provides ticketing and marketing software and services for clients, which are venues and event promoters across North America. Ticketfly's ticketing, digital marketing and analytics software helps promoters book talent, sell tickets and drive in-venue revenue, while Ticketfly's consumer tools help fans find and purchase tickets to events. Ticketfly’s revenue primarily consists of service and merchant processing fees from ticketing operations.

Refer to Note 6 "Dispositions" in the Notes to Condensed Consolidated Financial Statements for further details on the Ticketfly disposition.

As used herein, "Pandora," "we," "our," "the Company" and similar terms include Pandora Media, Inc. and its subsidiaries, unless the context indicates otherwise.
 
Basis of Presentation
 
The interim unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP") along with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission ("SEC") Regulation S-X, and include the accounts of Pandora and our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of our management, the interim unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our financial position for the periods presented. These interim unaudited condensed consolidated financial statements are not necessarily indicative of the results expected for the full fiscal year or for any subsequent period and should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.
 
Certain changes in presentation have been made to conform the prior period presentation to current period reporting. We have reclassified amortization of internal use-software costs from the product development and sales and marketing line items to the cost of revenue—other and general and administrative line items of our condensed consolidated statements of operations. We have also reclassified bad debt and goodwill impairment from the other operating activities line item to the bad debt and goodwill impairment line items of the condensed consolidated statements of cash flows.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Estimates are used in several areas including, but not limited to determining accrued content acquisition costs, amortization of minimum guarantees under content acquisition agreements, selling prices for elements sold in multiple-element arrangements, the allowance for doubtful accounts, the fair value of stock options, market stock units ("MSUs"), stock-settled performance-ba

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Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements
(unaudited)

sed restricted stock units ("PSUs"), the Employee Stock Purchase Plan ("ESPP"), the benefit from (provision for) income taxes, the fair value of the convertible subordinated promissory note ("Convertible Promissory Note"), the fair value of acquired property and equipment, intangible assets and goodwill and the useful lives of acquired intangible assets. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements could be affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result.
 
2.                        Summary of Significant Accounting Policies
 
Other than discussed below, there have been no material changes to our significant accounting policies as compared to those described in our Annual Report on Form 10-K for the year ended December 31, 2016.

Stock-Based Compensation—Restricted Stock Units and Stock Options

Stock-based awards granted to employees, including grants of restricted stock units ("RSUs") and stock options, are recognized as expense in our statements of operations based on their grant date fair value. We recognize stock-based compensation expense on a straight-line basis over the service period of the award, which is generally three to four years. We estimate the fair value of RSUs at our stock price on the grant date. We generally estimate the grant date fair value of stock options using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model is affected by our stock price on the date of grant, the expected stock price volatility over the expected term of the award, which is based on projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award and expected dividends.

Stock-based compensation expense is recorded in the statement of operations for only those stock-based awards that will vest. In the first quarter of 2017 we adopted new accounting guidance from the Financial Accounting Standards Board ("FASB") on stock compensation, or ASU 2016-09, as described in "Recently Adopted Accounting Standards" below and have elected to account for forfeitures as they occur, rather than estimating expected forfeitures. In addition, we recognize all income tax effects of awards in the income statement when the awards vest or are settled as required by ASU 2016-09.

Net Loss per Common Share

Basic net loss per common share is computed by dividing the net loss available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per common share is computed by giving effect to all potential shares of common stock, including stock options, restricted stock units, market stock units, performance-based RSUs, potential ESPP shares and instruments convertible into common stock, to the extent dilutive. Basic and diluted net loss per common share were the same for each period presented as the inclusion of all potential common shares outstanding would have been anti-dilutive.

Concentration of Credit Risk
 
For the three and nine months ended September 30, 2016 and 2017, we had no customers that accounted for more than 10% of our total revenue. As of December 31, 2016 and September 30, 2017, we had no customers that accounted for more than 10% of our total accounts receivable.
 
Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which amends the existing accounting standards for revenue recognition. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue. Under the guidance, revenue is recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard is effective for public entities with annual and interim reporting periods beginning after December 15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the guidance. We expect to adopt ASU 2014-09 as of January 1, 2018 using the modified retrospective method. We have completed our initial assessment and do not believe there will be a material impact to our condensed consolidated financial statements for the majority of our advertising and subscription revenue arrangements. We are finalizing the impact of ASU 2014-09 and are continuing to evaluate the expected impact on our business processes,

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Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


systems and controls. We expect to complete our assessment of the effects of adopting ASU 2014-09 during the fourth quarter of 2017, and we will continue our evaluation of ASU 2014-09, including how it may impact new arrangements we enter into as well as new or emerging interpretations of the standard, through the date of adoption.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires lessees to put most leases on their balance sheets and recognize expenses on their income statements and also eliminates the real estate-specific provisions for all entities. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have completed our initial assessment and expect to adopt ASU 2016-02 as of January 1, 2019 using the modified retrospective method. We expect the potential impact of adopting ASU 2016-02 to be material to our lease liabilities and assets on our consolidated balance sheets.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Credit Losses—Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 will replace today’s incurred loss approach with an expected loss model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within that fiscal year, although early adoption is permitted. We are currently evaluating the impact that this standard update will have on our condensed consolidated financial statements.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective prospectively for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. We do not expect the adoption of ASU 2017-09 will have a material impact on our financial statements.

Recently Adopted Accounting Standards

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718) ("ASU 2016-09"). ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. Additionally, it allows an employer to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. We adopted this guidance in the first quarter of 2017 using the modified retrospective transition method. Upon adoption, we recognized the previously unrecognized excess tax benefits as of January 1, 2017 through retained earnings. The previously unrecognized excess tax benefits were recorded as a deferred tax asset, which was fully offset by a valuation allowance. As a result, the net impact resulted in no effect on net deferred tax assets or our accumulated deficit as of January 1, 2017. Without the valuation allowance, the Company’s net deferred tax assets would have increased by approximately $142.0 million. Additionally, we elected to account for forfeitures as they occur, rather than estimating expected forfeitures. The net cumulative effect of this change was an increase to additional paid in capital as of January 1, 2017 of $1.2 million.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminated the requirement to calculate the implied fair value of goodwill, which is step two of the previous goodwill impairment test, to measure a goodwill impairment charge. By eliminating step two of the goodwill impairment test, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value. The guidance is effective for calendar-year public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, although early adoption is permitted for annual and interim goodwill impairment testing dates following January 1, 2017. We have elected to early adopt this guidance beginning in the second quarter of 2017 using the prospective method, as we believe the elimination of step two of the goodwill impairment test will make testing for goodwill impairment less costly.

3.                        Cash, Cash Equivalents and Investments
 
Cash, cash equivalents and investments consisted of the following:
 

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Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


 
As of 
 December 31, 
 2016
 
As of 
 September 30, 
 2017
 
(in thousands)
Cash and cash equivalents
 

 
 
Cash
$
144,192

 
$
405,677

Money market funds
55,752

 
87,504

Total cash and cash equivalents
$
199,944

 
$
493,181

Short-term investments
 

 
 

Corporate debt securities
$
37,109

 
$
6,249

Total short-term investments
$
37,109

 
$
6,249

Long-term investments
 

 
 

Corporate debt securities
$
6,252

 
$

Total long-term investments
$
6,252

 
$

Cash, cash equivalents and investments
$
243,305

 
$
499,430


 
Our short-term investments have maturities of twelve months or less and are classified as available-for-sale. Our long-term investments have maturities of greater than twelve months and are classified as available-for-sale.

The following tables summarize our available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category as of December 31, 2016 and September 30, 2017.
 
 
As of December 31, 2016
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in thousands)
Money market funds
$
55,752

 
$

 
$

 
$
55,752

Corporate debt securities
43,413

 
3

 
(55
)
 
43,361

Total cash equivalents and marketable securities
$
99,165

 
$
3

 
$
(55
)
 
$
99,113


 
As of September 30, 2017
 
Adjusted
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(in thousands)
Money market funds
$
87,504

 
$

 
$

 
$
87,504

Corporate debt securities
6,251

 

 
(2
)
 
6,249

Total cash equivalents and marketable securities
$
93,755

 
$

 
$
(2
)
 
$
93,753


 
The following table presents available-for-sale securities by contractual maturity date as of December 31, 2016 and September 30, 2017.
 
 
As of December 31, 2016
 
Adjusted
Cost
 
Fair Value
 
(in thousands)
Due in one year or less
$
92,914

 
$
92,861

Due after one year through three years
6,251

 
6,252

Total
$
99,165

 
$
99,113


10

Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


 
As of September 30, 2017
 
Adjusted
Cost
 
Fair Value
 
(in thousands)
Due in one year or less
$
93,755

 
$
93,753

Total
$
93,755

 
$
93,753


 
The following tables summarize our available-for-sale securities’ fair value and gross unrealized losses aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of December 31, 2016 and September 30, 2017.

 
As of December 31, 2016
 
Twelve Months or Less
 
More than Twelve Months
 
Total
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
 
(in thousands)
Corporate debt securities
$
34,257

 
$
(52
)
 
$
4,099

 
$
(3
)
 
$
38,356

 
$
(55
)
Total
$
34,257

 
$
(52
)
 
$
4,099

 
$
(3
)
 
$
38,356

 
$
(55
)

 
As of September 30, 2017
 
Twelve Months or Less
 
More than Twelve Months
 
Total
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
 
(in thousands)
Corporate debt securities
$
6,249

 
$
(2
)
 
$

 
$

 
$
6,249

 
$
(2
)
Total
$
6,249

 
$
(2
)
 
$

 
$

 
$
6,249

 
$
(2
)


Our investment policy requires investments to be investment grade, primarily rated "A1" by Standard & Poor’s or "P1" by Moody’s or better for short-term investments and rated "A" by Standard & Poor’s or "A2" by Moody’s or better for long-term investments, with the objective of minimizing the potential risk of principal loss. In addition, the investment policy limits the amount of credit exposure to any one issuer.
 
The unrealized losses on our available-for-sale securities as of September 30, 2017 were primarily a result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. As of September 30, 2017, we owned three securities that were in an unrealized loss position. Based on our cash flow needs, we may be required to sell a portion of these securities prior to maturity. However, we expect to recover the full carrying value of these securities. As a result, no portion of the unrealized losses at September 30, 2017 is deemed to be other-than-temporary, and the unrealized losses are not deemed to be credit losses. When evaluating investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the three and nine months ended September 30, 2017, we did not recognize any impairment charges.

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Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


4.                        Fair Value
 
We record cash equivalents and investments at fair value. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are required to be disclosed by level within the following fair value hierarchy:
 
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
Level 3 — Inputs lack observable market data to corroborate management’s estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
 
When determining fair value, whenever possible we use observable market data and rely on unobservable inputs only when observable market data is not available.
 
The following fair value hierarchy tables categorize information regarding our financial assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and September 30, 2017:
 
 
As of December 31, 2016
 
Fair Value Measurement Using
 
Quoted Prices in Active Markets
for Identical
Instruments
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Total
 
(in thousands)
Assets
 

 
 

 
 

Corporate debt securities
$

 
$
43,361

 
$
43,361

Total assets measured at fair value
$

 
$
43,361

 
$
43,361


 
As of September 30, 2017
 
Fair Value Measurement Using
 
Quoted Prices in Active Markets
for Identical
Instruments
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Total
 
(in thousands)
Assets
 

 
 

 
 

Corporate debt securities
$

 
$
6,249

 
$
6,249

Total assets measured at fair value
$

 
$
6,249

 
$
6,249


 
Our cash equivalents and short-term investments are classified as Level 2 within the fair value hierarchy because they are valued using professional pricing sources for identical or comparable instruments, rather than direct observations of quoted prices in active markets.

As of December 31, 2016 and September 30, 2017, we held no Level 3 assets or liabilities measured on a recurring basis. The fair value of our Convertible Promissory Note was calculated on a nonrecurring basis as of September 1, 2017 and i

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Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


s classified as a Level 3 measurement within the fair value hierarchy. Refer to Note 8 "Convertible Promissory Note Receivable" in the Notes to Condensed Consolidated Financial Statements for further details on the Convertible Promissory Note.

Our money market funds are no longer classified within the fair value hierarchy, as the fair values are measured at net asset value using the practical expedient. As of December 31, 2016 and September 30, 2017, the fair values of our money market funds were $55.8 million and $87.5 million.

Refer to Note 9, "Debt Instruments," in the Notes to Condensed Consolidated Financial Statements for the carrying amount and estimated fair value of our convertible senior notes, which are not recorded at fair value as of September 30, 2017.

5.                       Commitments and Contingencies

Minimum Guarantees and Other Provisions—Content Acquisition Costs

Certain of our content acquisition agreements contain minimum guarantees, and require that we make upfront minimum guarantee payments. During the three and nine months ended September 30, 2017, we prepaid $111.5 million and $257.3 million in content acquisition costs related to minimum guarantees, which were offset by amortization of prepaid content acquisition costs of $31.3 million and $177.2 million. As of September 30, 2017, we have future minimum guarantee commitments of $472.5 million, of which $65.0 million will be paid in 2017 and the remainder will be paid thereafter. On a quarterly basis, we record the greater of the cumulative actual content acquisition costs incurred or the cumulative minimum guarantee based on forecasted usage for the minimum guarantee period. The minimum guarantee period is the period of time that the minimum guarantee relates to, as specified in each agreement, which may be annual or a longer period. The cumulative minimum guarantee, based on forecasted usage considers factors such as listening hours, revenue, subscribers and other terms of each agreement that impact our expected attainment or recoupment of the minimum guarantees based on the relative attribution method.

Several of our content acquisition agreements also include provisions related to the royalty payments and structures of those agreements relative to other content licensing arrangements, which, if triggered, could cause our payments under those agreements to escalate. In addition, record labels, publishers and PROs with whom we have entered into direct license agreements have the right to audit our content acquisition payments, and any such audit could result in disputes over whether we have paid the proper content acquisition costs. However, as of September 30, 2017, we do not believe it is probable that these provisions of our agreements discussed above will, individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations or cash flows.

Legal Proceedings
 
We have been in the past, and continue to be, a party to various legal proceedings, which have consumed, and may continue to consume, financial and managerial resources. We record a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Our management periodically evaluates developments that could affect the amount, if any, of liability that we have previously accrued and make adjustments as appropriate. Determining both the likelihood and the estimated amount of a loss requires significant judgment, and management’s judgment may be incorrect. We do not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on our business, financial position, results of operations or cash flows.

Pre-1972 copyright litigation

On October 2, 2014, Flo & Eddie Inc. filed a class action suit against Pandora Media Inc. in the federal district court for the Central District of California. The complaint alleges misappropriation and conversion in connection with the public performance of sound recordings recorded prior to February 15, 1972. On December 19, 2014, Pandora filed a motion to strike the complaint pursuant to California’s Anti-Strategic Lawsuit Against Public Participation ("Anti-SLAPP") statute, which was appealed to the Ninth Circuit Court of Appeals. The district court litigation is currently stayed pending the Ninth Circuit’s decision. On December 8, 2016, the Ninth Circuit heard oral arguments on the Anti-SLAPP motion. On March 15, 2017, the Ninth Circuit requested certification to the California Supreme Court on the substantive legal questions. The California Supreme Court has accepted certification and the Company filed its opening brief on August 4, 2017.


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Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


Between September 14, 2015 and October 19, 2015, Arthur and Barbara Sheridan filed separate class action suits against the Company in the federal district courts for the Northern District of California and the District of New Jersey. The complaints allege a variety of violations of common law and state copyright statutes, common law misappropriation, unfair competition, conversion, unjust enrichment and violation of rights of publicity arising from allegations that we owe royalties for the public performance of sound recordings recorded prior to February 15, 1972. The actions in California and New Jersey are currently stayed pending the Ninth Circuit's decision in Flo & Eddie, Inc. v. Pandora Media, Inc.

On September 7, 2016, Ponderosa Twins Plus One et al. filed a class action suit against the Company alleging claims similar to that of Flo & Eddie, Inc. v. Pandora Media Inc. The action is currently stayed in the Northern District of California pending the Ninth Circuit’s decision in Flo & Eddie, Inc. v. Pandora Media, Inc.

The outcome of any litigation is inherently uncertain. Except as noted above, we do not believe it is probable that the final outcome of the matters discussed above will, individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations or cash flows; however, in light of the uncertainties involved in such matters, there can be no assurance that the outcome of each case or the costs of litigation, regardless of outcome, will not have a material adverse effect on our business.
 
Indemnification Agreements, Guarantees and Contingencies
 
In the ordinary course of business and in connection with the sale of Ticketfly, we are party to certain contractual agreements under which we may provide indemnifications of varying scope, terms and duration to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. Such indemnification provisions, other than the Ticketfly indemnifications, are accounted for in accordance with guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. In connection with the sale of Ticketfly, we have accrued approximately $5.1 million related to these indemnifications, which is the probable indemnification liability as estimated in accordance with the accounting guidance for loss contingencies. Other than this amount, to date, we have not incurred, do not anticipate incurring and therefore have not accrued for, any costs related to such indemnification provisions.
 
While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any claims under indemnification arrangements will have a material adverse effect on our business, financial position, results of operations or cash flows.

6.                       Dispositions

Ticketfly
On September 1, 2017, we completed the sale of Ticketfly, our ticketing service segment, to Eventbrite Inc. ("Eventbrite") for an aggregate unadjusted purchase price of $200.0 million. The aggregate unadjusted purchase price consists of $150.0 million in cash and a $50.0 million Convertible Promissory Note, which were paid and issued at the closing of the transaction. The Convertible Promissory Note was recorded at its fair value at the date of sale, which resulted in a discount of $13.8 million. The aggregate purchase price was further reduced by $4.9 million in costs to sell and $8.6 million in working capital adjustments and certain indemnification provisions, for a net purchase price of $172.7 million. Refer to Note 8 "Convertible Promissory Note Receivable" in the Notes to Condensed Consolidated Financial Statements for further details on the Convertible Promissory Note.
In the three months ended June 30, 2017, the assets and liabilities of Ticketfly were classified as held for sale, and we recognized a goodwill impairment charge of $131.7 million. The impairment charge was based on the fair value of the net assets as implied by the estimated purchase price of $184.5 million as of June 30, 2017. We consider the fair value of these net assets to be classified as Level 2 within the fair value hierarchy because Ticketfly is not a publicly traded company. Instead, the fair value was based on other observable inputs, such as the selling price, which represents an exit price. In the three months ended September 30, 2017, we recognized a loss on sale of $9.4 million in the general and administrative line item on our Condensed Consolidated Statements of Operations, which was based on an adjusted net purchase price of $172.7 million as of September 1, 2017.

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Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


Net cash proceeds from the sale of Ticketfly were $125.2 million and consisted of the cash purchase price of $150.0 million, less cash held for sale of $22.2 million and cash purchase price adjustments of $2.6 million.

Prior to the sale of Ticketfly, we operated in two reportable segments. Subsequent to the sale of Ticketfly, we operate in one reportable segment.

The revenues and expenses of Ticketfly are included in our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 through the disposition date of September 1, 2017. The following table provides Ticketfly’s loss before benefit from (provision for) income taxes for the three and nine months ended September 30, 2016 and 2017:

 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2017
 
2016
 
2017
 
(in thousands)
Loss before benefit from (provision for) income taxes
$
(10,515
)
 
$
(1,777
)
 
$
(26,365
)
 
$
(153,022
)


The sale of Ticketfly did not represent a strategic shift in our business, and therefore we have not classified the operations of Ticketfly as discontinued operations in our Condensed Consolidated Statements of Operations.
KXMZ
On August 31, 2017, we completed the sale of KXMZ, an FM radio station based in Rapid City, South Dakota. Net cash proceeds from the sale of KXMZ were $0.2 million. The sale did not result in a material impact to our condensed consolidated financial statements.
Disposal of Assets and Liabilities

The following table provides the carrying amounts of the major classes of assets and liabilities of Ticketfly and KXMZ that were disposed of in the three months ended September 30, 2017.

 
(in thousands)
Assets
 
Cash and cash equivalents
$
22,233

Accounts receivable, net
4,148

Prepaid expenses and other current assets
11,467

Property and equipment, net
5,237

Goodwill
103,474

Intangible assets, net
57,932

Other long-term assets
21,268

Total assets
$
225,759

Liabilities
 

Accounts payable, accrued liabilities and accrued compensation
$
4,630

Other current liabilities
29,573

Other long-term liabilities
9,151

Total liabilities
$
43,354


 
7.                       Goodwill and Intangible Assets

During the three months ended September 30, 2017, we completed the sale of both Ticketfly and KXMZ. In the three months ended June 30, 2017, we recognized a goodwill impairment of $131.7 million related to the Ticketfly sale. The

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Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


impairment charge was based on the fair value of Ticketfly's net assets as implied by the estimated purchase price of $184.5 million as of June 30, 2017. As a result of the KXMZ agreement, we recognized a goodwill impairment of $0.3 million in the three months ended June 30, 2017, which was based on the fair value of these net assets as implied by the estimated purchase price.

The changes in the carrying amount of goodwill in each of our reporting segments for the nine months ended September 30, 2017, are as follows:

 
Pandora
 
Ticketfly
 
Total
 
(in thousands)
Balance as of December 31, 2016
$
71,650

 
$
235,041

 
$
306,691

Goodwill impairment
(300
)
 
(131,697
)
 
(131,997
)
Goodwill related to disposed assets
(107
)
 
(103,367
)
 
(103,474
)
Effect of currency translation adjustment

 
23

 
23

Balance as of September 30, 2017
$
71,243

 
$

 
$
71,243



The following summarizes information regarding the gross carrying amounts and accumulated amortization of intangible assets.
 
 
As of December 31, 2016
 
As of September 30, 2017
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Disposal of Intangible Assets
 
Net Carrying Value
 
 
(in thousands)
 
(in thousands)
Finite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
 
$
8,030

 
$
(2,556
)
 
$
5,474

 
$
8,030

 
$
(3,106
)
 
$

 
$
4,924

Developed technology
 
56,162

 
(13,599
)
 
42,563

 
56,162

 
(20,958
)
 
(19,235
)
 
15,969

Customer relationships—clients
 
37,399

 
(5,487
)
 
31,912

 
37,399

 
(7,449
)
 
(29,950
)
 

Customer relationships—users
 
1,940

 
(1,288
)
 
652

 
1,940

 
(1,732
)
 
(208
)
 

Trade names
 
11,735

 
(2,104
)
 
9,631

 
11,735

 
(2,978
)
 
(8,346
)
 
411

Total finite-lived intangible assets
 
$
115,266

 
$
(25,034
)
 
$
90,232

 
$
115,266

 
$
(36,223
)
 
$
(57,739
)
 
$
21,304

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FCC license - Broadcast Radio
 
$
193

 
$

 
$
193

 
$
193

 
$

 
$
(193
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total intangible assets
 
$
115,459

 
$
(25,034
)
 
$
90,425

 
$
115,459

 
$
(36,223
)
 
$
(57,932
)
 
$
21,304

Note: Amounts may not recalculate due to rounding


Amortization expense of intangible assets was $5.1 million and $1.9 million for the three months ended September 30, 2016 and 2017. Amortization expense of intangible assets was $15.4 million and $11.2 million for the nine months ended September 30, 2016 and 2017.

The following is a schedule of future amortization expense related to finite-lived intangible assets as of September 30, 2017.

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Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)



 
As of 
 September 30, 
 2017
 
(in thousands)
Remainder of 2017
$
1,896

2018
6,066

2019
5,546

2020
5,251

2021
727

Thereafter
1,818

Total future amortization expense
$
21,304



8.                       Convertible Promissory Note Receivable

On September 1, 2017, we completed the sale of Ticketfly, our ticketing service segment, to Eventbrite for an aggregate unadjusted purchase price of $200.0 million. The aggregate unadjusted purchase price consists of $150.0 million in cash and a $50.0 million Convertible Promissory Note, which were paid and issued at the closing of the transaction. The Convertible Promissory Note will be due five years from its issuance date (the "Convertible Promissory Note Maturity Date") and will accrue interest at a rate of 6.5% per annum, payable quarterly in cash or in-kind for the first year at the discretion of Eventbrite, and in cash thereafter. Prior to the Convertible Promissory Note Maturity Date, the Convertible Promissory Note is convertible at our option into shares of Eventbrite’s common stock. The Convertible Promissory Note may be prepaid at any time.
The Convertible Promissory Note was recorded at its fair value of $36.2 million as of the issuance date of September 1, 2017, which resulted in a discount of $13.8 million. The note was further reduced by $2.5 million in purchase price adjustments. As of September 30, 2017, the balance of the Convertible Promissory Note also included $0.3 million in interest receivable and $0.2 million in accretion of the discount, for a total balance of $34.1 million.
The fair value of the Convertible Promissory Note was based on a methodology that combines inputs based on comparable debt instruments and market-corroborated inputs with quantitative pricing models. At issuance, our Convertible Promissory Note was classified as Level 3 within the fair value hierarchy because the fair value was based on unobservable inputs in an inactive market. However, our Convertible Promissory Note will not be remeasured at each reporting date.
The discount on the Convertible Promissory Note is being amortized to interest income using the effective interest method over the period from the date of issuance through the Convertible Promissory Note Maturity Date. The following table outlines the effective interest rate, contractually stated interest income and amortization of the discount for the Convertible Promissory Note:
 
Three and nine months ended
 
September 30, 2017
 
(in thousands except for effective interest rate)
Effective interest rate
14.73
%
Contractually stated interest income
$
258

Amortization of discount
$
171



9.                       Debt Instruments

Long-term debt, net consisted of the following:


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Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


 
As of December 31,
 
As of September 30,
 
2016
 
2017
 
(in thousands)
1.75% convertible senior notes due 2020
$
345,000

 
$
345,000

Credit facility
90,000

 

Unamortized discount and deferred issuance costs
(92,753
)
 
(77,604
)
Long-term debt, net
$
342,247

 
$
267,396


 
Convertible Debt Offering

On December 9, 2015, we completed an unregistered Rule 144A offering for the issuance of $345.0 million aggregate principal amount of our 1.75% Convertible Senior Notes due 2020 (the "Notes"). In connection with the issuance of the Notes, we entered into capped call transactions with the initial purchaser of the Notes and an additional financial institution ("capped call transactions"). The net proceeds from the sale of the Notes were approximately $336.5 million, after deducting the initial purchasers' fees and other estimated expenses. We used approximately $43.2 million of the net proceeds to pay the cost of the capped call transactions.

The Notes are unsecured, senior obligations of Pandora, and interest is payable semi-annually at a rate of 1.75% per annum. The Notes will mature on December 1, 2020, unless earlier repurchased or redeemed by Pandora or converted in accordance with their terms prior to such date. Prior to July 1, 2020, the Notes are convertible at the option of holders only upon the occurrence of specified events or during certain periods as further described in Note 7 "Debt Instruments" in our Annual Report on Form 10-K for the year ended December 31, 2016; thereafter, until the second scheduled trading day prior to maturity, the Notes will be convertible at the option of holders at any time.

The Notes were separated into debt and equity components and assigned a fair value. The value assigned to the debt component is the estimated fair value as of the issuance date of similar debt without the conversion feature. The difference between the cash proceeds and this estimated fair value represents the value which has been assigned to the equity component and recorded as a debt discount. The debt discount is being amortized using the effective interest method over the period from the date of issuance through the December 1, 2020 maturity date. The valuation of the Notes is further described in Note 7 "Debt Instruments" in our Annual Report on Form 10-K for the year ended December 31, 2016.
The following table outlines the effective interest rate, contractually stated interest expense and costs related to the amortization of the discount for the Notes:

 
Three months ended 
 September 30,
 
Nine months ended 
 September 30,
 
2016
 
2017
 
2016
 
2017
 
(in thousands except for effective interest rate)
Effective interest rate
10.18
%
 
10.18
%
 
10.18
%
 
10.18
%
Contractually stated interest expense
$
1,505

 
$
1,509

 
$
4,536

 
$
4,511

Amortization of discount
$
4,649

 
$
5,135

 
$
13,587

 
$
14,934



The total estimated fair value of the Notes as of September 30, 2017 was $323.8 million. The fair value was determined using a methodology that combines direct market observations with quantitative pricing models to generate evaluated prices. We consider the fair value of the Notes to be a Level 2 measurement due to the limited trading activity of the Notes.

The closing price of our common stock was $7.70 on September 30, 2017, which was less than the initial conversion price for the Notes of approximately $16.42 per share. As such, the if-converted value of the Notes was less than the principal amount of $345.0 million.

Credit Facility


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Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


We are party to a $120.0 million credit facility with a syndicate of financial institutions, which expires on September 12, 2018. In September 2016, we borrowed $90.0 million from the credit facility to enhance our working capital position. This amount was repaid in full in September 2017.

As of September 30, 2017, we had no outstanding borrowings, $1.2 million in letters of credit outstanding and $118.8 million of available borrowing capacity under the credit facility. We are in compliance with all financial covenants associated with the credit facility as of September 30, 2017.



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Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


10.                       Redeemable Convertible Preferred Stock

In June 2017, we entered into an agreement with Sirius XM Radio, Inc. ("Sirius XM") to sell 480,000 shares of Series A redeemable convertible preferred stock ("Series A") for $1,000 per share, with gross proceeds of $480.0 million. The Series A shares were issued in two rounds: an initial closing of 172,500 shares for $172.5 million that occurred on June 9, 2017 upon signing the agreement with Sirius XM, and an additional closing of 307,500 shares for $307.5 million that occurred on September 22, 2017 upon the receipt of antitrust clearance and the completion of other customary closing conditions. In the three and nine months ended September 30, 2017, total proceeds from the initial and additional closing, net of preferred stock issuance costs of $15.3 million and $29.3 million, were $292.2 million and $450.7 million, respectively.

Conversion Feature

Holders of the Series A shares have the option to convert their shares plus any accrued dividends into common stock. We have the right to settle the conversion in cash, common stock or a combination thereof. The conversion rate for the Series A is initially 95.2381 shares of common stock per each share of Series A, which is equivalent to an initial conversion price of approximately $10.50 per share of our common stock, and is subject to adjustment in certain circumstances. Dividends on the Series A will accrue on a daily basis, whether or not declared, and will be payable on a quarterly basis at a rate of 6% per year. We have the option to pay dividends in cash when authorized by the Board and declared by the Company or accumulate dividends in lieu of paying cash. Dividends accumulated in lieu of paying cash will continue to accrue and accumulate at rate of 6% per year.

Redemption Feature

Under certain circumstances, we will have the right to redeem the Series A on or after the date which is three years after the additional closing. The Series A holders will have the right to require us to redeem the Series A on or after the date which is five years after the additional closing. Any optional redemption of the Series A will be at a redemption price equal to 100% of the liquidation preference, plus accrued and unpaid dividends to, but excluding, the redemption date. We have the option to redeem the Series A in cash, common stock or a combination thereof.

Fundamental Changes

If certain fundamental changes involving the Company occur, including change in control or liquidation, the Series A will be redeemed subject to certain adjustments, as determined by the date of the fundamental change. The change in control amount is the greater of the redemption value of 100% of the liquidation preference, plus all accrued dividends unpaid through the fifth anniversary of the additional closing, assuming the shares would have remained outstanding through that date, or the price that common stockholders would receive if the Series A shares had been redeemed immediately prior to the announcement of the change in control.

Recognition

Since the redemption of the Series A is contingently or optionally redeemable and therefore not certain to occur, the Series A is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the Series A is redeemable at the option of the holders and is redeemable in certain circumstances upon the occurrence of an event that is not solely within the Company's control, we have classified the Series A in the redeemable convertible preferred stock line item in our condensed consolidated balance sheets. We did not identify any embedded features that would require bifurcation from the equity-like host instrument. We have elected to recognize the Series A at the redemption value at each period end, and have recorded the issuance costs through retained earnings as a deemed preferred stock dividend. In addition, we have elected to account for the 6% dividend at the stated rate.

As of September 30, 2017, redeemable convertible preferred stock consisted of the following:


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Table of Contents
Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


 
 
As of September 30,
 
 
2017
 
 
(in thousands)
Series A redeemable convertible preferred stock
 
$
480,000

Issuance costs
 
(29,259
)
Accretion of issuance costs
 
29,259

Stock dividend payable to preferred stockholders
 
3,588

Redeemable convertible preferred stock
 
$
483,588


Contract Termination Fees

In May 2017, we entered into an agreement to sell redeemable convertible preferred stock to KKR. In June 2017, in conjunction with the Series A, we terminated the previous contractual commitment to sell redeemable convertible preferred stock to KKR, which resulted in a contract termination fee and related legal and professional fees, totaling $23.0 million. This is included in the contract termination fees line item of our condensed consolidated statements of operations for the nine months ended September 30, 2017.


11.                       Stock-based Compensation Plans and Awards
 
ESPP
 
The ESPP allows eligible employees to purchase shares of our common stock through payroll deductions of up to 15% of their eligible compensation. The ESPP provides for six-month offering periods, commencing in February and August of each year.

We estimate the fair value of shares to be issued under the ESPP on the first day of the offering period using the Black-Scholes valuation model. The determination of the fair value is affected by our stock price on the first date of the offering period, as well as other assumptions including the risk-free interest rate, the estimated volatility of our stock price over the term of the offering period, the expected term of the offering period and the expected dividend rate. Stock-based compensation expense related to the ESPP is recognized on a straight-line basis over the offering period. Forfeitures are recognized as they occur.
 
The following assumptions for the Black-Scholes option pricing model were used to determine the per-share fair value of shares to be granted under the ESPP:


Three months ended September 30,
 
Nine months ended September 30,
 
2016

2017
 
2016
 
2017
Expected life (in years)
0.5

 
0.5

 
0.5

 
0.5

Risk-free interest rate
0.41 - 0.44%

 
0.65 - 1.13%

 
0.24 - 0.44%

 
0.44 - 1.13%

Expected volatility
41 - 52%

 
39 - 45%

 
41 - 52%

 
39 - 52%

Expected dividend yield
0
%
 
0
%
 
0
%
 
0
%

 
During the three months ended September 30, 2016 and 2017, we withheld $2.6 million and $1.9 million in contributions from employees and recognized $0.9 million and $1.0 million of stock-based compensation expense related to the ESPP, respectively. During the nine months ended September 30, 2016 and 2017, we withheld $6.4 million and $8.0 million in contributions from employees and recognized $2.3 million and $2.9 million of stock-based compensation expense related to the ESPP, respectively. In the three months ended September 30, 2016 and 2017, 643,562 and 739,922 shares of common stock were issued under the ESPP. In the nine months ended September 30, 2016 and 2017, 1,254,910 and 1,287,687 shares of common stock were issued under the ESPP.
 
Employee Stock-Based Awards
 

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Pandora Media, Inc. 
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)


Our 2011 Equity Incentive Plan (the "2011 Plan") provides for the issuance of stock options, restricted stock units and other stock-based awards to our employees. The 2011 Plan is administered by the compensation committee of our board of directors.
 
Stock options
 
We measure stock-based compensation expense for stock options at the grant date fair value of the award and recognize expense on a straight-line basis over the requisite service period, which is generally the vesting period. We estimate the fair value of stock options using the Black-Scholes option-pricing model. During the three months ended September 30, 2016 and 2017, we recorded stock-based compensation expense from stock options of approximately $2.2 million and $0.9 million. During the nine months ended September 30, 2016 and 2017, we recorded stock-based compensation expense from stock options of approximately $11.3 million and $6.9 million.

The per-share fair value of each stock option was determined on the grant date using the Black-Scholes option pricing model using the following assumptions:

 
Three months ended September 30,
 
Nine months ended 
 September 30,
 
2016
 
2017
 
2016
 
2017
Expected life (in years)
N/A
 
6.30

 
N/A
 
5.93 - 6.25

Risk-free interest rate
N/A
 
1.97
%
 
N/A
 
1.92 - 2.18%

Expected volatility
N/A
 
61
%
 
N/A
 
61
%
Expected dividend yield
N/A
 
0
%
 
N/A
 
0
%


There were no options granted in the three and nine months ended September 30, 2016.

RSUs
 
The fair value of RSUs is expensed ratably over the vesting period. RSUs typically have an initial annual cliff vest and then vest quarterly thereafter over the service period, which is generally three to four years. During the three months ended September 30, 2016 and 2017, we recorded stock-based compensation expense from RSUs of approximately $28.2 million and $27.7 million. During the nine months ended September 30, 2016 and 2017, we recorded stock-based compensation expense from RSUs of approximately $87.2 million and $86.5 million.
 
MSUs

In March 2015, the compensation committee of the board of directors granted performance awards consisting of market stock units to certain key executives under our 2011 Plan.

MSUs granted in March 2015 are earned as a function of Pandora’s TSR performance measured against that of the Russell 2000 Index across three performance periods:

One-third of the target MSUs are eligible to be earned for a performance period that is the first calendar year of the MSU grant (the "One-Year Performance Period");
One-third of the target MSUs are eligible to be earned for a performance period that is the first two calendar years of the MSU grant (the "Two-Year Performance Period"); and
Any remaining portion of the total potential MSUs are eligible to be earned for a performance period that is the entire three calendar years of the MSU grant (the "Three-Year Performance Period").

For each performance period, a "performance multiplier" is calculated by comparing Pandora’s TSR for the period to the Russell 2000 Index TSR for the same period, using the average adjusted closing stock price of Pandora stock, and the Russell 2000 Index, for ninety calendar days prior to the beginning of the performance period and the last ninety calendar days of the performance period. In each period, the target number of shares will vest if the Pandora TSR is equal to the Russell 2000 Index TSR. For each percentage point that the Pandora TSR