csod-20200930

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 September 30, 2020


☐			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 001-35098


Cornerstone OnDemand, Inc.
(Exact name of registrant as specified in its charter)


Delaware			13-4068197
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

1601 Cloverfield Blvd.

Suite 620 South

Santa Monica, CA 90404

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code:

(310) 752-0200

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, par value $0.0001 per share	CSOD	Nasdaq Stock Market LLC	(Nasdaq Global Select Market)

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	☐	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 October 30, 2020, the registrant had 64,602,956 shares of common stock, $0.0001 par value per share, outstanding.

CORNERSTONE ONDEMAND, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX


		Page No.
	PART I.—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Comprehensive (Loss ) Income	4
	Condensed Consolidated Statements of Changes in Stockholders' Equity	5
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
	PART II.—OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	64
SIGNATURE		65

TRADEMARKS

© Copyright 2020 Cornerstone OnDemand, Inc. All rights reserved. “Cornerstone,” “Cornerstone OnDemand,” the Cornerstone OnDemand logo, “CyberU” and other trademarks or service marks of Cornerstone OnDemand, Inc. appearing in this Quarterly Report on Form 10-Q are the property of Cornerstone OnDemand, Inc. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective holders and should be treated as such.

PART I. FINANCIAL INFORMATION

ITEM 1.Condensed Consolidated Financial Statements

CORNERSTONE ONDEMAND, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par values)

(unaudited)


	September 30, 2020		December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	170,937	$	215,907
Short-term investments	—		201,579
Accounts receivable, net	156,738		131,105
Deferred commissions, current portion	38,874		33,215
Prepaid expenses and other current assets	30,577		30,512
Total current assets	397,126		612,318
Capitalized software development costs, net	51,683		50,023
Property and equipment, net	33,892		36,526
Operating right-of-use assets	78,874		72,944
Deferred commissions, net of current portion	76,621		74,563
Long-term investments	9,043		60,192
Intangible assets, net	458,006		9,440
Goodwill	960,420		47,453
Deferred tax assets	2,928		1,045
Other assets	10,843		1,597
Total assets	$	2,079,436	$	966,101
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,165	$	3,803
Accrued expenses	90,665		78,075
Deferred revenue, current portion	370,494		339,522
Operating lease liabilities, current portion	17,230		7,235
Debt, current portion	10,047		—
Other liabilities	15,696		11,015
Total current liabilities	513,297		439,650
Debt, net of current portion	1,224,646		293,174
Deferred revenue, net of current portion	4,150		6,945
Operating lease liabilities, net of current portion	68,929		67,195
Deferred tax liabilities	17,396		—
Other liabilities, non-current	6,267		655
Total liabilities	1,834,685		807,619
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common stock, $0.0001 par value	6		6
Additional paid-in capital	808,592		682,717
Accumulated deficit	(566,223)		(524,680)
Accumulated other comprehensive income	2,376		439
Total stockholders’ equity	244,751		158,482
Total liabilities and stockholders’ equity	$	2,079,436	$	966,101

See accompanying notes.

CORNERSTONE ONDEMAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenue	$	199,498	$	144,952	$	533,992	$	426,929
Cost of revenue	64,503		37,167		164,427		111,049
Gross profit	134,995		107,785		369,565		315,880
Operating expenses:
Sales and marketing	71,850		57,815		192,122		171,011
Research and development	29,665		25,695		82,088		77,778
General and administrative	28,884		20,562		79,229		65,741
Acquisition-related costs	4,852		—		31,756		—
Restructuring	1,362		—		11,095		—
Total operating expenses	136,613		104,072		396,290		314,530
(Loss) income from operations	(1,618)		3,713		(26,725)		1,350
Other expense:

Interest expense	(19,609)		(3,321)		(43,329)		(9,889)
Other, net	5,817		(1,018)		(61)		(2,720)
Other expense, net	(13,792)		(4,339)		(43,390)		(12,609)
Loss before income tax provision	(15,410)		(626)		(70,115)		(11,259)
Income tax (provision) benefit	(371)		(591)		28,572		(2,227)
Net loss	$	(15,781)	$	(1,217)	$	(41,543)	$	(13,486)
Net loss per share, basic and diluted	$	(0.25)	$	(0.02)	$	(0.66)	$	(0.23)

Weighted average common shares outstanding, basic and diluted	64,375		60,652		63,204		59,841

See accompanying notes.

CORNERSTONE ONDEMAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net loss	$	(15,781)	$	(1,217)	$	(41,543)	$	(13,486)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment	(1,450)		1,198		2,160		2,389
Net change in unrealized gains (losses) on investments	—		167		(223)		352
Other comprehensive (loss) income, net of tax	(1,450)		1,365		1,937		2,741
Total comprehensive (loss) income	$	(17,231)	$	148	$	(39,606)	$	(10,745)

See accompanying notes.

CORNERSTONE ONDEMAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total
	Shares	Par Value
Balance as of June 30, 2020	64,060	$	6	$	788,150	$	(550,442)	$	3,826	$	241,540
Issuance of common stock upon the exercise of options	70	—		1,166		—		—		1,166
Vesting of restricted stock units	424	—		—		—		—		—


Stock-based compensation	—	—		19,276		—		—		19,276




Net loss	—	—		—		(15,781)		—		(15,781)
Other comprehensive loss, net of tax	—	—		—		—		(1,450)		(1,450)
Balance as of September 30, 2020	64,554	$	6	$	808,592	$	(566,223)	$	2,376	$	244,751


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total
	Shares	Par Value
Balance as of December 31, 2019	61,038	$	6	$	682,717	$	(524,680)	$	439	$	158,482
Issuance of common stock upon the exercise of options	774	—		9,354		—		—		9,354
Vesting of restricted stock units	1,502	—		—		—		—		—
Shares issued under employee stock purchase plan	130	—		4,370		—		—		4,370

Stock-based compensation	—	—		60,664		—		—		60,664


Common stock issued in acquisition	1,110	—		32,889		—		—		32,889
Modification of Convertible Notes	—	—		18,598		—		—		18,598
Net loss	—	—		—		(41,543)		—		(41,543)
Other comprehensive income, net of tax	—	—		—		—		1,937		1,937
Balance as of September 30, 2020	64,554	$	6	$	808,592	$	(566,223)	$	2,376	$	244,751

See accompanying notes.

CORNERSTONE ONDEMAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)

(in thousands)

(unaudited)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total
	Shares	Par Value
Balance as of June 30, 2019	59,977	$	6	$	637,770	$	(532,895)	$	1,852	$	106,733
Issuance of common stock upon the exercise of options	474	—		16,826		—		—		16,826
Vesting of restricted stock units	529	—		—		—		—		—

Repurchase of common stock	(254)	—		(13,530)		—		—		(13,530)
Stock-based compensation	—	—		20,832		—		—		20,832

Net loss	—	—		—		(1,217)		—		(1,217)
Other comprehensive income, net of tax	—	—		—		—		1,365		1,365
Balance as of September 30, 2019	60,726	$	6	$	661,898	$	(534,112)	$	3,217	$	131,009


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total
	Shares	Par Value
Balance as of December 31, 2018	58,886	$	6	$	585,387	$	(520,626)	$	476	$	65,243
Issuance of common stock upon the exercise of options	744	—		26,973		—		—		26,973
Vesting of restricted stock units	1,260	—		—		—		—		—
Shares issued under employee stock purchase plan	90	—		3,927		—		—		3,927
Repurchase of common stock	(254)	—		(13,530)		—		—		(13,530)
Stock-based compensation	—	—		59,141		—		—		59,141

Net loss	—	—		—		(13,486)		—		(13,486)
Other comprehensive income, net of tax	—	—		—		—		2,741		2,741
Balance as of September 30, 2019	60,726	$	6	$	661,898	$	(534,112)	$	3,217	$	131,009

See accompanying notes.

CORNERSTONE ONDEMAND, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended
	September 30,
	2020		2019
Cash flows from operating activities
Net loss	$	(41,543)	$	(13,486)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	80,190		30,848
Accretion of debt discount and amortization of debt issuance costs	7,502		3,130
Amortization (accretion) of purchased investment premium or discount, net	41		(900)
Net foreign currency and other loss	4,063		2,504
Stock-based compensation expense	55,197		55,714
Deferred income taxes	(32,081)		—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	32,243		23,900
Deferred commissions	(8,715)		(14,130)
Prepaid expenses and other assets	14,302		12,589
Accounts payable	(6,852)		(6,040)
Accrued expenses	(4,545)		(5,563)
Deferred revenue	(43,349)		(39,048)
Other liabilities	5,456		3,437
Net cash provided by operating activities	61,909		52,955
Cash flows from investing activities
Purchases of marketable investments	(20,419)		(201,981)

Maturities and sales of investments	272,173		206,040
Capital expenditures	(2,910)		(15,987)
Capitalized software costs	(20,296)		(18,835)
Cash paid for acquisitions, net of cash acquired	(1,295,508)		—
Net cash used in investing activities	(1,066,960)		(30,763)
Cash flows from financing activities
Proceeds from term loan debt, net of discount	979,582		—


Payments of debt issuance and modification costs	(30,429)		—

Proceeds from employee stock plans	15,953		33,072
Payment of tax withholdings for employee stock plans	—		(5,469)
Repurchases of common stock	—		(13,530)
Net cash provided by financing activities	965,106		14,073
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	3		(1,123)
Net (decrease) increase in cash, cash equivalents, and restricted cash	(39,942)		35,142
Cash, cash equivalents, and restricted cash at beginning of period	215,907		183,596
Cash, cash equivalents, and restricted cash at end of period	$	175,965	$	218,738
Supplemental cash flow data
Cash paid for interest	$	38,873	$	17,356
Cash paid for income taxes	3,725		1,488
Non-cash investing and financing activities:
Assets acquired under capital leases and other financing arrangements	$	—	$	1,276
Capitalized assets financed by accounts payable and accrued expenses	56		1,205
Capitalized stock-based compensation	5,467		3,427
Issuance of common stock for partial consideration for acquisition	32,889		—
Increase in debt discount as a result of modification of Convertible Notes	18,598		—


	As of September 30,
	2020		2019
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents	$	170,937	$	218,738
Restricted cash included in prepaid expenses and other current assets	3,752		—
Restricted cash included in other assets	1,276		—
Total cash, cash equivalents, and restricted cash	$	175,965	$	218,738

See accompanying notes.

CORNERSTONE ONDEMAND, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Company Overview

Cornerstone OnDemand, Inc. (“Cornerstone” or the “Company”) is a leading global provider of people development solutions, delivered as software-as-a-service (“SaaS”). The Company helps organizations around the globe recruit, train, and manage their employees. The Company’s solution combines the world’s leading unified talent management solutions with state-of-the-art analytics and HR administration solutions to enable organizations to manage the entire employee lifecycle. Its focus on continuous learning and development helps organizations empower employees to realize their potential and drive success. On April 22, 2020, the Company acquired Saba Software, Inc. (“Saba”), a provider of talent experience solutions.

The Company works with customers across all geographies, vertical markets, and market segments. Its Learning, Performance, Recruiting, and HR administration solutions help with sourcing, recruiting, and onboarding new hires; managing training and development requirements; nurturing knowledge sharing and collaboration among employees; goal setting, reviews, competency management, and continuous feedback; linking compensation to performance; identifying development plans based on performance gaps; streamlining employee data management, self-service, and compliance reporting; and then utilizing state-of-the-art analytics capabilities to make smarter, more-informed decisions using data from across the solution for talent mobility, engagement, and development so that HR and leadership can focus on strategic initiatives to help their organizations succeed.

The Company’s management has determined that the Company operates in one segment as it only reports financial information on an aggregated and consolidated basis to the Company’s chief executive officer, who is the Company’s chief operating decision maker.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements. These unaudited condensed financial statements are presented in accordance with (i) accounting standards generally accepted in the United States of America (“GAAP”) for interim financial information and (ii) the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in the annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements include all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the interim periods presented.

Results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, for any other interim period, or for any other future year. Certain prior period balances have been reclassified to conform to the current period presentation.

Recently Adopted Accounting Pronouncements

Effective January 1, 2020, the Company adopted the requirements of Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), using a modified retrospective method of adoption. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with this new standard with results for reporting periods beginning after January 1, 2020 presented under ASU 2016-13, while prior period amounts and disclosures were not adjusted and continue to be reported under the accounting standards in effect for the prior periods. ASU 2016-13 replaces the incurred loss methodology with an expected loss methodology, referred to as current expected credit loss (“CECL”), for financial instruments, including accounts receivable. The cumulative effect of adopting ASU 2016-13 did not have a material impact on the Company’s accumulated deficit as of January 1, 2020. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current receivables aging, consideration of current conditions, and other relevant data.

On January 1, 2020, the Company adopted the requirements of Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (“ASU 2018-15”), using a prospective method of adoption. ASU 2018-15 aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

Accounting Pronouncements Pending Adoption

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which enhances and simplifies various aspects of the income tax accounting guidance. The guidance is effective for the Company in the first quarter of 2021, although early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2019-12 on its consolidated financial statements.

Summary of Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission, or SEC, on February 25, 2020.

2. BUSINESS COMBINATIONS

Saba

On April 22, 2020, the Company acquired 100% of the equity interests of the direct and indirect subsidiaries of Vector Talent Holdings, L.P., including Saba Software, Inc. (such subsidiaries, collectively, “Saba”), to expand its cloud-based learning, talent management, and talent experience software offerings. The Company acquired Saba for an aggregate purchase price of $1.310 billion, consisting of $1.277 billion in cash (net of cash acquired) and 1,110,352 shares of the Company's common stock with an aggregate value of $32.9 million. The acquisition was financed with a combination of cash on hand and proceeds from new borrowings (refer to Note 3 – Debt for further details). Under the terms of the purchase agreement, the final consideration is subject to certain adjustments based on a determination of closing net working capital and net indebtedness (as defined in the purchase agreement). The purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date with the excess recorded as goodwill, none of which is expected to be deductible for tax purposes. The goodwill is primarily attributable to the acquired workforce and synergies expected to arise after the acquisition, including future technologies and customers of the combined business. The final allocation of purchase consideration to assets and liabilities remains in process as the Company continues to evaluate certain balances, estimates, and assumptions during the measurement period (up to one year from the acquisition date).

The results of operations and the provisional fair values of the assets acquired and liabilities assumed have been included in the condensed consolidated financial statements as of the date of acquisition. During the three and nine months ended September 30, 2020, Saba contributed approximately $47 million and $76 million to revenue, respectively. The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as a result of the acquisition of Saba, as adjusted in the third quarter of 2020 (in thousands):


	Preliminary Fair Value at Acquisition Date		Measurement Period Adjustments1		Adjusted Fair Value at Acquisition Date
Cash and cash equivalents	$	49,471			$	49,471
Accounts receivable	58,764				58,764
Prepaid expenses and other current assets	13,020				13,020
Property and equipment	9,446				9,446
Operating right-of-use assets	16,700				16,700
Intangible assets	481,000				481,000
Goodwill	905,498		(2,694)		902,804
Other assets	2,698		1,122		3,820
Total assets	1,536,597		(1,572)		1,535,025
Accounts payable and accrued expenses	28,978				28,978
Deferred revenue	69,940		1,092		71,032
Operating lease liabilities	16,532				16,532
Deferred tax liabilities, net	46,472				46,472
Other liabilities	12,782				12,782
Total liabilities	174,704		1,092		175,796
Total purchase consideration	$	1,361,893	$	(2,664)	$	1,359,229

1 The Company received approximately $2.7 million from escrow and made other revisions to certain acquired balances during the three months ended September 30, 2020.

Identifiable Intangible Assets

The following table provides the preliminary valuation of the Saba intangible assets, along with their estimated useful lives:


	Estimated Fair Value (in thousands)		Estimated Useful Life (in years)
Customer relationships	$	294,800	11
Customer contracts	58,500		2
Developed technology	120,500		3 – 5




Trade names, trademarks, and domain names	7,200		3
Total	$	481,000

The identifiable intangible assets are amortized on a straight-line basis over their respective estimated useful lives to sales and marketing for customer-related intangible assets, cost of revenue for developed technology intangible assets, and general and administrative expense for all other intangible assets. Management applied significant judgment in determining the fair value of intangible assets, which involved the use of estimates and assumptions with respect to estimated future subscription revenue and related profit margins, costs anticipated to fulfill remaining acquired performance obligations and related profit margins, customer retention rates, technology migration curves, royalty rates, discount rates, and economic lives assigned to acquired intangible assets.

Unaudited Pro Forma Financial Information

The following table presents the unaudited pro forma results for the three and nine months ended September 30, 2020 and 2019. The unaudited pro forma financial information combines the results of operations of Cornerstone OnDemand and Saba as though the companies had been combined as of January 1, 2019. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time. The unaudited pro forma results presented below include adjustments for amortization of identifiable intangible assets, interest expense related to debt financing, and related tax effects (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenue	$	199,498	$	209,465	$	639,036	$	618,765
Net loss	(10,776)		(20,641)		(95,625)		(79,164)

Clustree

On January 24, 2020, the Company purchased all of the outstanding shares of Clustree SAS (“Clustree”), a developer of a skills engine and skills ontology. The Company paid cash consideration of approximately $18.6 million. The purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date with the excess recorded as goodwill, none of which is expected to be deductible for tax purposes. The goodwill generated from this transaction is primarily attributable to the ability to enhance the Company’s product portfolio. The final allocation of purchase consideration to certain assets and liabilities, primarily related to taxes and assumed liabilities, remains in process as the Company continues to evaluate certain estimates and assumptions during the measurement period (up to one year from the acquisition date).

The Company's preliminary allocation of the total purchase consideration as of January 24, 2020 is summarized below:


	Fair Value (in thousands)
Tangible assets	$	1,275
Intangible assets – developed technology	9,800
Intangible assets – customer relationships	800
Goodwill	8,875
Deferred tax liabilities	(1,020)
Accounts payable and accrued expenses	(755)
Deferred revenue	(336)
Net assets acquired	$	18,639

The intangible assets related to developed technology and customer relationships are amortized on a straight-line basis over three years to cost of revenue and two years to sales and marketing expense, respectively.

Pro forma results of operations related to the acquisition of Clustree have not been presented as the impact of the acquisition is not material to the Company’s financial results.

Acquisition-related costs

Acquisition-related costs for both Saba and Clustree primarily consisted of external fees for advisory, legal, and other professional services, and totaled approximately $4.9 million and $31.8 million, for the three and nine months ended September 30, 2020, respectively. These costs were expensed as incurred and recorded in acquisition-related costs in the condensed consolidated statements of operations.

3. DEBT

Term Loan B and Revolving Credit Facility

On April 22, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent (“Agent”), which provided for a seven-year senior secured term loan B facility (the “Term Loan Facility”) in an aggregate principal amount of $1.0047 billion for a purchase price equal to 97.5% of the aggregate principal amount after original issue discount. Principal payments are due quarterly, beginning in the fourth quarter of 2020, at a rate of 0.25% of the principal amount; the remaining outstanding principal balance is due in April 2027. In addition, the Company entered into a five-year senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of up to $150.0 million, of which $50.0 million remained available at September 30, 2020. The available borrowings under the Revolving Credit Facility are limited by indebtedness covenants with the holders of the Convertible Notes (as defined below) and drawn letters of credit issued under the Credit Agreement. The Revolving Credit Facility includes a letter of credit sub-facility of up to $30.0 million. Borrowings under the Credit Agreement bear interest at a rate per annum equal to LIBOR for an interest period of one month, plus an applicable margin of 4.25%, with a 0.00% LIBOR floor. Interest is payable on a monthly or quarterly basis at the Company’s option.

The net carrying amounts of the components of the Term Loan Facility consist of the following (in thousands):


	September 30, 2020
Principal amount	$	1,004,700
Unamortized debt discount	(23,971)
Unamortized debt issuance costs	(22,237)
Net carrying value	$	958,492

The effective interest rate is 5.3% for the Term Loan Facility as of September 30, 2020.

The following table presents the interest expense recognized related to the Term Loan Facility (in thousands):


	Three Months Ended		Nine Months Ended
	September 30, 2020
Contractual interest expense	$	12,061	$	22,359
Accretion of debt discount	447		1,146
Amortization of debt issuance costs	425		1,088
Total	$	12,933	$	24,593

Undrawn amounts under the Revolving Credit Facility accrue a commitment fee at an initial per annum rate of 0.50% subject to certain adjustments, beginning July 1, 2020. In addition to the unused commitment fee, the Company is required to pay certain letter of credit and related fronting fees and other administrative fees. The Company did not draw any amounts under the Revolving Credit Facility as of September 30, 2020.

The Term Loan Facility, Revolving Credit Facility, and Convertible Notes (as discussed below) contain customary covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, grant liens, make certain investments (including acquisitions), dispose of certain assets, and make certain payments (including share repurchases and dividends). As of September 30, 2020, the Company was in compliance with all financial covenants.

Convertible Notes

In 2017, the Company issued $300.0 million principal amount of 5.75% senior convertible notes (the “Convertible Notes”) for a purchase price equal to 98% of the principal amount. The Company received net proceeds of $284.8 million, net of a discount of $6.0 million and issuance costs of $9.2 million. The debt discount is being accreted to interest expense over the term of the Convertible Notes using the effective interest method. The issuance costs were deferred and are being amortized to interest expense over the term of the Convertible Notes using the effective interest method. Interest is payable semi-annually in arrears on January 1 and July 1, commencing January 1, 2018.

The Convertible Notes are convertible at an initial conversion rate of 23.8095 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes, which represents an initial conversion price of $42.00 per share, subject to adjustment for anti-dilutive issuances, voluntary increases in the conversion rate, and make-whole adjustments upon a fundamental change. A fundamental change includes a change in control, delisting of the Company’s common stock, or a liquidation of the Company. Upon conversion, the Company will deliver the applicable number of the Company’s common stock and cash in lieu of any fractional shares. Holders of the Convertible Notes may convert their Convertible Notes at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date.

The holders of the Convertible Notes may require the Company to repurchase all or a portion of their Convertible Notes at a cash repurchase price equal to 100% of the principal amount of the notes being repurchased, plus the remaining scheduled interest through and including the maturity date, upon a fundamental change or event of default, including non-payment of interest or principal and other obligations.

On April 20, 2020, the Company amended the indenture to the Convertible Notes with US Bank National Association, as trustee (the “Supplemental Indenture”). Upon the completion of the acquisition of Saba on April 22, 2020, the Supplemental Indenture became effective, which permitted the Company to incur additional indebtedness and extended the maturity date of the Convertible Notes from July 1, 2021 to March 17, 2023. In connection with this amendment, the Company paid approximately $3.4 million in consent and other fees to the holders of the Convertible Notes which were capitalized as debt issuance costs. As part of the amendment, the Company applied modification accounting as the criteria requiring extinguishment accounting were not met. As a result of the modification accounting, the fair value of the conversion feature increased by $18.6 million. This increase in fair value was recorded as a debt discount with a corresponding increase to additional paid-in capital. The Company will accrete the debt discount related to the conversion feature and amortize the debt issuance costs related to consent and other fees, including the previously unaccreted and unamortized amounts, to interest expense over the remaining term of the Convertible Notes.

The net carrying amounts of the components of the Convertible Notes consist of the following (in thousands):


	September 30, 2020		December 31, 2019
Principal amount	$	300,000	$	300,000
Unaccreted debt discount	(17,930)		(2,691)
Unamortized debt issuance costs	(5,869)		(4,135)
Net carrying value	$	276,201	$	293,174

The effective interest rate is 9.9% for the Convertible Notes as of September 30, 2020.

The following table presents the interest expense recognized related to the Convertible Notes (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Contractual interest expense	$	4,313	$	4,313	$	12,939	$	12,939
Accretion of debt discount	1,428		418		3,358		1,233
Amortization of debt issuance costs	414		642		1,670		1,897
Total	$	6,155	$	5,373	$	17,967	$	16,069

4. NET LOSS PER SHARE

The following table presents the Company’s basic and diluted net loss per share (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net loss	$	(15,781)	$	(1,217)	$	(41,543)	$	(13,486)
Net loss per share, basic and diluted	$	(0.25)	$	(0.02)	$	(0.66)	$	(0.23)

Weighted-average shares of common stock outstanding, basic and diluted	64,375		60,652		63,204		59,841

The potential shares of common stock that would have a dilutive impact are computed using the treasury stock method or the if-converted method, as applicable. The following potential shares were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive (in thousands):


	September 30,
	2020	2019
Options to purchase common stock, restricted stock units, and performance-based restricted stock units	8,091	9,146
Shares issuable pursuant to employee stock purchase plan	161	103
Convertible notes	7,143	7,143
Total shares excluded from net loss per share	15,395	16,392

5. CASH AND INVESTMENTS

The Company’s investments in marketable and non-marketable securities are made pursuant to its investment policy, which has established guidelines relative to the diversification of the Company’s investments and their maturities, with the principal objective of capital preservation and maintaining liquidity that is sufficient to meet cash flow requirements.

As of September 30, 2020, the Company did not have any marketable investments. The following is a summary of cash and marketable investments, including those that meet the definition of a cash equivalent, as of December 31, 2019 (in thousands):


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Cash	$	67,818	$	—	$	—	$	67,818
Cash equivalents:
Money market funds	126,075		—		—		126,075
Corporate bonds	1,000		—		—		1,000
Agency bonds	6,485		1		—		6,486
Commercial paper	9,609		—		(1)		9,608
Certificates of deposit	171		—		—		171
US treasury securities	4,749		—		—		4,749
Total cash equivalents	148,089		1		(1)		148,089
Total cash and cash equivalents	$	215,907	$	1	$	(1)	$	215,907
Short-term investments:
Corporate bonds	$	103,130	$	110	$	(7)	$	103,233
Agency bonds	3,966		2		—		3,968
US treasury securities	50,703		62		(1)		50,764
Commercial paper	23,827		1		—		23,828
Certificates of deposit	3,936		2		(1)		3,937
Asset-backed securities	15,837		12		—		15,849
Total short-term investments	$	201,399	$	189	$	(9)	$	201,579
Long-term marketable investments:
Corporate bonds	$	19,407	$	12	$	(4)	$	19,415
US treasury securities	19,300		25		—		19,325
Asset-backed securities	11,693		10		(1)		11,702
Total long-term marketable investments	$	50,400	$	47	$	(5)	$	50,442

Unrealized gains and losses on investments were immaterial individually and in aggregate as of September 30, 2020 and December 31, 2019. Realized gains and losses for sales of investments during the three and nine months ended September 30, 2020 and 2019 were immaterial.

The Company’s long-term investments are composed of the following (in thousands):


	September 30, 2020		December 31, 2019
Long-term marketable investments	$	—	$	50,442
Non-marketable investments	9,043		9,750
Total long-term investments	$	9,043	$	60,192

The Company’s non-marketable investments are composed of the following (in thousands):


	September 30, 2020		December 31, 2019
Accounted for at cost, adjusted for observable price changes	$	1,750	$	1,750
Accounted for using the equity method	7,293		8,000
Total non-marketable investments	$	9,043	$	9,750

6. INTANGIBLE ASSETS AND GOODWILL

Finite-lived Intangibles

The Company has finite-lived intangible assets which are amortized over their estimated useful lives on a straight-line basis. The following table presents the gross carrying amount and accumulated amortization of finite-lived intangible assets (dollars in thousands):


		September 30, 2020						December 31, 2019
	Weighted Average Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Developed technology	2.9	$	141,337	$	(22,144)	$	119,193	$	39,984	$	(34,268)	$	5,716
Content library	3.6	4,700		(1,619)		3,081		4,700		(976)		3,724
Customer relationships	10.5	296,046		(12,125)		283,921		—		—		—
Customer contracts	1.5	58,580		(12,921)		45,659		—		—		—
Trade names, trademarks, and domain names	2.5	7,212		(1,060)		6,152		—		—		—
Total		$	507,875	$	(49,869)	$	458,006	$	44,684	$	(35,244)	$	9,440

During the first quarter of 2020, the gross carrying amount and accumulated amortization of fully amortized intangible assets were written off. Amortization of customer-related intangible assets is recorded in sales and marketing expense in the accompanying condensed consolidated statements of operations; amortization of developed technology and content library intangible assets is recorded in cost of revenue; amortization of all other finite-lived intangibles is recorded in general and administrative expense. Total amortization expense was $24.3 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively. Total amortization expense was $44.5 million and $3.3 million for the nine months ended September 30, 2020 and 2019 respectively.

The following table presents the Company's estimate of remaining amortization expense for finite-lived intangible assets that existed as of September 30, 2020 (in thousands):


2020 - remaining period	$	24,176
2021	95,421
2022	72,331
2023	50,295
2024	42,238
Thereafter	173,545
Estimated remaining amortization expense	$	458,006

The Company evaluates the recoverability of its long-lived assets with finite useful lives, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company does not believe an impairment trigger occurred which would impact the recoverability of the carrying values as of September 30, 2020. There were no impairment charges related to identifiable intangible assets for the three and nine months ended September 30, 2020 and 2019.

Goodwill

The following table presents the carrying amount of goodwill (in thousands):


Balance as of December 31, 2019	$	47,453
Goodwill resulting from acquisitions	914,373
Measurement period adjustments	(2,694)
Effect of foreign currency translation	1,288
Balance as of September 30, 2020	$	960,420

7. RESTRUCTURING

On June 2, 2020, the Company announced workforce reductions as part of the Company’s integration plan with Saba to streamline the organization. The cost of these workforce reductions is primarily composed of severance payments and termination benefits. The actions are expected to be substantially complete by the fourth quarter of 2020. All liabilities for severance and related benefits are included in accrued expenses in the condensed consolidated balance sheets with certain cash payment obligations continuing into the first quarter of 2021.

Activity for the Company's restructuring plan is as follows:


	Nine Months Ended
	September 30, 2020
	(in thousands)
Restructuring charges	$	10,695
Non-cash charges	400
Total restructuring expense	$	11,095

Restructuring liability balance as of December 31, 2019	$	—
Restructuring charges	10,695
Cash payments	(7,786)
Effect of foreign currency translation	98
Restructuring liability balance as of September 30, 2020	$	3,007

8. OTHER BALANCE SHEET AMOUNTS

Property and Equipment, net

The balance of property and equipment, net is as follows (in thousands):


	Useful Life	September 30, 2020		December 31, 2019
Computer equipment and software	1 – 5 years	$	64,342	$	57,482
Furniture and fixtures	3 – 7 years	6,898		6,096
Leasehold improvements	1 – 7 years	25,011		22,800

Total property and equipment		96,251		86,378
Less: accumulated depreciation and amortization		(62,359)		(49,852)
Total property and equipment, net		$	33,892	$	36,526

Depreciation expense was $5.4 million and $3.0 million for the three months ended September 30, 2020 and 2019 and $14.3 million and $8.7 million for the nine months ended September 30, 2020 and 2019, respectively.

Accrued Expenses

The balance of accrued expenses is as follows (in thousands):


	September 30, 2020		December 31, 2019
Accrued compensation	$	47,667	$	33,626
Accrued commissions	13,329		18,834
Accrued interest	5,435		8,625
Other accrued expenses	24,234		16,990
Total accrued expenses	$	90,665	$	78,075

Deferred Commissions

The Company defers commissions paid to its sales force and related payroll taxes as these amounts are incremental costs of obtaining a contract with a customer and are recoverable from future revenue due to the non-cancelable customer agreements that gave rise to the commissions. Deferred commissions are then amortized over the related benefit period which has been determined to be six years for commissions for initial contracts. For the three months ended September 30, 2020 and 2019, the Company recognized $10.4 million and $10.4 million in commissions expense, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized $29.4 million and $27.8 million in commissions expense, respectively. These expenses were recorded in sales and marketing expense in the accompanying condensed consolidated statements of operations.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs are based on market data obtained from independent sources. The fair value hierarchy is based on the following three levels of inputs, of which the first two are considered observable and the last one is considered unobservable:

•Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that management has the ability to access at the measurement date.

•Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•Level 3 – Unobservable inputs

Assets and liabilities measured at fair value on a recurring basis included the following (in thousands):


	September 30, 2020								December 31, 2019
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Cash equivalents	$	—	$	—	$	—	$	—	$	148,089	$	148,089	$	—	$	—
Corporate bonds	—		—		—		—		122,648		—		122,648		—
Agency bonds	—		—		—		—		3,968		—		3,968		—
US treasury securities	—		—		—		—		70,089		—		70,089		—
Commercial paper	—		—		—		—		23,828		—		23,828		—
Certificate of deposit	—		—		—		—		3,937		3,937		—		—
Asset-backed securities	—		—		—		—		27,551		—		27,551		—
Foreign currency forward contracts	43		—		43		—		—		—		—		—
Total	$	43	$	—	$	43	$	—	$	400,110	$	152,026	$	248,084	$	—

At September 30, 2020, the Company had no cash equivalents measured at fair value on a recurring basis. At December 31, 2019, cash equivalents of $148.1 million consisted of money market funds with original maturity dates of three months or less backed by US Treasury bills, as well as corporate bonds, agency bonds, commercial paper, certificates of deposit, and US treasury securities.

At September 30, 2020, foreign currency forward contracts were classified within Level 2 of the fair value hierarchy and were valued based on quoted foreign exchange rates. The aggregate notional value of these contracts outstanding at September 30, 2020 was $4.0 million. The forward contracts have a maturity of less than one year and are not used for speculative purposes. These forward contracts are to exchange US dollars for Canadian dollars and are used to manage the Company’s exposure to foreign exchange rate risk related to operating expenses incurred in Canadian dollars. The contracts are re-measured to fair value at the end of each reporting period and are not designated as hedging instruments under applicable accounting guidance; therefore, changes in fair value of these contracts are recorded in other, net in the condensed consolidated statements of operations.

At December 31, 2019, corporate bonds, agency bonds, US treasury securities, commercial paper, and asset-backed securities were classified within Level 2 of the fair value hierarchy. The instruments were valued using information obtained from pricing services, which obtained quoted market prices from a variety of industry data providers, security master files from large financial institutions, and other third-party sources. The Company performed supplemental analysis to validate information obtained from its pricing services. As of December 31, 2019, no adjustments were made to such pricing information.

Convertible Notes

The Company’s Convertible Notes, as described in Note 3 – Debt, are presented in the accompanying condensed consolidated balance sheets at their original issuance value, net of unaccreted debt discount and unamortized debt issuance costs, and are not remeasured to fair value each period. The fair value of the Company’s Convertible Notes as of September 30, 2020 was approximately $360 million. The fair value of the Convertible Notes, which are classified as Level 2 financial instruments, was estimated on the basis of the current equity value implicit in the instrument.

10. STOCKHOLDERS’ EQUITY

Common Stock

As of September 30, 2020 and December 31, 2019 there were 1,000,000,000 shares of common stock authorized. As of September 30, 2020 and December 31, 2019 there were 64,554,401 and 61,037,517 shares issued and outstanding, respectively.

Share Repurchase Programs

In August 2019, the Company’s board of directors authorized a $150.0 million share repurchase program of its common stock (the “2019 Share Repurchase Program”). The 2019 Share Repurchase Program is set to terminate when the aggregate cost of shares repurchased under the 2019 Share Repurchase Program reaches $150.0 million. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions, or otherwise. The timing and amount of any share repurchase will depend on share price, corporate and regulatory requirements, economic and market conditions, and other factors. At October 1, 2020, $127.6 million remained available for repurchase of shares under the 2019 Share Repurchase Program. There were no share repurchases under the 2019 Share Repurchase Program during the three and nine months ended September 30, 2020.

11. STOCK-BASED AWARDS

Stock Options

Stock option activity is summarized as follows (in thousands, except per share and term information):


	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value1
Outstanding, December 31, 2019	2,851	$	30.97	3.1	$	78,580

Exercised	(774)	12.09
Forfeited	(174)	42.43
Outstanding, September 30, 2020	1,903	$	37.62	2.9	$	9,347

Exercisable at September 30, 2020	1,903	$	37.62	2.9	$	9,347
Vested and expected to vest at September 30, 2020	1,903	$	37.62	2.9	$	9,347


1 Based on the Company’s closing stock price of $36.36 on September 30, 2020 and $58.55 on December 31, 2019.

There were no stock options granted during the three and nine months ended September 30, 2020 and 2019.

Restricted Stock Units

Restricted stock unit (“RSU”) activity is summarized as follows (shares in thousands):


	Number of Shares	Weighted- Average Grant Date Fair Value
Unvested shares at December 31, 2019	3,756	$	47.76
Granted	2,019	34.39
Forfeited	(296)	46.69
Vested	(1,502)	43.44
Unvested shares at September 30, 2020	3,977	$	42.68

Unrecognized compensation expense related to unvested RSUs was $125.2 million at September 30, 2020, which is expected to be recognized over a weighted-average period of 2.5 years.

Performance-Based Restricted Stock Units

Performance-based restricted stock unit (“PRSU”) activity is summarized as follows (shares in thousands):


	Number of Shares	Weighted- Average Grant Date Fair Value
Unvested shares at December 31, 20191	1,752	$	44.21
Granted	720	36.06
Forfeited	(261)	40.69

Unvested shares at September 30, 20201	2,211	$	41.97

1 Assumes maximum achievement of the specified financial targets.

Unrecognized compensation expense related to unvested PRSUs was $14.9 million at September 30, 2020, which is expected to be recognized over a weighted-average period of 1.6 years.

Employee Stock Purchase Plan

Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP”), eligible employees are granted the right to purchase shares at the lower of 85% of the fair value of the stock at the time of grant or 85% of the fair value at the time of exercise. The right to purchase shares is granted semi-annually, in June and December, for six month offering periods. As of and for the three months ended September 30, 2020, no shares were purchased under the ESPP, and 4,326,341 shares remained available for issuance.

Stock-Based Compensation

Stock-based compensation expense is reflected in the accompanying condensed consolidated statements of operations as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Cost of revenue	$	2,205	$	1,748	$	7,028	$	4,670
Sales and marketing	7,197		7,915		21,409		20,771
Research and development	4,283		4,285		11,807		12,800
General and administrative	4,047		5,570		14,553		17,473
Restructuring	192		—		400		—
Total	$	17,924	$	19,518	$	55,197	$	55,714

12. INCOME TAXES

The Company’s income tax provision was approximately $(0.4) million and $(0.6) million with an effective income tax rate of (2.4)% and (94.4)% for the three months ended September 30, 2020 and 2019. The Company’s income tax benefit (provision) was approximately $28.6 million and $(2.2) million with an effective income tax rate of 40.8% and (19.8)% for the nine months ended September 30, 2020 and 2019. The Company’s effective tax rate differs from the US statutory rate of 21% primarily due to the change in the valuation allowance on the Company’s deferred tax assets and income taxes in foreign jurisdictions with no valuation allowances. In connection with the acquisition of Saba, the Company recorded excess deferred tax liabilities that are expected to provide a source of future income. This resulted in a partial change in judgment as to the realizability of the Company's US federal and state deferred tax assets. Consequently, the Company determined that a portion of its existing deferred tax assets were more likely than not to be realized and recognized a discrete income tax benefit of approximately $26.7 million during the three months ended June 30, 2020.

The income tax provision is related to domestic income, certain foreign income, and withholding taxes. The Company does not have a material tax provision in significant jurisdictions in which it operates, such as the United States, as it has historically generated losses. The Company has recorded a full valuation allowance against its net deferred tax assets and the Company does not currently anticipate recording an income tax benefit related to these deferred tax assets or current year losses other than to the extent stated above.

The Company computed income taxes for the quarter ended September 30, 2020 using the discrete method, applying the actual year-to date effective tax rate to pre-tax income or loss. The Company believes this method yields a more reliable income tax calculation for the period than the estimated annual effective tax rate method. The estimated annual effective tax rate method is not reasonable for the Company due to its sensitivity to small changes in forecasted annual income or loss before income taxes, which would result in significant variations in the customary relationship between income tax expense and pre-tax income or loss for interim periods.

The Company is subject to United States federal income tax as well as to income tax in multiple state and foreign jurisdictions, including the United Kingdom. Federal income tax returns of the Company are subject to IRS examination for the 2016 through 2019 tax years. State income tax returns are subject to examination for the 2015 through 2019 tax years. Currently, an audit is ongoing in the UK for the year ended December 31, 2017. There are no ongoing audits in any other significant foreign tax jurisdictions.

During the quarter ended June 30, 2020, the Company recorded an increase in its uncertain tax positions in the amount of $5.5 million, including interest and penalties, related to the acquisition of Saba. No additional increases were recorded for the quarter ended September 30, 2020.

13. COMMITMENTS AND CONTINGENCIES

Commitments

In March 2020, the Company entered into an agreement with a provider of cloud computing services to provide services over approximately seven years. The remaining obligation as of September 30, 2020 is $81.2 million.

Letters of Credit

The Company maintains standby letters of credit in association with other contractual arrangements. Total letters of credit outstanding at September 30, 2020 and December 31, 2019 were $9.4 million and $8.3 million, respectively.

Guarantees and Indemnifications

The Company has made guarantees and indemnities under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. The Company is obligated to indemnify its directors and officers to the maximum extent permitted under the laws of the State of Delaware. However, the Company has a directors and officers insurance policy that may reduce its exposure in certain circumstances and may enable it to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases, is indefinite but subject to statutes of limitations. To date, the Company has made no payments related to these guarantees and indemnities. The Company estimates the fair value of its indemnification obligations as insignificant based on this history and the Company’s insurance coverage and, therefore, has not recorded any liability for these guarantees and indemnities in the accompanying condensed consolidated balance sheets.

Litigation

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. If the Company determines that it is probable that a loss has been incurred and the amount is reasonably estimable, the Company will record a liability. The Company has determined that it does not have a potential liability related to any legal proceedings or claims that would individually, or in the aggregate, have a significant adverse effect on its financial condition or operating results.

14. LEASES

The Company has various non-cancelable operating leases for its offices and data centers. These arrangements have remaining lease terms ranging from 1 to 12 years. Certain lease agreements contain renewal options, termination rights, rent abatement, and/or escalation clauses with renewal terms that can extend the lease term, generally from 1 to 5 years.

The components of lease cost related to the Company's operating leases are as follows:



	Nine Months Ended
	September 30,
		2020		2019

		(in thousands)
Operating lease cost		$	13,979	$	11,613
Sublease income		(2,834)		(2,732)
Net lease cost		$	11,145	$	8,881

Supplemental cash flow information related to leases, including leases acquired in business combinations, is as follows:


	Nine Months Ended
	September 30,
		2020		2019

		(in thousands)
Cash paid for operating leases		$	10,357	$	9,639
Right-of-use assets obtained in exchange for lease obligations		18,409		5,452

Supplemental balance sheet information related to the Company's operating leases is as follows:


	September 30, 2020		December 31, 2019
Weighted-average remaining lease term	4.4 years		6.0 years
Weighted-average incremental borrowing rate	3.5	%	3.3	%

Maturities of the Company’s operating lease liabilities at September 30, 2020 are as follows (in thousands):




2020 – remaining period	$	3,787
2021	20,908
2022	19,980
2023	18,864
2024	9,598
Thereafter	22,401
Total lease payments	95,538
Less: Imputed interest1	(9,379)
Present value of operating lease liabilities	$	86,159
1 Calculated using the incremental borrowing rate for each lease.

15. REVENUE, DEFERRED REVENUE, AND REMAINING PERFORMANCE OBLIGATIONS

Disaggregation of Revenue

The following table sets forth the Company’s sources of revenue (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Subscription revenue	$	185,643	$	137,446	$	507,281	$	401,264
Professional services revenue	13,855		7,506		26,711		25,665
Total revenue	$	199,498	$	144,952	$	533,992	$	426,929

Revenue by geographic region, which is generally based on the address of the Company’s customers as defined in their master subscription agreements, is set forth below (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
United States	$	123,907	$	94,880	$	341,210	$	278,157
All other countries	75,591		50,072		192,782		148,772
Total revenue	$	199,498	$	144,952	$	533,992	$	426,929

Deferred Revenue

The Company recognized $168.2 million and $127.1 million of revenue during the three months ended September 30, 2020 and 2019, respectively, that was included in the deferred revenue balances as of June 30, 2020 and 2019, respectively. The Company recognized $306.9 million and $286.7 million of revenue during the nine months ended September 30, 2020 and 2019, respectively, that was included in the deferred revenue balances as of December 31, 2019 and 2018, respectively.

Transaction Price Allocated to Remaining Performance Obligations

As of September 30, 2020, approximately $1.134 billion of revenue is expected to be recognized from remaining performance obligations. The Company expects to recognize revenue on approximately 70% of these remaining performance obligations over the next 18 months, with the balance recognized thereafter.

The estimated revenues from the remaining performance obligations do not include uncommitted contract amounts such as (i) amounts which are cancellable by the customer without significant penalty, (ii) future billings for time and material contracts, and (iii) amounts associated with optional renewal periods.

16. RELATED PARTY TRANSACTIONS

The Cornerstone OnDemand Foundation (the “Foundation”) empowers communities in the United States and internationally by increasing the impact of the non-profit sector through the utilization of people development technology including the Company’s products. The Company’s founder and co-chairman of the board is on the board of directors of the Foundation. The Company does not direct the Foundation’s activities, and accordingly, the Company does not consolidate the Foundation’s activities with its financial results. During the three months ended September 30, 2020 and 2019, the Company provided at no charge certain resources to the Foundation, with approximate values of $0.7 million and $0.8 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company provided at no charge certain resources to the Foundation, with approximate values of $2.5 million and $2.8 million, respectively.

17. SUBSEQUENT EVENTS

Subsequent to September 30, 2020, the Company made principal prepayments of $50.0 million on the Term Loan Facility. The Company expects to make voluntary prepayments on the Term Loan Facility from time to time in the future.

ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, statements regarding our business strategies; anticipated future operating results and operating expenses; our ability to attract new customers to enter into subscriptions for our solutions; our ability to service those customers effectively and induce them to renew and upgrade their deployments of our solutions; our ability to expand our sales organization to address effectively the new industries, geographies, and types of organizations we intend to target; our ability to optimize the efficiency of our operations and scalability of our business; our ability to accurately forecast revenue and appropriately plan our expenses; market acceptance of enhancements to our solutions; alternate ways of addressing people development needs or new technologies generally by us and our competitors; continued acceptance of software-as-a-service as an effective method for delivering people development solutions and other business management applications; the attraction and retention of qualified employees and key personnel; our ability to protect and defend our intellectual property; costs associated with defending intellectual property infringement and other claims; the effects of global outbreaks of pandemics or contagious diseases or fear of such outbreaks, such as the ongoing COVID-19 pandemic, including on the demand for our products, our ability to expand in new geographic markets, or the timing of such expansion efforts, and on overall economic conditions and software-as-a-service spending; other events in the markets for our solutions and alternatives to our solutions, as well as in the United States and global markets generally; future regulatory, judicial, and legislative changes in our industry; our ability to successfully and efficiently integrate Saba Software, Inc. into our business; the timing and amount of capital expenditures and share repurchases; and changes in the competitive environment in our industry and the markets in which we operate. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of such terms or other comparable terminology. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

Overview

Cornerstone OnDemand, Inc. is a leading global provider of learning and people development solutions, delivered as software-as-a-service (“SaaS”). Unless the context requires otherwise, the words “Cornerstone,” “we,” “Company,” “us,” and “our” refer to Cornerstone OnDemand, Inc. and its wholly owned subsidiaries. We were founded with a passion for empowering people through learning and a conviction that people should be an organization’s greatest competitive advantage. We believe people can achieve anything when they have the right development and growth opportunities. We offer organizations the technology, content, expertise, and specialized focus to help them realize their potential. Cornerstone’s people development solutions feature comprehensive recruiting, personalized learning, modern content delivered in the flow of work, development-driven performance management, and holistic workforce data management and insights. On April 22, 2020, the Company acquired Saba Software, Inc. (“Saba”), a provider of talent experience solutions. We are actively engaged in integrating Saba. Together, the combined Company reaches over 6,000 customers of all sizes across over 180 countries and nearly 50 languages.

We work with customers across all geographies, vertical markets, and market segments. Our customers include multi-national corporations, large domestic and foreign-based enterprises, mid-market companies, public sector organizations, healthcare providers, higher education institutions, non-profit organizations, and small businesses. We sell our solution domestically and internationally through both direct and indirect channels, including direct sales teams throughout North and South America, Europe, and Asia-Pacific and distributor relationships with payroll companies, human resource consultancies, and global system integrators.

Our enterprise people development solution is composed of:

•Our Cornerstone Learning solution provides robust, modern learning management software designed to scale with the organization. Cornerstone Learning comprehensively supports compliance, knowledge sharing, and employee-driven development training to close skills gaps;

•Our Cornerstone Content Anytime offering provides modern, personalized learning content from our own studios or a variety of quality partners in a streamlined, easy way;

•Our Cornerstone Performance solution provides tools to manage goal setting, performance reviews, competency assessments, compensation management, and succession planning;

•Our Cornerstone Careers solution helps employees understand how to get from their current position to future strategic roles with continuous feedback, goal setting, development plans, career exploration, and engagement survey tools;

•Our Cornerstone Recruiting solution helps organizations to attract, hire, and onboard the right employees; and

•Our Cornerstone HR solution provides an aggregated view of all employee data with workforce planning, self-service management, and compliance reporting capabilities resulting in more accurate data.

Our goal is to empower people, organizations, and communities to realize their potential with a comprehensive people development solution that is built to last. Our growth strategy since inception has been deliberate and focused on long-term success. This has allowed us to weather periods of economic turmoil and significant changes in the markets we serve without experiencing business contraction. We plan to continue with the same systematic approach in the future. Key elements of our strategy include:

Continue to Innovate and Extend Our Technological Leadership. We believe we have developed over the last 20 years a deep understanding of the people development challenges our customers face. We continually collaborate with our customers to build extensive functionality that addresses their specific needs and requests. We plan to continue to leverage our expertise in people development and customer relationships to develop new products, features, and functionality that will enhance our solutions and expand our addressable market. We plan to continue our policy of implementing best practices across our organization, expanding our technical operations, and investing in our network infrastructure and service capabilities in order to support continued future growth.

Retain and Expand Business with Existing Customers. We believe our existing installed base of customers offers a substantial opportunity for growth.

•Focus on Customer Success, Retention, and Growth. We believe focusing on our customers’ success will lead to our own success. We have developed a Customer Success Framework that governs our operating model. We strive to maintain our strong retention rates by continuing to provide our customers with high levels of service, support, and increasing functionality.

•Sell Additional Products to Existing Customers. We believe there is a significant growth opportunity in selling additional functionality to our existing customers. Many customers have added functionality subsequent to their initial deployments as they recognize the benefits of our unified solution. With our expanding product portfolio functionality, we believe significant upsell opportunity remains within our existing customer base.

Focus on Growing Recurring Revenue. We believe our primary growth drivers are as follows:

•Invest in North America. We believe the market for people development is large and remains significantly underpenetrated. In particular, content and recruiting provide an opportunity to increase our recurring sales to both new and existing customers. Additionally, we believe the small and medium-sized business (“SMB”) market represents a very large and underpenetrated opportunity.

•Continue to Invest in Our International Operations. We believe a substantial opportunity exists to continue to grow sales of our solution internationally. We intend to grow our Europe, Middle East, and Africa (“EMEA”) and Asia-Pacific and Japan (“APJ”) operations.

•Grow Our Cornerstone Content Anytime Sales. We believe there is a significant market opportunity for developing employees throughout their careers with modern, fresh e-learning content. Our Content Anytime subscription offering provides access to industry leading content which we believe will increase user engagement on our solution. Our content partners for Content Anytime include industry leaders as well as regional, functional, and vertically-focused online training providers. In addition, we have agreements with providers of specific competency models for use by our customers directly in our people development solution. We intend to enter into additional license agreements to continue providing the best content available for our customers.

•Expand the Ecosystem. In recent years, we have expanded our relationships with various third-party consulting firms to deliver the successful implementation of our solution and to optimize our customers’ use of our solution during the terms of their engagements. Our partner strategy and experience includes certifications and curricula developed to ensure successful delivery by our partners and continued high customer satisfaction. We believe we have a significant opportunity to leverage these third-parties interested in building or expanding their businesses to increase our market penetration.

Increase Operating Income and Free Cash Flow. We have increased our focus on managing our costs while making smart investments to scale our middle and back-office operations, which we believe will support growth in recurring revenue and our long-term success over time. We believe we have executed and intend to continue to execute operational excellence initiatives to optimize our margin profile, which we believe will enable further leverage in our expense structure and growth in operating income and free cash flow.

Acquisitions and Strategic Investments. We may acquire or invest in additional businesses, products, or technologies that we believe will complement or expand our solution, enhance our technical capabilities or otherwise offer growth opportunities. Most recently, in April 2020, we completed our previously announced acquisition of Saba, a provider of talent experience solutions. In January 2020, we acquired Clustree SAS (“Clustree”), a developer of a skills engine and skills ontology. In December 2019, we invested in Talespin Inc. (“Talespin”), a developer of enterprise virtual reality training software. In November 2018, we acquired Grovo Learning, Inc. (“Grovo”), a provider of Microlearning® content. In September 2018, we acquired Workpop Inc. (“Workpop”), a web and mobile solution for candidates and hiring managers in service-based industries. Saba was acquired to expand our customer footprint and engineering resources. Clustree was acquired to accelerate the development of a skills engine. Grovo was acquired to enhance our Content Anytime offering and Workpop was acquired to enhance our Recruiting solution.

We generate most of our revenue from the sale of our products pursuant to multi-year customer agreements. Customer agreements for our people development solution generally have terms of three years. Our sales processes are typically competitive, and sales cycles generally vary in duration from two to nine months depending on the size of the potential customer. We generally price our people development solution based on the number of products purchased and the permitted number of users with access to each product.

We generally recognize revenue from subscriptions ratably over the term of the customer agreement and revenue from professional services as the services are performed. We normally invoice our customers upfront for annual subscription fees for multi-year subscriptions and upfront for professional services. We record amounts invoiced for annual subscription periods that have not occurred or services that have not been performed as deferred revenue.

We have historically experienced seasonality in terms of when we enter into customer agreements. We usually sign a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter of each year. This seasonality is driven by customer purchasing patterns. As the terms of most of our customer agreements are full year increments, agreements initially entered into the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenue, due to the fact that we generally recognize subscription revenue ratably over the term of the customer agreement, which is generally three years. In addition, this seasonality is reflected in changes in our deferred revenue balance, which generally is impacted by the timing of when we enter into agreements with new customers, invoice customers, and recognize revenue. We expect this seasonality to continue, which may cause fluctuations in certain of our operating results and financial metrics, and thus limit our ability to predict future results.

Our quarterly operating results have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, many of which are beyond our control, including those described in the “Risk Factors” section of this Quarterly Report on Form 10-Q. One or more of these factors may cause our operating results to vary widely. As such, we believe our quarterly results of operations may vary significantly in the future and period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.

COVID-19

The impact of the COVID-19 pandemic on the global economy and on our business continues to be fluid. We responded quickly across our organization to guard the health and safety of our team, support our partners and vendors, and mitigate risk. After careful review of our operations, while the ongoing and developing circumstances related to the COVID-19 pandemic remain highly uncertain, we believe that we are well positioned to address challenges related to the COVID-19 pandemic and to continue to execute against our strategic priorities and financial goals. We have several members of our team working cross-functionally to collect, monitor, and analyze evolving information regarding the COVID-19 pandemic and to make recommendations to our executive leadership team and board of directors regarding risk identification and mitigation planning. We have also taken steps to protect the health and welfare of our employees by temporarily closing our offices and suspending non-essential business-related travel, while continuing our commitment and efforts to serve customers that rely on us. Thus far, we believe our employees have rapidly adapted to working remotely and we are closely monitoring the COVID-19 pandemic to ensure we have all necessary plans in place for mitigating disruptions in our operations, including maintaining high levels of uptime, and service and support to our customers. We continue to proactively assess, monitor, and respond to domestic and international developments related to the COVID-19 pandemic, and we will implement risk-mitigation plans as needed to minimize the impact on our partner relationships and business operations. While our customer base spans a variety of industries and geographies, our customers may be negatively impacted by COVID-19 which may result in an increase in delayed purchasing decisions from prospective customers, reduced customer demand, reduced customer spend, and delayed payments, all of which could affect our future revenues. Because our near-term revenues are relatively predictable as a result of our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our operating results and financial condition until future periods.

Metrics

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions.

•Revenue. Revenue consists primarily of subscription revenue and professional services revenue. We generally recognize revenue over the delivery period. Because of the seasonality of our business and the timing of when we enter into new customer agreements, revenue from customer agreements signed in the current period may not be fully reflected in the current period.

•Subscription Revenue. Subscription revenue represents subscriptions to our people development solution, content subscriptions, and related support sold on a recurring basis.

•Annual Recurring Revenue. In order to assess our business performance with a metric that reflects our focus on a subscription-based (or recurring revenue) business model, we track annual recurring revenue, a non-GAAP financial measure, which we define as the annualized recurring value of all active contracts at the end of a reporting period. We believe this metric is useful to investors in evaluating our ongoing operational performance and trends, and in comparing our financial measures with other companies in the same industry. However, it is important to note that other companies, including companies in our industry, may calculate annual recurring revenue differently or not at all, which may reduce its usefulness as a comparative measure.

•Free Cash Flow. We define free cash flow, a non-GAAP financial measure, as cash provided by operating activities minus capital expenditures and capitalized software costs. We present this metric because it is a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including investing in our business and strengthening our balance sheet.

•Annual Dollar Retention Rate. We define annual dollar retention rate, a non-GAAP financial measure, as the percentage of annual recurring revenue from all customers on the first day of a fiscal year that is retained from those same customers on the last day of that same fiscal year. Accordingly, this percentage excludes all annual recurring revenue from new customers added during the fiscal year. Furthermore, incremental sales during the fiscal year to customers included in the calculation are only counted to the extent those sales offset any decreases in annual recurring revenue from the original amount on the first day of our fiscal year. Therefore, the annual dollar retention rate can never exceed 100%. This ratio excludes the annual recurring revenue from customers of our Cornerstone for Salesforce, Cornerstone PiiQ, Grovo, and Workpop products. We believe that our annual dollar retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain our customers.

•Constant Currency Results. We have historically presented constant currency information, a non-GAAP financial measure, to provide a framework for assessing how our underlying business performed excluding the effect of foreign currency fluctuations. However, due to the acquisition of Saba in the second quarter of 2020, constant currency results on a combined company basis were not presented for the second and third quarter in 2020 as the historical comparative periods did not include the combined company results for a full quarter.

•Number of Customers. We believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business as we continue to invest in our direct sales teams and distributors. Our customer count includes contracted customers for our enterprise people development solution as of the end of the period. During the second quarter of 2020, we adjusted our method of determining customer count to exclude customers that are sold through resellers that share one tenant or instance of our product. We continue to exclude customers from our Cornerstone for Salesforce, PiiQ, Grovo, Workpop, and Clustree products from our customer count metrics.

Key Components of Our Results of Operations

Sources of Revenue and Revenue Recognition

Our solution is designed to enable organizations to meet the challenges they face in maximizing the productivity of their human capital. We generate revenue from the following sources:

•Subscriptions to Our Products and Other Offerings on a Recurring Basis. Customers pay subscription fees for access to our enterprise people development solution, other products, and support on a recurring basis. Fees are based on a number of factors, including the number of products purchased, which may include e-learning content, and the number of users having access to a product. We generally recognize revenue from subscriptions ratably over the term of the agreements beginning on the date the subscription service is made available to the customer. Subscription agreements are typically three years, billed annually in advance, and non-cancelable, with payment due within 30 days of the invoice date.

•Professional Services and Other. We offer our customers and implementation partners assistance in implementing our products and optimizing their use. Services are generally billed upfront on a fixed fee basis and to a lesser degree on a time-and-material basis. We generally recognize revenue from fixed fee professional services contracts as services are performed based on the proportion performed to date relative to the total expected services to be performed. Revenue associated with time-and-material contracts are recorded as such time and materials are incurred.

Our customer agreements generally include both subscriptions to access our products and related professional services. Our agreements generally do not contain any cancellation or refund provisions other than in the event of our default.

Cost of Revenue

Cost of revenue consists primarily of costs related to hosting our products and delivery of professional services, and includes the following:

•personnel and related expenses, including stock-based compensation;

•expenses for network-related infrastructure and IT support;

•delivery of contracted professional services and on-going customer support and customer success initiatives;

•payments to external service providers contracted to perform implementation services;

•depreciation of data centers and amortization of capitalized software costs and developed technology software license rights; and

•content and licensing fees and referral fees.

In addition, we allocate a portion of overhead, such as rent, IT costs, depreciation and amortization, and employee benefits costs, to cost of revenue based on headcount. The costs associated with providing professional services are significantly higher, as a percentage of revenue, than the costs associated with providing access to our products due to the labor costs to provide the consulting services. Cost of revenue also includes amortization of technology-related intangible assets from acquisitions.

Operating Expenses

Our operating expenses generally are as follows:

•Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, stock-based compensation, and commissions; costs of marketing and promotional events, corporate communications, online marketing, product marketing, and other brand-building activities; amortization of customer-related intangible assets from acquisitions; and allocated overhead.

•Research and Development. Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses, and stock-based compensation; the cost of certain third-party service providers; and allocated overhead. Research and development costs, other than software development costs qualifying for capitalization, are expensed as incurred.

•General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for administrative, legal, finance, and human resource staff, including salaries, benefits, bonuses, and stock-based compensation; professional fees; insurance premiums; amortization of acquisition-related intangible assets; other corporate expenses; and allocated overhead.

•Acquisition-Related Costs. Acquisition-related costs consist primarily of external professional services directly associated with acquisitions, such as advisory fees, accounting and legal costs, filing fees, due diligence, and integration costs.

•Restructuring. Restructuring costs consist primarily of payroll-related and stock-based compensation costs associated with employee terminations.

Other Income (Expense)

•Interest Expense. Interest expense consists primarily of interest expense from our debt obligations, including our Term Loan Facility, Revolving Credit Facility, and Convertible Notes (each defined below). Interest expense is primarily composed of contractual interest, commitment fees on unused amounts available on the Revolving Credit Facility, accretion of debt discount, and amortization of debt issuance costs.

•Other, Net. Other, net consists of interest income, income and expense associated with fluctuations in foreign currency exchange rates, fair value adjustments to strategic investments, and other non-operating expenses. Interest income consists primarily of interest income from investment securities. We expect interest income to vary depending on the level of our investments in marketable securities, which may include corporate bonds, agency bonds, US treasury securities, and commercial paper. We expect other, net to vary depending on the movement in foreign currency exchange rates and the related impact on our foreign exchange gain (loss).

Income Tax Provision

On a consolidated basis, we have incurred operating losses and have recorded a valuation allowance against our US, UK, and other deferred tax assets for all periods to date and, accordingly, have not recorded a benefit for income taxes for any of the periods presented, other than a provision for certain foreign and state income taxes and a benefit for the nine months ended September 30, 2020. This benefit, which was realized in connection with the recording of deferred tax liabilities from the acquisition of Saba, was attributable to the reversal of $26.7 million of a portion of our US federal and state valuation allowance on deferred tax assets that are more likely than not to be realized. Certain foreign subsidiaries and branches provide intercompany services and are compensated as limited risk distributors and/or on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with US GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, provision for income taxes, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

We believe that the following critical accounting policies involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

We recognize revenue from contracts with customers based on the five steps below. The application of these steps may require the use of certain estimates and judgments, particularly in identifying and evaluating complex or unusual contract terms and conditions that may impact revenue recognition.

1) Identification of the contract, or contracts, with a customer

2) Identification of all performance obligations in the contract

3) Determination of the transaction price

4) Allocation of the transaction price to the performance obligations in the contract

5) Recognition of revenue as we satisfy a performance obligation

We identify enforceable contracts with a customer when the agreement is signed. Contracts may contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold, customer demographics, geographic locations, and the number and types of users within our contracts.

Business Combinations

The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Assets and liabilities of an acquired business are recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.

The purchase price allocation process requires management to make significant estimates and assumptions. Although we believe the assumptions and estimates we have made are reasonable, they are inherently uncertain and based in part on experience, market conditions, projections of future performance, and information obtained from legacy management of acquired companies. Critical estimates include but are not limited to:

•estimated future subscription revenue; related profit margin associated with subscription revenues; and, expected customer retention rates;

•costs anticipated to fulfill remaining acquired performance obligations and estimated profit margin for such obligations;

•technology migration curves and royalty rates;

•discount rates;

•useful lives assigned to acquired intangibles assets; and

•uncertain tax positions and tax-related valuation allowances assumed.

Sales Commissions

We defer commissions paid to our sales force and related payroll taxes as these amounts are incremental costs of obtaining a contract with a customer and are recoverable from future revenue due to the non-cancelable customer agreements that gave rise to the commissions. We determine separate periods of benefit for commissions related to initial contracts and commissions related to renewal contracts. Commissions for initial contracts are deferred on the consolidated balance sheets and amortized on a straight-line basis over a period of benefit that has been determined to be six years. We consider technology life and other factors in estimating the benefit period. Commissions for renewal contracts are deferred and amortized on a straight-line basis over the related contract renewal period. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations.

Stock-based Compensation

We measure and recognize compensation expense for stock-based awards granted to employees and directors using a fair value method, including restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”). For RSUs, and PRSUs with service and performance conditions, fair value is based on the closing price of our common stock on the date of grant. For PRSUs with service and market conditions, fair value is estimated using a Monte-Carlo simulation. We recognize compensation expense for PRSUs only if it is probable the performance or market conditions will be met, which is dependent upon our expectations of whether future specified financial targets will be achieved. The likelihood of achievement of these targets is assessed at each balance sheet date. We may prospectively adjust previously recognized compensation expense if current expectations differ from assessments made in previous periods. Compensation expense, net of estimated forfeitures, is recognized over the requisite service period (which is generally the vesting period) on a straight-line basis for awards with only service conditions and using the accelerated attribution method for awards with both performance or market and service conditions. We estimate forfeitures based on our historical experience and regularly review the estimated forfeiture rate and make changes as factors affecting the forfeiture rate calculations and assumptions change.

Capitalized Software Costs

We capitalize the costs associated with software developed or obtained for internal use, including costs incurred in connection with the development of our products, when the preliminary project stage is completed, management has decided to make the project a part of a future offering and the software will be used to perform the function intended. These capitalized costs include external direct costs of materials and services consumed in developing or obtaining internal-use software, personnel and related expenses for employees who are directly associated with internal-use software projects and, when material, interest costs incurred during the development. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Costs incurred for upgrades to our products are also capitalized. Post-configuration training and maintenance costs are expensed as incurred. Capitalized software costs are amortized to cost of revenue using the straight-line method over the estimated useful life of the software of typically three years, commencing when the software is ready for its intended use.

Income Taxes

We use the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using tax rates expected to be in effect during the years in which the basis differences are expected to reverse. We record a valuation allowance when it is more likely than not that some of our net deferred tax assets will not be realized. In determining the need for a valuation allowance, we consider our projected future taxable income and future reversals of existing taxable temporary differences. We have recorded a valuation allowance to reduce our US, UK, and other net deferred tax assets to zero, because we have determined that it is not more likely than not that any of our US, UK, and other net deferred tax assets will be realized based on a history of losses in these jurisdictions. If in the future we determine that we will be able to realize any of our US, UK, and other net deferred tax assets, we will make an adjustment to the allowance, which would increase our income in the period that the determination is made.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 1 – Organization and Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Results of Operations

The following table sets forth our results of operations for each of the periods indicated (in thousands). The period-to-period comparison of financial results is not necessarily indicative of future results.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenue	$	199,498	$	144,952	$	533,992	$	426,929
Cost of revenue	64,503		37,167		164,427		111,049
Gross profit	134,995		107,785		369,565		315,880
Operating expenses:
Sales and marketing	71,850		57,815		192,122		171,011
Research and development	29,665		25,695		82,088		77,778
General and administrative	28,884		20,562		79,229		65,741
Acquisition-related costs	4,852		—		31,756		—
Restructuring	1,362		—		11,095		—
Total operating expenses	136,613		104,072		396,290		314,530
(Loss) income from operations	(1,618)		3,713		(26,725)		1,350
Other expense:

Interest expense	(19,609)		(3,321)		(43,329)		(9,889)
Other, net	5,817		(1,018)		(61)		(2,720)
Other expense, net	(13,792)		(4,339)		(43,390)		(12,609)
Loss before income tax provision	(15,410)		(626)		(70,115)		(11,259)
Income tax (provision) benefit	(371)		(591)		28,572		(2,227)
Net loss	$	(15,781)	$	(1,217)	$	(41,543)	$	(13,486)

The following table sets forth our results of operations as a percentage of total revenue for each of the periods indicated.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	32.3	%	25.6	%	30.8	%	26.0	%
Gross profit	67.7	%	74.4	%	69.2	%	74.0	%
Operating expenses:
Sales and marketing	36.0	%	39.9	%	36.0	%	40.1	%
Research and development	14.9	%	17.7	%	15.4	%	18.2	%
General and administrative	14.5	%	14.2	%	14.8	%	15.4	%
Acquisition-related costs	2.4	%	—	%	5.9	%	—	%
Restructuring	0.7	%	—	%	2.1	%	—	%
Total operating expenses	68.5	%	71.8	%	74.2	%	73.7	%
(Loss) income from operations	(0.8)	%	2.6	%	(5.0)	%	0.3	%
Other expense:

Interest expense	(9.8)	%	(2.3)	%	(8.1)	%	(2.3)	%
Other, net	2.9	%	(0.7)	%	—	%	(0.6)	%
Other expense, net	(6.9)	%	(3.0)	%	(8.1)	%	(2.9)	%
Loss before income tax provision	(7.7)	%	(0.4)	%	(13.1)	%	(2.6)	%
Income tax (provision) benefit	(0.2)	%	(0.4)	%	5.4	%	(0.5)	%
Net loss	(7.9)	%	(0.8)	%	(7.7)	%	(3.1)	%

The following table sets forth our revenue and key metrics that we use to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions:

Metrics


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

	(dollars in thousands)
Revenue	$	199,498	$	144,952	$	533,992	$	426,929
Subscription revenue	$	185,643	$	137,446	$	507,281	$	401,264
Operating loss	$	(1,618)	$	3,713	$	(26,725)	$	1,350
Free cash flow	$	25,740	$	13,057	$	38,703	$	18,133
Number of customers	6,229		3,446		6,229		3,446

Revenue increased by $54.5 million or 37.6% for the three months ended September 30, 2020 as compared to the same period in 2019. Revenue increased by $107.1 million or 25.1% for the nine months ended September 30, 2020 as compared to the same period in 2019. The rate of our revenue increase was impacted by the acquisition of Saba, the mix and timing of new customer agreements signed and upsells to existing customers, the success of our focus on subscription revenue and reducing our professional services business, and fluctuations in foreign exchange rates.

The following table sets forth our sources of revenue for each of the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Subscription revenue	$	185,643		$	137,446		$	507,281		$	401,264
Percentage of subscription revenue to total revenue	93.1		%	94.8		%	95.0		%	94.0		%
Professional services revenue	$	13,855		$	7,506		$	26,711		$	25,665
Percentage of professional services revenue to total revenue	6.9		%	5.2		%	5.0		%	6.0		%
Total revenue	$	199,498		$	144,952		$	533,992		$	426,929

Subscription revenue increased by $48.2 million, or 35.1%, for the three months ended September 30, 2020 as compared to the same period in 2019. Subscription revenue increased by $106.0 million, or 26.4%, for the nine months ended September 30, 2020 as compared to the same period in 2019. The increase was attributable to the acquisition of Saba as well as new business, which includes new customers, upsells, cross-sells, and renewals from existing customers.

Professional services revenue increased by $6.3 million, or 84.6%, for the three months ended September 30, 2020 and by $1.0 million, or 4.1%, for the nine months ended September 30, 2020 as compared to the same periods in 2019, respectively. The increase of professional services revenue was attributable to the acquisition of Saba.

Revenue by geography is generally based on the address of the customer as defined in our master subscription agreement with each customer. The following table sets forth our revenue by geographic area for each of the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
United States	$	123,907		$	94,880		$	341,210		$	278,157
Percentage for United States	62.1		%	65.5		%	63.9		%	65.2		%
All other countries	$	75,591		$	50,072		$	192,782		$	148,772
Percentage for all other countries	37.9		%	34.5		%	36.1		%	34.8		%
Total revenue	$	199,498		$	144,952		$	533,992		$	426,929

Net Cash Provided By Operating Activities and Free Cash Flow


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Net cash provided by operating activities	$	33,147		$	24,478		$	61,909		$	52,955
Capital expenditures	(635)			(6,713)			(2,910)			(15,987)
Capitalized software costs	(6,772)			(4,708)			(20,296)			(18,835)
Free cash flow	$	25,740		$	13,057		$	38,703		$	18,133
Free cash flow margin	12.9		%	9.0		%	7.2		%	4.2		%

Net cash provided by operating activities for the three months ended September 30, 2020 and 2019 was $33.1 million and $24.5 million, respectively. For the nine months ended September 30, 2020 and 2019, net cash provided by operating activities was $61.9 million and $53.0 million, respectively. The increase was primarily due to changes in net income adjusted for non-cash items including depreciation and amortization, and the timing of cash receipts from customers as compared to the same periods in 2019, and was partially offset by cash payments for acquisition-related costs and restructuring activities.

Free cash flow for the three months ended September 30, 2020 and 2019 was $25.7 million and $13.1 million, respectively, resulting in free cash flow margins of 12.9% and 9.0%. Free cash flows for the nine months ended September 30, 2020 and 2019 was $38.7 million and $18.1 million, respectively, and free cash flow margins were 7.2% and 4.2%.

Cost of Revenue, Gross Profit, and Gross Margin


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Cost of revenue	$	64,503		$	37,167		$	164,427		$	111,049
Gross profit	$	134,995		$	107,785		$	369,565		$	315,880
Gross margin	67.7		%	74.4		%	69.2		%	74.0		%

Cost of revenue increased $27.3 million, or 73.5%, for the three months ended September 30, 2020. The increase is primarily attributable to the acquisition of Saba. Cost of revenue increased by $53.4 million, or 48.1%, for the nine months ended September 30, 2020 as compared to the same period in 2019; primarily due to the acquisition of Saba, the reallocation of certain internal resources to customer delivery initiatives, and increased allocation of data center costs from research and development to cost of revenue.

Sales and Marketing


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Sales and marketing	$	71,850		$	57,815		$	192,122		$	171,011
Percent of revenue	36.0		%	39.9		%	36.0		%	40.1		%

Sales and marketing expenses increased $14.0 million, or 24.3% for the three months ended September 30, 2020 as compared to the same period in 2019, primarily due to the acquisition of Saba, which was partially offset by decreased employee-related expenses as well as decreased marketing expenses from changes to move our Convergence event to fully remote in response to the ongoing COVID-19 pandemic.

Sales and marketing expenses increased $21.1 million, or 12.3%, for the nine months ended September 30, 2020 as compared to the same period in 2019 primarily due to the acquisition of Saba as described above. This increase was partially offset by decreased employee-related expenses including changes in stock-based compensation related to expected attainment of performance conditions, and by decreased travel, marketing, and overhead costs in response to the ongoing COVID-19 pandemic.

Research and Development


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Research and development	$	29,665		$	25,695		$	82,088		$	77,778
Percent of revenue	14.9		%	17.7		%	15.4		%	18.2		%

Research and development expenses increased $4.0 million, or 15.5%, for the three months ended September 30, 2020 as compared to the same period in 2019. Research and development expenses increased $4.3 million, or 5.5% for the nine months ended September 30, 2020 as compared to the same period in 2019. The increases in both periods were attributable to the acquisition of Saba, as discussed above, and were partially offset by a reduction in spending for outside consulting services, reduced costs for travel due to COVID-19, and reallocation of certain internal resources from research and development to customer delivery initiatives during the first quarter of 2020.

We capitalize a portion of our software development costs related to the development and enhancements of our products, which are then amortized to cost of revenue. The timing and levels of resources dedicated to our capitalizable development and enhancement projects may affect the amount of development costs expensed in any given period. We capitalized $7.6 million and $6.4 million of software development costs and amortized $7.1 million and $6.7 million during the three months ended September 30, 2020 and 2019, respectively. We capitalized $22.7 million and $22.0 million of software development costs and amortized $21.0 million and $18.6 million during the nine months ended September 30, 2020 and 2019, respectively.

General and Administrative


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
General and administrative	$	28,884		$	20,562		$	79,229		$	65,741
Percent of revenue	14.5		%	14.2		%	14.8		%	15.4		%

General and administrative expenses increased by $8.3 million, or 40.5%, for the three months ended September 30, 2020 as compared to the same period in 2019. General and administrative expenses increased $13.5 million, or 20.5%, for the nine months ended September 30, 2020 as compared to the same period in 2019. The increase in both periods was primarily due to the acquisition of Saba.

Acquisition-Related Costs


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Acquisition-related costs	$	4,852		$	—		$	31,756		$	—
Percent of revenue	2.4		%	—		%	5.9		%	—		%

During the three and nine months ended September 30, 2020 we incurred $4.9 million and $31.8 million of costs, respectively, related to the acquisitions of Saba and Clustree. We expect to incur additional costs related to the acquisition of Saba during the remainder of 2020.

Restructuring


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

	(dollars in thousands)
Restructuring	$	1,362		$	—		$	11,095		$	—
Percent of revenue	0.7		%	—		%	2.1		%	—		%

During the three and nine months ended September 30, 2020, we incurred $1.4 million and $11.1 million of restructuring costs, respectively, primarily due to workforce reductions announced as part of our integration plan associated with the acquisition of Saba. We are evaluating other areas of synergy as part of our integration planning efforts and expect actions to be substantially complete by the fourth quarter of 2020 with certain related cash payment obligations continuing into the first quarter of 2021. For additional information refer to Note 7 – Restructuring of the Notes to Condensed Consolidated Financial Statements.

Other Expense


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

	(in thousands)

Interest expense	$	(19,609)	$	(3,321)	$	(43,329)	$	(9,889)
Other, net	5,817		(1,018)		(61)		(2,720)
Total	$	(13,792)	$	(4,339)	$	(43,390)	$	(12,609)

Interest expense increased for the three and nine months ended September 30, 2020 as compared to the same periods in 2019, primarily due to additional interest costs as well as amortization and accretion resulting from the Term Loan Facility and the modification of our Convertible Notes, (each defined below), which were executed in April 2020. Refer to the section below titled Liquidity and Capital Resources for additional information regarding interest expense associated with our Term Loan Facility and Convertible Notes.

Other, net is primarily composed of foreign exchange gains and losses related to transactions denominated in foreign currencies, foreign exchange gains and losses related to our intercompany loans and certain cash accounts, and interest income. The increase in other, net for the three and nine months ended September 30, 2020 as compared to the same periods in 2019 was primarily driven by foreign exchange gains from fluctuations in exchange rates between the euro and British pound due to the global nature of our operations, as well as lower interest income combined with realized losses on the sale of a significant portion of our investment portfolio during the first quarter of 2020.

Income Tax Benefit (Provision)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019

	(in thousands)
Income tax (provision) benefit	$	(371)	$	(591)	$	28,572	$	(2,227)

For the three and nine months ended September 30, 2020, we recorded an income tax provision related to certain foreign and state income taxes. Additionally, for the nine months ended September 30, 2020, we recorded a benefit attributable to the reversal of $26.7 million of our US federal and state valuation allowance on deferred tax assets that are more likely than not to be realized, in connection with the acquisition of Saba due to the deferred tax liabilities recognized in accounting for the acquisition.

Liquidity and Capital Resources

At September 30, 2020, our principal sources of liquidity were $170.9 million of cash and cash equivalents and $156.7 million of accounts receivable. On April 22, 2020, we acquired Saba for an aggregate purchase price of approximately $1.310 billion, consisting of $1.277 billion in cash and 1,110,352 shares of common stock of the Company. In connection with the acquisition, we incurred $1.0047 billion of additional indebtedness as a senior term loan (the “Term Loan Facility”) for a purchase price equal to 97.5% of the principal amount. Principal payments are due quarterly, beginning in the fourth quarter of 2020, at a rate of 0.25% of the principal amount; the remaining outstanding principal balance is due in April 2027. Interest is payable on a monthly or quarterly basis at the Company's option. We also entered into a revolving credit facility (the “Revolving Credit Facility”) to borrow up to an additional $150.0 million, of which $50.0 million remained available at September 30, 2020. The available borrowings under the Revolving Credit Facility are limited by indebtedness covenants with the holders of the Convertible Notes (defined below) and drawn letters of credit issued under the Credit Agreement. The Revolving Credit Facility includes a letter of credit sub-facility of up to $30.0 million. For additional information regarding our acquisition of Saba, including the consideration payable and debt arrangements, refer to Note 2 – Business Combinations and Note 3 – Debt of the Notes to Condensed Consolidated Financial Statements.

Additionally, in 2017, we issued $300.0 million principal amount of 5.75% senior convertible notes (the “Convertible Notes”) for a purchase price equal to 98% of the principal amount, to certain entities affiliated with Silver Lake and LinkedIn. Holders of the Convertible Notes may convert their notes at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date. On April 20, 2020, we amended the indenture to the Convertible Notes with US Bank National Association, as trustee (the “Supplemental Indenture”). Upon the completion of the acquisition of Saba on April 22, 2020, the Supplemental Indenture became effective, which permitted us to incur additional indebtedness and extended the maturity date of the Convertible Notes from July 1, 2021 to March 17, 2023. In connection with this amendment, the Company paid approximately $3.4 million in consent and other fees to the holders of the Convertible Notes.

Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities, access to the Revolving Credit Facility, and existing cash and cash equivalents will provide adequate funds for our ongoing operations, debt service requirements, and general corporate purposes for at least the next twelve months. However, if the ongoing COVID-19 pandemic worsens or is prolonged, our customers may increasingly delay payments or request price concessions, which could adversely impact our operating cash flows. Our future capital requirements will depend on many factors, including our ability to achieve cost synergies from integrating Saba, our rate of revenue growth and collections, the level of our sales and marketing efforts, the timing and extent of spending to support product development efforts and expansion into new territories, the timing of introductions of new services and enhancements to existing services, the timing of general and administrative expenses as we grow our administrative infrastructure, and the continuing market acceptance of our products. To the extent that existing cash, cash from operations, and access to our Revolving Credit Facility are not sufficient to fund our future activities, we may need to raise additional funds. In addition, we may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies in the future, which could also require us to seek additional financing or utilize our cash resources.

The following table sets forth a summary of our cash flows:


	Nine Months Ended September 30,
	2020		2019

	(in thousands)
Net cash provided by operating activities	$	61,909	$	52,955
Net cash used in investing activities	(1,066,960)		(30,763)
Net cash provided by financing activities	965,106		14,073

Our cash flows from operating activities are significantly influenced by our growth, ability to maintain our contractual billing and collection terms, and our investments in headcount and infrastructure to support anticipated growth. Given the seasonality and continued growth of our business, our cash flows from operations will vary from period to period.

Cash provided by operating activities was $61.9 million for the nine months ended September 30, 2020 compared to $53.0 million for the same period in 2019. The increase in operating cash flow was primarily due to changes in net income adjusted for non-cash items including depreciation and amortization, and the timing of cash receipts from customers as compared to the same period in 2019, and was partially offset by cash payments for acquisition-related costs and restructuring activities.

Our primary investing activities have consisted of acquisitions, investments, capital expenditures to develop our capitalized software as well as to purchase software, computer equipment, leasehold improvements, and furniture and fixtures in support of expanding our infrastructure and workforce.

Cash used in investing activities was $1.067 billion for the nine months ended September 30, 2020, compared to cash used in investing activities of $30.8 million for the same period in 2019. The change in cash flows from investing activities was primarily due to cash paid for the acquisition of Saba.

Cash provided by financing activities was $965.1 million for the nine months ended September 30, 2020, compared to cash provided by financing activities of $14.1 million for the same period in 2019. The increase in financing cash flows was primarily due to proceeds from debt that we incurred in connection with the acquisition of Saba, which were partially offset by payments of debt issuance and other related costs.

Share Repurchase Program

In August 2019, the board of directors authorized a $150.0 million share repurchase program (the “2019 Share Repurchase Program”), under which we have repurchased 416,761 shares of common stock at an average price per share of $53.64 as of September 30, 2020. As of September 30, 2020, $127.6 million was available for purchase of shares under the 2019 Share Repurchase Program. For additional information on the 2019 Share Repurchase Program, refer to Note 10 – Stockholders' Equity of the Notes to Condensed Consolidated Financial Statements.

Contractual Obligations

Our principal commitments consist of obligations for contractual debt payments, leases for our office space, software and cloud services, and other contractual obligations. In April 2020, we incurred $1.0047 billion of additional indebtedness in connection with the acquisition of Saba. Principal payments on this Term Loan Facility are due quarterly, beginning in the fourth quarter of 2020, at a rate of 0.25% of the principal amount; the remaining outstanding principal balance is due in April 2027. Refer to Note 3 – Debt for additional information. Additionally, as part of the acquisition of Saba, we assumed $48.2 million of contractual commitments—the majority of which related to lease agreements and software and cloud services. $43.7 million of these commitments relate to the five-year period following the acquisition, with the remainder relating to the period thereafter. In March 2020, we entered into an agreement with a provider of cloud computing services to provide services over approximately 7 years. Refer to Note 13 – Commitments and Contingencies for additional information regarding this agreement.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in those types of relationships.

ITEM 3.Quantitative and Qualitative Disclosures About Market Risk

We have operations in the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange, inflation, and counterparty risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. The ongoing COVID-19 pandemic has resulted in negative impacts on global economies and financial markets, which may increase our foreign currency exchange risk and interest rate risk. For further discussion of the potential impacts of the COVID-19 pandemic on our business, operating results, and financial condition, refer to “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by principally collecting in advance and setting credit limits as we deem appropriate. In addition, our investment strategy has been to invest in financial instruments, including corporate bonds, US treasury securities, agency securities, commercial paper, certificates of deposit, asset-backed securities, and money market funds backed by United States Treasury Bills within the guidelines established under our investment policy. We also make strategic investments in privately-held companies in the development stage.

Interest Rate Risk

At September 30, 2020, we had cash and cash equivalents of $170.9 million. Our Term Loan Facility bears interest at a variable rate. As a result, we are exposed to market risk associated with the variable interest rate payments on these borrowings. A hypothetical immediate increase of 100 basis points in interest rates would result in an increase of approximately $2.4 million in quarterly interest payments. We may use interest rate swap contracts in the future to manage interest rate exposure.

The primary objectives of our marketable investment activities are the preservation of capital, the fulfillment of liquidity needs, and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. We liquidated a significant portion of our investment portfolio during the first quarter of 2020 to partially fund the acquisition of Saba; we liquidated the remainder of our investment portfolio during the second quarter of 2020. We, therefore, do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates on interest-bearing investments.

We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe these cash investments do not contain excessive risk, we cannot guarantee that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits. We cannot guarantee that we will not experience losses on these deposits.

Foreign Currency Risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the US dollar, primarily euros and British pounds. Increases and decreases in our foreign-denominated revenue from movements in foreign exchange rates are often partially offset by the corresponding decreases or increases in our foreign-denominated operating expenses. Due to our legal structure, revenue and operating expenses denominated in currencies other than the US dollar primarily flow through subsidiaries with functional currencies of the British pound and euro. Our other income (expense) is also impacted by the remeasurement of US dollar denominated intercompany loans, cash accounts held by our overseas subsidiaries, accounts receivable denominated in foreign currencies, and accounts payable denominated in foreign currencies.

As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations can increase the costs of our international expansion. The effect of a hypothetical immediate 10% adverse change in foreign exchange rates on foreign-denominated accounts at September 30, 2020, including our intercompany loans with our subsidiaries, would result in a foreign currency loss of approximately $4.0 million.

Due to our exposure to market risks that may result from changes in foreign currency exchange rates, we sometimes enter into foreign currency forward contracts to mitigate these risks. We have not used, nor do we intend to use, these contracts for trading or speculative purposes. Forward contracts are not designated as accounting hedges; therefore, the unrealized gains and losses are recorded in other, net in the condensed consolidated statement of operations. The fair value of these contracts is recorded in other current assets for contracts in an unrealized gain position and accrued expenses for contracts in an unrealized loss position. Our foreign currency forward exchange contracts are generally short-term in duration. The aggregate notional value of these contracts outstanding at September 30, 2020 was $4.0 million and consisted of contracts to exchange US dollars for Canadian dollars, which are used to manage the Company's exposure to foreign exchange rate risk related to operating expenses incurred in Canadian dollars. No forward contracts were outstanding at December 31, 2019.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Counterparty Risk

Our financial statements are subject to counterparty credit risk, which we consider as part of the overall fair value measurement. We are closely tracking counterparty risk and we will continue to attempt to mitigate this risk through credit monitoring procedures.

ITEM 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We acquired Saba during the second quarter of 2020 and are in the process of integrating the acquired business into our overall internal control over financial reporting process. We expect to exclude Saba from our assessment of internal control over financial reporting as of December 31, 2020.

PART II. OTHER INFORMATION

ITEM 1.Legal Proceedings

From time to time, we are involved in a variety of claims, suits, investigations, and proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract and tort claims, labor and employment claims, tax, and other matters. Although claims, suits, investigations, and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of our current pending matters will not have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources, and other factors. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect our financial position, results of operations, or cash flows in a particular period.

ITEM 1A.Risk Factors

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 24 of this Quarterly Report on Form 10-Q for a discussion of the forward-looking statements that are qualified by these risk factors. If any of the events or circumstances described in the following risk factors actually occurs, our business, operating results, and financial condition could be materially adversely affected.

Risks Related to Our Business and Industry

Our operations and employees face risks related to health crises, such as the ongoing COVID-19 pandemic, that could adversely affect our financial condition and operating results. The COVID-19 pandemic could materially affect our operations, including at our headquarters and/or anywhere else we operate, and the business or operations of our customers, suppliers, partners, or other third parties with whom we conduct business.

Our business could be adversely impacted by the effects of a health crisis, such as the ongoing COVID-19 pandemic, which could also cause significant disruption in the operations of our customers and the suppliers, partners, and other third-parties upon whom we rely. Our headquarters and many of our employees are located in Los Angeles County, California. Officials in Los Angeles County and elsewhere have issued multiple orders to implement various precautions intended to slow the spread of COVID-19, including prohibitions on large gatherings and directives related to social distancing and closure of non-essential or non-critical business at physical locations. Authorities in many other states and cities where our customers, suppliers, and partners are located have issued orders with similar goals and restrictions. While some of these restrictions have been lifted or relaxed in certain areas, the COVID-19 pandemic continues to present serious health risks and there is no guarantee when or if all such restrictions will be eliminated, such that we and our customers, suppliers and partners will be able to safely resume operations consistent with our pre-COVID-19 operations.

In response to the serious risk posed by the COVID-19 pandemic and to comply with applicable governmental orders, we have substantially closed our headquarters in Santa Monica, California, along with our other domestic and international offices, asked all of our employees to work from home, and cancelled non-essential business-related travel. These and other operational changes we have implemented may negatively impact productivity and disrupt our business. Additionally, in connection with the COVID-19 pandemic, our suppliers and partners may be unable fulfill their obligations to us in a timely manner or at all. Further, to the extent our customers’ operations have been and continue to be negatively impacted, they may delay payments to us, request payment or other concessions, elect not to renew their agreements with us in a timely manner or at all, or reduce their spending level on our products and services. While we have not had a material impact to date in connection with the COVID-19 pandemic, we continue to experience lengthening of sales cycles, reduced renewal rates and customer spending, delayed payments, and requests for extensions of payment terms from certain customers. The COVID-19 pandemic may have an impact on our revenue in the near term.

The extent of the effect of COVID-19, or any future health crisis, on our operational and financial performance, and on our relationships with suppliers, partners, and customers, will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on our business. If the pandemic continues to persist as a severe worldwide health crisis, the disease could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

Failure to integrate our business and operations successfully with those of Saba in the expected time-frame or otherwise may adversely affect our operating results and financial condition.

We do not have a substantial history of acquiring other large companies and have never completed an acquisition of the size and complexity of Saba. The success of our acquisition of Saba will depend, in substantial part, on our ability to integrate Saba's business and operations successfully with ours and to realize fully the anticipated benefits and potential synergies from combining our companies, including, among others, cost savings from eliminating duplicative functions; operational efficiencies in research and development investments; and revenue growth resulting from the addition of Saba’s product portfolio into our pre-acquisition product portfolio and “cross-selling” additional products to Saba customers. If we are unable to achieve these objectives, the anticipated benefits and potential synergies from the acquisition may not be realized fully or at all, or may take longer to realize than expected. Any failure to timely realize these anticipated benefits could have an adverse effect on our business, operating results, and financial condition.

We completed our acquisition of Saba in April 2020 and are still actively engaged in the integration process. In connection with the integration process, we could experience the loss of key employees, loss of key customers, decreases in revenues, and increases in operating costs, as well as the disruption of our ongoing businesses, any or all of which could limit our ability to achieve the anticipated benefits and potential synergies from the acquisition and have a material adverse effect on our business, operating results, and financial condition.

The additional scale of the combined company's operations, together with the complexity of the integration effort, including integration of critical information technology systems, as well as combining other financial, HR, and administrative processes, may adversely affect our ability to report financial results on a timely basis. The acquisition may necessitate significant modifications to our internal control systems, processes, and information systems, both during the transition and over the longer-term as we fully integrate the combined company, particularly in light of the fact that Saba (as a private company) was not previously required to report on its internal control over financial reporting. Due to the complexity of the acquisition, we cannot be certain that our internal control over financial reporting will be effective for any period, or on an ongoing basis, nor can we be certain that changes to our internal controls or the design and implementation of new internal controls will not be required. If we are unable to accurately report our financial results in a timely manner or are unable to assert that our internal control over financial reporting is effective, our business, financial condition, and results of operations, and the market perception thereof, may be materially adversely affected.

Servicing our debt will require a significant amount of cash, which could adversely affect our business, financial condition and results of operations.

Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including our Convertible Notes due March 17, 2023 with an aggregate principal amount of $300.0 million and the Term Loan Facility due April 22, 2027 of $1.0047 billion, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the Term Loan Facility, the Convertible Notes, and any future indebtedness we may incur; or to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the Convertible Notes, the Term Loan Facility, or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Convertible Notes, the Term Loan Facility, or future indebtedness.

Further, with certain exceptions, upon a change of control the holders of our Convertible Notes may require that we repurchase all or part of such notes at a purchase price equal to the principal amount plus the total sum of all remaining scheduled interest payments through the remainder of the term of such notes. In such event, we may not have enough cash available or be able to obtain financing to repurchase the Convertible Notes, and our ability to repurchase the Convertible Notes may be limited by law, regulatory authority, or agreements governing our other indebtedness.

Unfavorable conditions in our industry or the global markets, or reductions in information technology spending, could limit our ability to grow our business and negatively affect our operating results.

Our operating results may vary based on the impact of changes in our industry or the global economy on us or our customers. The US and other key international economies continue to experience events in connection with the COVID-19 pandemic that may result, and have at times in the past experienced cyclical downturns that have resulted, in a significant weakening of the economy, limited availability of credit, a reduction in business confidence and activity, and other difficulties that may affect one or more of the industries to which we sell our services. In addition to the COVID-19 pandemic, developments such as the UK’s exit from the European Union (the “EU”), evolving trade policies between the US and international trade partners, and conflicts in the Middle East and elsewhere have created many economic and political uncertainties which have impacted worldwide markets. These global economic and political conditions may impact our business in a number of ways. The revenue growth and potential profitability of our business depends on demand for enterprise application software generally and for people development solutions in particular. We sell our people development solutions primarily to large, mid-sized, and small business organizations whose businesses fluctuate based on general economic and business conditions. In addition, a portion of our revenue is attributable to the number of users of our products at each of our customers, which in turn is influenced by the employment and hiring patterns of our customers and potential customers. To the extent that economic uncertainty or weak economic conditions, whether in connection with the ongoing COVID-19 pandemic or otherwise, cause our customers and potential customers to freeze or reduce their headcount, demand for our products may be negatively affected. In connection with the COVID-19 pandemic, we have experienced lengthening of sales cycles, delayed payments, and requests for extensions of payment terms from certain customers. Additionally, economic downturns have historically resulted in overall reductions in spending on information technology and people development solutions as well as pressure from customers and potential customers for extended billing terms. If economic, political, or market conditions deteriorate, or if there is uncertainty around these conditions, our customers and potential customers may elect to decrease their information technology and people development budgets by deferring or reconsidering product purchases, which would limit our ability to grow our business and negatively affect our operating results.

Our business depends substantially on the level of our customer satisfaction and specifically on customers renewing their agreements with us, purchasing additional products from us, or adding additional users. Any significant decline in our customer satisfaction rates, customer renewal rates, or the rates at which our customers purchase additional products or add additional users would harm our future operating results.

In order for us to improve our operating results, it is important that our customer satisfaction remains high, that our customers renew their agreements with us when the initial contract term expires, and that they also purchase additional products or add additional users. Our customers have no obligation to renew their subscriptions after the initial subscription period, and there is no assurance that our customers will renew their subscriptions at the same or a higher level of service, if at all. Every year, some of our customers elect not to renew their agreements with us. Moreover, certain of our customers have the right to cancel their agreements for convenience, subject to certain notice requirements and, in some cases, early termination fees. Our customer renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our products, our customer service, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base and/or the acquired customer base, reduced hiring by our customers, or reductions in our customers’ spending levels. If our customers do not renew their subscriptions, renew on less favorable terms, fail to purchase additional products, or fail to add new users, our revenue may decline, and our operating results may be harmed.

We may require additional capital to support business growth, and this capital may not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may seek additional funds to respond to business challenges, including the need to develop new features or enhance our existing products, improve our operating infrastructure, or acquire complementary businesses and technologies. Accordingly, we may need to engage in additional equity or debt financings to secure additional funds. For example, we incurred $1.0047 billion of additional indebtedness and issued 1,110,352 shares of our common stock to finance the acquisition of Saba, which was completed in April 2020. If we raise additional funds through issuances of equity or debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.

Further, the indenture governing the Convertible Notes and the Term Loan Facility include restrictive covenants that, subject to specified exceptions and parameters, limit our ability to incur additional debt, and the Term Loan Facility includes additional restrictive covenants that limit, subject to specific exceptions and parameters, our ability to make investments or acquisitions, declare dividends, or take certain other corporate actions. As a result, we may be unable to take advantage of strategic or business development opportunities as they arise, or we may not be able to react to market conditions, if we are restricted in our ability to raise debt financing, or we may be required to seek alternative means to generate cash, including by selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive, if available at all.

If we fail to retain key employees and recruit qualified technical and sales personnel, our business could be harmed.

We believe that our success depends on the continued employment of our senior management and other key employees. From time to time, there may be changes in our management team resulting from the hiring or departure of executives. For example, recently our founder, Adam Miller, transitioned from chief executive officer to co-chairman of the board; Phil Saunders, the former chief executive officer of Saba, was appointed by the board to serve as Cornerstone’s new chief executive officer; and Brian Swartz resigned from his position as our chief financial officer. Changes such as these could disrupt our business. In addition, because our future success is dependent on our ability to continue to enhance and introduce new software and services, we are heavily dependent on our ability to attract and retain qualified engineers with the requisite education, background, and industry experience. As we expand our business, our continued success will also depend, in part, on our ability to attract and retain qualified sales, marketing, and operational personnel capable of supporting a larger and more diverse customer base. The loss of the services of a significant number of our engineers or sales people could be disruptive to our development efforts or business relationships. In addition, if any of our key employees joins a competitor or decides to otherwise compete with us, we may experience a material disruption of our operations and development plans, which may cause us to lose customers or increase operating expenses as the attention of our remaining senior managers is diverted to recruit replacements for the departed key employees.

Furthermore, foreign nationals who are not US citizens or permanent residents constitute an important part of our US workforce, particularly in the areas of engineering and product development. Our ability to hire and retain these workers and their ability to remain and work in the US are impacted by laws and regulations, as well as by procedures and enforcement practices of various government agencies. Changes to US immigration and work authorization laws and regulations, including those recently implemented in the US, can be significantly affected by political forces and levels of economic activity. These and any further legislative or administrative changes to immigration or visa laws and regulations may impair our ability to hire or retain personnel who are not US citizens or permanent residents, increase our operating expenses, or negatively impact our ability to deliver our products and services, which may materially adversely affect our business or our ability to expand our operations, including internationally.

Our financial results may fluctuate due to various business factors, some of which may be beyond our control.

There are a number of other factors that may cause our financial results to fluctuate from period to period including, among others:

•changes in billing terms and collection cycles in customer agreements;

•the extent to which new customers are attracted to our products to satisfy their people development needs;

•the timing and rate at which we sign agreements with new customers;

•our access to service providers and partners when we outsource customer service projects;

•our ability to manage the quality and completion of the customer implementations performed by partners;

•the timing and duration of our customer implementations, which is often outside of our direct control;

•our ability to provide, or partner with effective partners to provide, resources for customer implementations and consulting projects;

•the extent to which we retain existing customers and satisfy their requirements;

•the extent to which existing customers renew their subscriptions to our products and the timing of those renewals;

•the extent to which existing customers purchase or discontinue the use of additional products and add or decrease the number of users;

•the extent to which our customers request enhancements to underlying features and functionality of our products, and the timing of our delivery of these enhancements to our customers;

•the addition or loss of large customers, including through acquisitions or consolidations;

•the number and size of new customers, as well as the number and size of renewal customers in a particular period;

•the mix of customers among large, mid-sized, and small organizations;

•changes in our pricing policies or those of our competitors;

•seasonal factors affecting demand for our products or potential customers’ purchasing decisions;

•the financial condition and creditworthiness of our customers;

•the amount and timing of our operating expenses, including those related to the maintenance, expansion, and restructuring of our business, operations, and infrastructure;

•changes in the operational efficiency of our business;

•the timing and success of synergy realization resulting from integration of acquired companies, such as Saba;

•the timing and success of our new product and service introductions;

•the timing of expenses of the development of new products and technologies, including enhancements to our products;

•our ability to aggregate large data sets into meaningful insights to drive increased demand for our products;

•continued strong demand for people development in the US and globally;

•the success of current and new competitive products and services by our competitors;

•other changes in the competitive dynamics of our industry, including consolidation among competitors, customers, or strategic partners;

•our ability to manage our existing business and future growth, including in terms of additional headcount, additional customers, incremental users, and new geographic regions;

•expenses related to our network and data centers, and the expansion of such networks and data centers;

•the effects of, and expenses associated with, acquisitions of third-party technologies or businesses and any potential future charges for impairment of goodwill resulting from those acquisitions;

•equity issuances, including as consideration in acquisitions or due to the conversion of our outstanding Convertible Notes;

•business disruptions, costs and events related to shareholder activism;

•legal or political changes in local or foreign jurisdictions that decrease demand for, or restrict our ability to sell or provide, our products;

•fluctuations in foreign currency exchange rates, including any fluctuation caused by uncertainties relating to UK’s exit from the EU, commonly referred to as Brexit;

•general economic, industry, and market conditions, including in connection with the COVID-19 pandemic; and

•various factors related to disruptions in our SaaS hosting network infrastructure, defects in our products, privacy and data security considerations, and exchange rate fluctuations, each of which is described elsewhere in these risk factors.

In light of the foregoing factors, we believe that our financial results, including our revenue, operating income and free cash flows may vary significantly from period-to-period. As a result, period-to-period comparisons of our operating results may not be meaningful and should not be relied on as an indication of future performance.

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for people development solutions is highly competitive, rapidly evolving and fragmented. Many of our competitors and potential competitors are larger and have greater brand name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we do. Further, if one or more of our competitors were to merge, acquire or partner with another of our competitors, the change in the competitive landscape could adversely affect our business. Our competitors may also establish or strengthen cooperative relationships with our current or future strategic distributors, systems integrators, HR outsourcers, payroll services companies, third-party consulting firms, or other parties with whom we have relationships, thereby limiting our ability to promote our products and limiting the number of consultants available to implement our products. In addition, with the introduction of new technologies and market entrants, we expect competition to intensify in the future. Any of these events could disrupt our operations, reduce our revenue, or harm our business generally.

We face competition from desktop software tools and custom-built software that is designed to support the needs of a single organization, as well as from third-party talent and human resource application providers. These software vendors include, without limitation, IBM Kenexa, Learning Technologies Group plc (PeopleFluent), Oracle Corporation, SAP America, Inc. (SuccessFactors), SkillSoft Limited (SumTotal), Talentsoft SA, Ultimate Kronos Group, Inc., and Workday, Inc. In addition, some of the parties with which we maintain business alliances offer, or may offer, products or services that compete with our products or services.

Many of our competitors are able to devote greater resources to the development, promotion, and sale of their products and services. In addition, many of our competitors have established marketing relationships, access to larger customer bases, and major distribution agreements with consultants, system integrators, and distributors. Moreover, many software vendors can bundle human resource products or offer such products at a lower price as part of a larger product sale. In addition, some competitors may offer software that addresses one or a limited number of people development functions at a lower price point or with greater depth than our products. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements, and they may also be better able to respond to operational disruptions (such as in connection with the COVID-19 pandemic) than we are. Further, some potential customers, particularly large enterprises, may elect to develop their own internal products. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

Our systems collect, access, use, and store personal and other customer proprietary information. As a result, we are subject to security risks and are required to invest significant resources to prevent, mitigate, or correct issues arising from potential or actual security breaches. If a security breach occurs, our reputation could be harmed, our business may suffer, and we could incur significant liability.

Our people development solutions involve the storage and transmission of customers’ sensitive, proprietary, and confidential information, including personal information, over the Internet (including public networks). Our security measures may be breached as a result of efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations or nation-states. Our security measures could also be compromised by employee error or malfeasance, which could result in someone obtaining unauthorized access to, or denying authorized access to our IT systems, our customers’ data or our data, including our intellectual property and other confidential business information. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords, or other information to gain access to our customers’ data, our data, or our IT systems.

Such breaches and other incidents can result in a risk of unauthorized, unlawful, or inappropriate access to, denial of access to, disclosure of, or loss of our customers’ or our sensitive, proprietary, and confidential information, as well as damage to our IT systems and our ability to make required reporting and disclosures as a public company. An actual or perceived security breach or similar incident could adversely affect our operating results and financial condition due to loss of confidence in the security of our products, or result in damage to our reputation, early termination of contracts, decline in sales, disruption to our operations, litigation, regulatory investigations and penalties, or other liabilities.

In particular, federal, state, and foreign governments continue to adopt new, or modify existing, laws requiring companies and their service providers to maintain certain security measures or to report data breaches to government authorities or affected individuals. In turn, customers’ expectations for the security measures we implement have increased. If we experience security breaches that could have been prevented by measures required by these laws or our customer contracts, or fail to report security breaches within timeframes mandated by law or our customer contracts, we could face significant liability.

Techniques to compromise IT systems have become more complex over time and are often not identified until they are exploited. As a result, we may be unable to anticipate or prevent such techniques. Our products operate in conjunction with and are dependent on a broad range of products, components and third-party services, and a vulnerability in any of them can expose us to a security breach. In addition, our customers and their third-party service providers may not have adequate security measures in place to protect their data that is stored in our solution, and because we do not control our customers or their service providers, we cannot prevent vulnerabilities in their security measures from being exploited.

Our efforts to detect, prevent, and remediate known or potential security vulnerabilities, including those arising from third-party hardware or software, may result in additional direct and indirect costs.

Finally, if a high-profile security breach occurs with respect to another SaaS provider, our customers and potential customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing customers or attract new ones.

Any significant disruption in our SaaS hosting network infrastructure could harm our reputation, require us to provide credits or refunds, result in early terminations of customer agreements or a loss of customers and adversely affect our business.

Our SaaS hosting network infrastructure is a critical part of our business operations. Our customers access our people development solution through a standard web browser and depend on us for fast and reliable access to our products. Our software is proprietary, and we currently rely on four third-party data center hosting facilities, which we lease, and the expertise of members of our engineering and software development teams for the continued performance of our solution. We are in the process of migrating our solution from our leased data center hosting facilities to public cloud third-party data center providers. After we complete this migration, we will rely extensively on these public cloud providers to provide our customers and their users with fast and reliable access to our products. Any disruption of or interference with our SaaS hosting network infrastructure, including the services and operations of the public cloud providers could harm our reputation, business, and results of operations. We have experienced, and may in the future experience, disruptions in our computing and communications infrastructure. Factors that may cause such disruptions that may harm our reputation include:

•human error;

•security breaches;

•telecommunications outages from third-party providers;

•computer viruses;

•acts of terrorism, sabotage or other intentional acts of vandalism, including cyber attacks;

•unforeseen interruption or damages experienced in moving hardware to a new location;

•fire, earthquake, flood, and other natural disasters; and

•power loss.

Although we generally back-up our customer databases hourly, store our data in more than one geographically distinct location at least weekly, and perform real-time mirroring of data to disaster recovery locations, we do not currently offer immediate access to disaster recovery locations in the event of a disaster or major outage. Thus, in the event of any of the factors described above, or certain other failures of our computing infrastructure, customers may not be able to access their data for 24 hours or more and there is a remote chance that customer data from recent transactions may be permanently lost or otherwise compromised. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption. Moreover, some of our agreements include performance guarantees and service level standards that obligate us to provide credits, refunds, or termination rights in the event of a significant disruption in our SaaS hosting network infrastructure or other technical problems that relate to the functionality or design of our solution.

Because of how we recognize revenue, a significant downturn in our business may not be immediately reflected in our operating results.

Generally, we recognize revenue from subscription agreements monthly over the terms of these agreements, which is typically three years for our people development solution. As a result, a significant portion of the revenue we report in each quarter is generated from customer agreements entered into during previous periods. Consequently, a decline in new subscriptions in any one quarter may not significantly impact our revenue and financial performance in that quarter, but will negatively affect our revenue, or rate of revenue growth and financial performance in future quarters.

In addition, if subscription agreements expire and are not renewed in the same quarter, our revenue and financial performance in that quarter and subsequent quarters will be negatively affected. However, the revenue impact may not be immediately reflected in our operating results to the extent there is an offsetting increase in revenue from services contracts performed in that same quarter.

Finally, we may be unable to adjust our fixed costs in response to reduced revenue. Accordingly, the effect of significant declines in sales and market acceptance of our products may not be reflected in our short-term operating results.

Existing or future laws and regulations relating to privacy or data security could increase the cost of our products, limit their use and adoption, and subject us or our customers to litigation, regulatory investigations and penalties, and other potential liabilities.

Our people development solution enables our customers to collect, manage, and store a wide range of data, including personal data, related to every phase of the employee performance and management cycle. The US and various state governments have adopted or proposed laws governing the collection, use, storage, sharing, and processing of personal data. Several foreign jurisdictions, including but not limited to the EU and its member states, the UK, Korea, Japan, Singapore, Australia, and India, have adopted legislation (including directives or regulations) that increase or change the requirements governing the personal data of individuals in these jurisdictions. In some cases, these laws impose obligations not only on many of our customers, but also directly on us. These laws and regulations are complex and change frequently, at times due to differing economic conditions and changes in political climate, with new laws and regulations proposed frequently and existing laws and regulations subject to different and conflicting interpretations. These laws have the potential to increase costs of compliance, risks of noncompliance and penalties for noncompliance, and the cost and complexity of selling and delivering our solutions.

For example, the EU’s General Data Protection Regulation (“GDPR”), which took effect on May 25, 2018, imposes obligations on our customers and directly on us. Among other obligations under the GDPR, we are required to give more detailed disclosure about how we collect, use, and share personal data; contractually commit to data protection measures in our contracts with customers; maintain adequate data security measures; notify regulators and affected individuals of certain personal data breaches; meet extensive privacy governance and documentation requirements; and honor individuals’ expanded data protection rights, including their rights to access, correct, and delete their personal data. Companies that violate the GDPR can face fines of up to the greater of 20 million euros or 4% of their worldwide annual revenue, and restrictions on data processing. Our customers’ failure to comply with the GDPR could lead to significant fines imposed by regulators or restrictions on our ability to process personal information as needed to provide our services. We may also be obligated to assist our customers with their own compliance obligations under the GDPR.

Further, the GDPR and other European data protection laws restrict the transfer of personal information from Europe to the United States and most other countries unless the parties to the transfer have implemented specific compliance mechanisms. One of the mechanisms on which we previously relied, the EU-U.S. Privacy Shield Framework, was invalidated by the Court of Justice of the European Union in a July 2020 decision. The decision also called into question whether companies can lawfully use the European Commission’s Standard Contractual Clauses as a compliance mechanism for transfers of personal data from Europe to the United States or most other countries. Authorities in Switzerland also have issued guidance calling the Swiss-U.S. Privacy Shield Framework inadequate and raising similar questions about the Standard Contractual Clauses. At present, there are few, if any, viable alternatives to the Standard Contractual Clauses, on which we have relied, including for transfers to India, where we maintain a significant support center. If we are unable to implement sufficient safeguards to ensure that our transfers of personal information from Europe are lawful, we will face increased exposure to regulatory actions, substantial fines, and injunctions against processing personal information from Europe. We also rely on the European Commission’s recognition of Canada, Israel, and New Zealand, where we maintain significant support centers, as providing an “adequate” level of protection for personal data transferred from Europe to those countries. Loss of our ability to lawfully transfer personal data out of Europe to these or any other jurisdictions may cause reluctance or refusal by current or prospective European customers to use our products, and we may be required to increase our data processing capabilities in Europe at significant expense. Additionally, other countries outside of Europe have passed or are considering passing laws requiring local data residency, which could increase the cost and complexity of delivering our services.

Further, Brexit has created uncertainty with regard to data protection regulation in the UK, where our operations involve the processing of EU residents’ personal data. In particular, it is unclear whether, after Brexit, the UK will enact data protection legislation equivalent to the GDPR and how data transfers to and from the UK will be regulated. Thus, it is uncertain whether our operations in, and data transfers to and from, the UK can comply with UK and EU law post-Brexit.

Privacy and data security laws in the US are also increasingly complex and changing rapidly. Many states have enacted laws requiring companies to implement reasonable data security measures, and laws in all states and US territories require businesses to notify affected individuals and governmental entities of the occurrence of certain security breaches affecting personal information. These laws are not consistent, and compliance with them in the event of a widespread data breach may be complex and costly. States have also begun to introduce more comprehensive privacy legislation. Just over a month after the GDPR took effect, the California legislature passed the California Consumer Privacy Act of 2018 (“CCPA”), which took effect on January 1, 2020. The CCPA gives California residents certain rights similar to the individual rights given under the GDPR, including the right to access and delete their personal information, opt-out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA prohibits discrimination against individuals who exercise their privacy rights, provides for civil penalties for violations, and creates a private right of action for data breaches that is expected to increase data breach litigation. Since the enactment of the CCPA, new privacy and data security laws have been proposed in more than half of the US states and in the US Congress, reflecting a trend toward more stringent privacy legislation in the US. The CCPA itself will be expanded substantially if California voters approve a November 2020 ballot measure proposing enactment of the California Privacy Rights Act of 2020, which would, among other things, restrict use of certain categories of sensitive personal information that we handle; further restrict the sharing of personal information; establish restrictions on the retention of personal information; expand the types of data breaches subject to the private right of action; and establish the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines.

The costs of compliance with, and other burdens imposed by, privacy and data security laws and regulations may limit the use and adoption of our services, lead to negative publicity, reduce overall demand for our services, make it more difficult to meet expectations of or commitments to customers, require us to take on more onerous obligations in our contracts with customers, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business. These laws could also impact our ability to offer, or our customers’ ability to deploy, our services in certain locations. The costs, burdens, and potential liabilities imposed by existing privacy laws could be compounded if other jurisdictions in the US or abroad begin to adopt similar laws.

In addition to government activity, privacy advocacy and other industry groups have established, or may establish, new self-regulatory standards that may place additional burdens on our ability to provide our services globally. Our customers expect us to meet voluntary certifications and other standards established by third parties, such as ISO 27001 and ISO 27701. If we are unable to earn and maintain these certifications or meet these standards, it could adversely affect our ability to provide our solutions to certain customers and could harm our business.

Furthermore, concerns regarding data privacy and security may cause our customers’ customers, members, employees, or other stakeholders to resist providing the data necessary to allow our customers to use our services effectively. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services and could limit adoption of our cloud-based solutions.

Any of these matters could materially adversely affect our business, financial condition, or operational results.

As we have in the past, we may seek to acquire or invest in other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders or otherwise disrupt our operations and harm our operating results.

As we have in the past, we may seek to acquire or invest in other businesses, products, or technologies that we believe could complement or expand our existing solutions, enhance our technical capabilities, lead to cost synergies, or otherwise offer growth opportunities. Most recently, in April 2020, we acquired Saba, a provider of talent experience solutions, for $1.277 billion in cash consideration (net of cash acquired) and 1,110,352 shares of our common stock. The pursuit of other potential acquisitions, along with the work required to successfully integrate the businesses we acquire, may divert the attention of management, result in additional dilution, and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are ultimately consummated.

When acquiring other businesses, we may not be able to successfully integrate the personnel, operations, and technologies of any businesses that we have acquired or may acquire in the future or effectively manage the combined business following the acquisition. We may also not achieve the anticipated benefits from other acquired businesses due to a number of factors, including:

•unanticipated costs or liabilities associated with the acquisition;

•incurrence of acquisition-related costs or tax impacts, some or all of which might be unanticipated;

•ineffective or inadequate controls, procedures, or policies at the acquired company;

•diversion of management’s attention from other business concerns;

•failure to realize synergies in a timely fashion or at all;

•harm to our existing relationships with customers, distributors, and partners, including as a result of competing in the markets in which such parties operate;

•inability to maintain relationships with key customers, distributors, and partners of the acquired business;

•the potential loss of key employees and customers;

•potential unknown liabilities or risks associated with the acquired businesses, including those arising from existing contractual obligations or litigation matters;

•exposure to claims and disputes by third parties, including intellectual property claims and disputes;

•the use of resources that might be used in other parts of our business; and

•the use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill or intangible assets which must be assessed for impairment at least annually or upon certain triggering events. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could harm our operating results.

Other future acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. For example, as noted above, in connection with the acquisition of Saba, we issued 1,110,352 shares of our common stock and incurred approximately $1.0047 billion of indebtedness. In addition, if an acquired business fails to meet our expectations, our operating results, business, and financial condition may suffer.

Defects in our solution could affect our reputation, result in significant costs to us and impair our ability to sell our products and related services.

Defects in our solution could adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. The costs incurred in correcting any product defects may be substantial and could adversely affect our operating results. Although we continually test our products for defects and work with customers through our customer support organization to identify and correct errors, defects in our products are likely to occur in the future. Any defects that cause interruptions to the availability of our products could result in:

•lost or delayed market acceptance and sales of our products;

•early termination of customer agreements or loss of customers;

•credits or refunds to customers;

•product liability suits against us;

•diversion of development resources;

•injury to our reputation; and

•increased maintenance and warranty costs.

While our customer agreements typically contain limitations and disclaimers that purport to limit our liability for damages related to defects in our products, such limitations and disclaimers may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.

Evolving regulation of the Internet, changes in the infrastructure underlying the Internet, or interruptions in Internet access may adversely affect our financial condition by increasing our expenditures and causing customer dissatisfaction.

As Internet commerce continues to evolve, regulation by federal, state, or foreign agencies may increase. We are particularly sensitive to these risks because the Internet is a critical component of our business model. In addition, taxation of services provided over the Internet or other charges for accessing the Internet may be imposed by government agencies or private organizations. Changes in laws or regulations that adversely affect the growth, popularity or use of the Internet, or impact the way that Internet service providers treat Internet traffic, including laws impacting net neutrality and laws requiring local storage of certain types of data in foreign jurisdictions, may negatively increase our operating costs or otherwise impact our business. Any regulation imposing greater fees for Internet use or restricting information exchanged over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.

In addition, the rapid and continual growth of traffic on the Internet has resulted at times in slow connection and download speeds among Internet users. Our business expansion may be harmed if the Internet infrastructure cannot handle our customers’ demands or if hosting capacity becomes insufficient. If our customers become frustrated with the speed at which they can utilize our products over the Internet, our customers may discontinue the use of our people development solution and choose not to renew their contracts with us. Further, the performance of the Internet has also been adversely affected by viruses, worms, hacking, phishing attacks, denial of service attacks, and other similar malicious programs, as well as other forms of damage to portions of its infrastructure, which have resulted in a variety of Internet outages, interruptions, and other delays. These service interruptions could diminish the overall attractiveness of our products to existing and potential users and could cause demand for our products to suffer.

Failure to effectively retain and continue to increase the productivity of our direct sales teams and develop and expand our indirect sales channel will impede our growth.

We will need to continue to increase the productivity of and expand our sales and marketing infrastructure in order to grow our customer base and our business. We may engage additional third-party distributors, both domestically and internationally. Identifying, recruiting, and training these people and entities will require significant time, expense, and attention. Our business will be seriously harmed and our financial resources will be wasted if our efforts to expand our indirect sales channels do not generate a corresponding increase in revenue, and we may be required to sacrifice near-term growth and divert management attention in order to restructure our direct sales teams. In particular, if we are unable to achieve our expected productivity increases, we may not be able to significantly increase our revenue, profitability, and/or free cash flows. Due to the COVID-19 pandemic, we have suspended non-essential business-related travel and a significant portion of our employees are now working from home which limits the ability of our sales team to visit customers and prospects. This may affect our business, financial condition, or operating results.

If for any reason we are not able to develop enhancements and new features, keep pace with technological developments or respond to future disruptive technologies, our business will be harmed.

Our future success will depend on our ability to adapt and innovate. To attract new customers and increase revenue from existing customers, we will need to enhance and improve our existing products and introduce new features. The success of any enhancement or new feature depends on several factors, including timely completion, introduction, and market acceptance. If we are unable to enhance our existing products to meet customer needs or successfully develop or acquire new features or products, or if such new features or products fail to be successful, our business and operating results will be adversely affected.

In addition, because our products are designed to operate on a variety of network, hardware, and software platforms using Internet tools and protocols, we will need to continuously modify and enhance our products to keep pace with changes in internet-related hardware, software, communication, browser, and database technologies. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments, our products may become less marketable and less competitive or obsolete, and our operating results may be negatively impacted.

Finally, our ability to grow is subject to the risk of future disruptive technologies. If new technologies emerge that are able to deliver a people development solution at lower prices, more efficiently, or more conveniently, such technologies could adversely impact our ability to compete.

We rely significantly on implementation partners to deliver professional services to our customers, and if these implementation partners fail to deliver these professional services effectively, or if we are unable to incentivize new partners to service our customers, our operating results will be harmed.

We rely significantly on various partners to assist us in the successful implementation of our products and to optimize our customers’ use of our products during the terms of their engagements. We provide our implementation partners with specific training and programs to assist them in servicing our customers, but there can be no assurance that these steps will be utilized or effective. If these partners fail to deliver these services to our customers in an effective and timely manner, we may suffer reputational harm and our results of operations may be adversely impacted. We also may not be able to incentivize new partners to service our customers. If we are unable to maintain our existing relationships or enter into new ones, we would have to devote substantially more resources to delivering our professional services. If we fail to effectively manage our implementation partners, our ability to sell our products and subscriptions and our operating results will be harmed.

Our growth depends in part on the success of our strategic relationships with third parties.

We anticipate that we will continue to depend on various third-party relationships in order to grow our business. In addition to growing our indirect sales channels, we intend to pursue additional relationships with other third parties, such as technology and content providers and implementation consultants. Identifying, negotiating, and documenting relationships with third parties requires significant time and resources, as does integrating third-party content and technology. Our agreements with distributors and providers of technology, content, and consulting services are typically non-exclusive and do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our products. In addition, these distributors and providers may not perform as expected under our agreements, and we have had and may in the future have, disagreements or disputes with such distributors and providers, which could negatively affect our brand and reputation. A global economic slowdown could also adversely affect the businesses of our distributors and it is possible that they may not be able to devote the resources we expect to our relationships with such distributors.

If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results could suffer. Even if we are successful, we cannot guarantee that these relationships will result in improved operating results.

Our financial results may fluctuate due to our long, variable and, therefore, unpredictable sales cycle and our focus on large and mid-market organizations.

We plan our expenses based on certain assumptions about the length and variability of our sales cycle. If our sales cycle becomes longer or more variable, our results may be adversely affected. Our sales cycle generally varies in duration from two to nine months and, in some cases, much longer depending on the size of the potential customer. Factors that may influence the length and variability of our sales cycle include among others:

•the need to educate potential customers about the uses and benefits of our products;

•the relatively long duration of the commitment customers make in their agreements with us;

•the discretionary nature of potential customers’ purchasing and budget cycles and decisions;

•the competitive nature of potential customers’ evaluation and purchasing processes;

•the lengthy purchasing approval processes of potential customers;

•the evolving functionality demands of potential customers;

•fluctuations in the people development needs of potential customers;

•announcements or planned introductions of new products by us or our competitors; and

•macroeconomic factors, such as the evolving COVID-19 pandemic.

The fluctuations that result from the length and variability of our sales cycle may be magnified by our focus on sales to large and mid-sized organizations. If we are unable to close an expected significant transaction with one or more of these companies in a particular period, or if an expected transaction is delayed until a subsequent period, our operating results for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized, may be adversely affected.

Our business and operations are experiencing growth and organizational change. If we fail to effectively manage such growth and change in a manner that preserves the key aspects of our corporate culture, our business and operating results could be harmed.

Our corporate culture focuses on rapid innovation, teamwork, and attention to customer success, all of which we believe have been central to our growth so far. We have experienced, and may continue to experience, rapid growth and organizational change, including growth and organizational change resulting from our acquisition of and subsequent integration with other businesses, such as Saba, as well as organizational change due to workforce reduction plans announced in early June 2020, which has placed, and may continue to place, significant demands on our operational, financial, and management resources. We may continue to expand our international operations into other countries in the future, either organically or through acquisitions. We have also experienced significant growth in the number of users, transactions, and data that our SaaS hosting infrastructure supports. Finally, our organizational structure is becoming more complex as we improve our operational, financial, and management controls as well as our reporting systems and procedures. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining our corporate culture. If we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate culture, the quality of our products may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers.

Fluctuations in the exchange rate of foreign currencies could result in foreign currency gains and losses.

We conduct our business in various countries across the world. As we continue to expand our international operations, we will become more exposed to the effects of fluctuations in currency exchange rates. This exposure is the result of selling in multiple currencies and operating in foreign countries where the functional currency is the local currency. Further, our overseas subsidiaries’ results are also impacted by exchange rates affecting the carrying value of US dollar denominated intercompany loans with us. Because we conduct business in currencies other than US dollars, but report our results of operations in US dollars, fluctuations in the exchange rates of these foreign currencies, including any fluctuations caused by uncertainties following Brexit, may hinder our ability to predict our future results and earnings and materially impact our business, financial condition, and operating results. Due to our legal structure and the currencies in which we operate, any fluctuations in the exchange rates of the British pound may be particularly impactful. Additionally, the impact of fluctuations may not be immediately apparent in the constant currency results we present, because we present these results based on prior period exchange rates. We sometimes engage in foreign currency hedging. When we hedge our foreign currency exposure, we may not be able to completely eliminate the impact of fluctuations in the exchange rates.

As a public company, we are obligated to maintain proper and effective internal control over financial reporting. If our internal control over financial reporting is ineffective, our financial reporting may not be accurate, complete, and timely and our auditors may be unable to attest to its effectiveness when required, thus adversely affecting investor confidence in our company.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. Our auditors also need to audit the effectiveness of our internal control over financial reporting, including disclosure of any material weaknesses in our internal control over financial reporting.

We have incurred and continue to incur significant costs assessing our system of internal control over financial reporting and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may discover, and may not be able to remediate, future significant deficiencies or material weaknesses, or we may be unable to complete our evaluation, testing or any required remediation in a timely fashion. Further, to the extent we acquire other businesses, such as Saba, a privately held company we acquired in April 2020, during the course of integration we may find that the acquired company did not have a sufficiently robust system of internal controls and we may discover significant deficiencies or material weaknesses, any of which could require us to implement changes to our existing system of internal control over financial reporting. Failure of our internal controls over financial reporting could cause our financial reporting to be inaccurate, incomplete, or delayed. Moreover, even if there is no inaccuracy, incompletion, or delay of reporting results, if we identify one or more material weaknesses in our internal controls over financial reporting, we will be unable to assert, and our auditors will be unable to affirm, that our internal control environment is effective, in which case investors may lose confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the price of our common stock and our ability to meet the applicable covenants in our credit agreement.

Additionally, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, have been detected. Failure of our control systems to prevent error could materially adversely impact us.

Certain of our operating results and financial metrics are difficult to predict as a result of seasonality.

We have historically experienced seasonality in terms of when we enter into customer agreements for our products. We sign a significantly higher percentage of agreements with new customers, and renewal agreements with existing customers, in the fourth quarter of each year. Within a given quarter, often a significant portion of our agreements are signed during the last two weeks of the quarter. This seasonality is reflected to a much lesser extent and sometimes is not immediately apparent in our revenue, due to the fact that we generally recognize subscription revenue over the term of the customer agreement, which is generally three years. We expect this seasonality to continue, which may cause fluctuations in certain of our operating results and financial metrics, and thus difficulties in predictability.

We rely on third-party computer hardware and software that may be difficult to replace or could cause errors or failures of our service.

In addition to the software we develop, we rely on computer hardware, purchased or leased, and software licensed from third parties in order to deliver our solution. This hardware and software may not continue to be available on commercially reasonable terms, if at all. Any loss of the right to use any of this hardware or software could result in delays in our ability to provide our solution until equivalent technology is either developed by us or, if available, identified, obtained, and integrated. In addition, errors or defects in third-party hardware or software used in our solution could result in errors or a failure of our products, which could harm our business.

If we fail to manage our SaaS hosting network infrastructure capacity, our existing customers may experience service outages and our new customers may experience delays in the deployment of our people development solution.

We have experienced significant growth in the number of users, transactions, and data that our hosting infrastructure supports. We seek to maintain sufficient excess capacity in our SaaS hosting network infrastructure to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments. However, the provision of new hosting infrastructure requires significant lead time. If we do not accurately predict our infrastructure capacity requirements, our existing customers may experience service outages that may subject us to financial penalties, financial liabilities, and customer losses. If our hosting infrastructure capacity fails to keep pace with increased sales, customers may experience delays as we seek to obtain additional capacity, which could harm our reputation and adversely affect our revenue growth.

Restructuring activities could adversely affect our ability to execute our business strategy.

We have in the past implemented headcount-related restructuring measures, and in the future it may become necessary for us to continue to restructure our business due to worldwide market conditions or other factors that reduce the demand for our products and services, which could adversely affect our ability to execute our business strategy. For example, in 2020, we announced a plan to reduce headcount as part of our phased integration with Saba to streamline the organization. This workforce reduction plan and any future restructuring may have other consequences, such as attrition beyond the planned reduction in workforce, a negative effect on employee morale and productivity, or a reduction in our ability to attract and retain highly skilled employees.

Failure to effectively manage customer deployments by our third-party service providers could adversely impact our business.

In cases where our third-party service providers are engaged either by us or by a customer directly to deploy a product for a customer, our third-party service providers need to have a substantial understanding of such customer’s business so they can configure the product in a manner that complements its existing business processes and integrates the product into its existing systems. It may be difficult for us to manage the timeliness of these deployments and the allocation of personnel and resources by our customers. Failure to successfully manage customer deployments by us or our third-party service providers could harm our reputation and cause us to lose existing customers, face potential customer disputes, or limit the rate at which new customers purchase our products.

Even if demand for people development products and services increases generally, there is no guarantee that demand for SaaS products like ours will increase to a corresponding degree.

The widespread adoption of our products depends not only on strong demand for people development products and services generally, but also for products and services delivered via a SaaS business model in particular. There are still a significant number of organizations that have adopted no people development functions at all. It is unclear whether such organizations will ever adopt such functions and, if they do, whether they will desire a SaaS people development solution like ours. As a result, we cannot guarantee that our SaaS people development solutions will achieve and sustain the high level of market acceptance that is critical for the success of our business.

Integrated, comprehensive SaaS products such as ours represent a relatively recent approach to addressing organizations’ people development challenges, and we may be forced to change the prices and billing terms for our products, or our pricing model generally, as the market for these types of products evolves.

Providing organizations with applications to address their people development challenges through integrated, comprehensive SaaS products is a developing market that is still evolving. Some of our current competitors offer their products or services at a lower price or on different billing terms, which has resulted in pressures on our pricing and billing terms. Additionally, competitive dynamics may cause pricing levels, as well as billing terms and pricing models generally, to change further as the market matures and as existing and new market participants introduce new types of products and different approaches to enable organizations to address their people development needs. As a result, we may be forced to reduce the prices we charge for our products or the pricing model on which they are based, and may be unable to renew existing customer agreements or enter into new customer agreements at the same prices and upon the same terms that we have historically. If we are unable to maintain our pricing levels, billing terms, or pricing model, our operating results could be negatively impacted. In addition, pricing pressures, increased competition, and macroeconomic factors and events generally could result in reduced sales, reduced margins, losses or the failure of our products to achieve or maintain more widespread market acceptance, any of which could harm our business.

We currently have a number of international offices and may expand our international operations. Doing business internationally has unique risks with respect to operational execution and regulatory compliance.

We currently have international offices in several countries, and we may expand our international operations into other countries in the future. If we invest substantial time and resources to expand our international operations and are unable to do so successfully, our business and operating results will suffer. Conducting our business internationally, particularly with expansion into countries in which we have limited experience, subjects us to a variety of risks that that we do not necessarily face to the same degree in the US. These risks may lead to a decreased demand for, or restrict our ability to sell or provide, our products, and include, among others:

•unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties, or other trade restrictions;

•differing labor regulations;

•regulations relating to data security and the unauthorized use of, or access to, commercial and personal information;

•potential penalties or other adverse consequences for violations of anti-corruption, anti-bribery, and other similar laws and regulations, including the US Foreign Corrupt Practices Act (“FCPA”) and the UK Bribery Act;

•greater difficulty in supporting and localizing our products;

•unrest and/or changes in a specific country’s or region’s social, political, legal, health, or economic conditions, including in connection with the COVID-19 pandemic;

•challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, controls, policies, benefits, and compliance programs;

•currency exchange rate fluctuations including any fluctuations caused by uncertainties following Brexit;

•limited or unfavorable intellectual property protection;

•competition with companies or other services that understand local markets better than we do;

•increased financial accounting and reporting burdens, and complexities associated with implementing and maintaining adequate internal controls; and

•restrictions on repatriation of earnings.

Our operations could be materially affected by changes in domestic and foreign economic, political, or legal conditions. For example, we are continuing to monitor developments related to Brexit, which could have significant implications for our business. Pursuant to the formal withdrawal arrangements agreed between the UK and the EU, the UK will be subject to a transition period, which is currently scheduled to last until December 31, 2020, or the Transition Period, during which EU rules will continue to apply. Negotiations between the UK and the EU are expected to continue in relation to the customs and trading relationship between the UK and the EU following the expiration of the Transition Period. Lack of clarity about future UK laws and regulations as the UK determines which EU rules and regulations to replace or replicate, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws and employment laws, could decrease foreign direct investment in the UK, increase costs, depress economic activity, and restrict access to capital. The political and economic instability created by Brexit has also caused and may continue to cause significant volatility in global financial markets and the value of the British pound currency or other currencies, including the euro, and due to our legal structure, any fluctuations in the exchange rates of the British pound may be particularly impactful.

Such a withdrawal from the EU is unprecedented. It is unclear how the UK’s access to the European single market for goods, capital, services, and labor within the EU, or single market, and the wider commercial, legal, and regulatory environment, will impact our UK operations and customers. Our UK operations service customers in the UK as well as in other countries in the EU and the European Economic Area (“EEA”), and these operations could be disrupted by Brexit, particularly if there is a change in the UK’s relationship to the single market.

We may also face new regulatory costs and challenges that could have an adverse effect on our operations. Depending on the outcome of negotiations during and following the Transition Period, the UK could lose the benefits of global trade agreements negotiated by the EU on behalf of its members, which may result in increased trade barriers that could make doing business in the EU and the EEA more difficult. Even prior to any change to the UK’s relationship with the EU, economic uncertainty surrounding Brexit and its consequences could adversely impact customer confidence resulting in customers reducing their spending budgets on our solutions, which could adversely affect our business, revenue, financial condition, and results of operations.

Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.

We are subject to the FCPA, the UK Bribery Act, and other anti-corruption, anti-bribery, and anti-money laundering laws in various jurisdictions both domestic and abroad. We leverage third parties, including channel partners, to sell subscriptions to our solution and conduct our business abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, we cannot guarantee that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Any violation of the FCPA, the UK Bribery Act, or other applicable anti-bribery, anti-corruption laws, and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or debarment from US or other government contracts, all of which may have an adverse effect on our reputation, business, operating results, and prospects.

If we fail to develop our brand, our business may suffer.

We believe that developing and maintaining awareness of the Cornerstone OnDemand brand is critical to achieving widespread acceptance of our existing and future products and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. In addition, the Cornerstone OnDemand Foundation shares our company name and any negative perceptions of any kind about the Foundation could adversely affect our brand and reputation. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

Our sales to government entities are subject to a number of additional challenges and risks.

We sell to US federal and state and foreign governmental agency customers, and we may increase sales to government entities in the future. The additional risks and challenges associated with doing business with governmental entities include, but are not limited to, the following:

•Selling to governmental entities can be more competitive, expensive and time-consuming than selling to private entities, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale;

•Government certification requirements may change, or we may lose one or more government certifications, such as the Federal Risk and Authorization Management Program, and in doing so restrict our ability to sell into the government sector until we have attained revised certificates;

•Governmental entities may have significant leverage in negotiations, thereby enabling such entities to demand contract terms that differ from what we generally agree to in our standard agreements, including, for example, most favored nation clauses and terms allowing contract termination for convenience;

•Government demand and payment for our products may be influenced by public sector budgetary cycles and funding authorizations, with funding reductions or delays, resulting from the COVID-19 pandemic or otherwise, having an adverse impact on public sector demand for our products; and

•Government contracts are generally subject to audits and investigations, which we have limited experience with, potentially resulting in termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines, and suspensions or debarment from future government business.

To the extent that we become more reliant on contracts with government entities in the future, our exposure to such risks and challenges could increase, which, in turn, could adversely impact our business.

Because we generally recognize subscription revenue from our customers over the terms of their agreements but incur most costs associated with generating such agreements upfront, rapid growth in our customer base may put downward pressure on our operating margin in the short term.

The expenses associated with generating customer agreements are generally incurred up front but the resulting subscription revenue is generally recognized over the life of the agreements; therefore, increased growth in the number of our customers will result in our recognition of more costs than revenue during the early periods covered by such agreements, even in cases where the agreements are expected to be profitable for us over their full terms.

We have a history of losses, and we cannot be certain that we will achieve or sustain profitability.

We have a history of losses. We experienced net losses of $4.1 million, $33.8 million, and $61.3 million in 2019, 2018, and 2017, respectively. At September 30, 2020, our accumulated deficit was $566.2 million and total stockholders’ equity was $244.8 million. Although our losses have decreased in each of the last three years, we expect our net loss to increase in 2020. It is possible that we may continue to incur operating losses in the future as a result of expenses associated with the continued development and expansion of our business as well as borrowing costs on our substantial indebtedness. Our expenses include among others, sales and marketing, research and development, consulting and support services, costs related to our acquisitions and the integration of businesses we acquire, and other costs related to the development, marketing, and sale and service of our products that may not generate revenue until later periods, if at all. Any failure to increase revenue or manage our cost structure as we implement initiatives to grow our business could prevent us from sustaining profitability. In addition, our ability to achieve sustained profitability is subject to a number of the risks and uncertainties discussed below, many of which are beyond our control. We cannot be certain that we will be able to sustain profitability on a quarterly or annual basis.

The nature of our business requires the application of complex revenue and expense recognition rules. Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported operating results.

The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission and various bodies formed to promulgate and interpret appropriate accounting principles. In addition, many companies’ accounting disclosures are being subjected to heightened scrutiny by regulators and the public. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

If we fail to adequately protect our proprietary rights, our competitive advantage and brand could be impaired and we may lose valuable assets, generate reduced revenue and incur costly litigation to protect our rights.

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws, and contractual restrictions to establish and protect our proprietary rights in our products and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer, and disclosure of our licensed products may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the US. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase. We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. These agreements may not be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management, and could result in the impairment or loss of portions of our intellectual property. If we fail to secure, protect, and enforce our intellectual property rights, we may lose valuable assets, generate reduced revenue, and incur costly litigation to protect our rights, which could seriously harm our brand and adversely impact our business.

We may be sued by third parties for alleged infringement of their proprietary rights or may find it necessary to enter into licensing arrangements with third parties to settle or forestall such claims, either of which could have a material adverse effect on our operating results and financial condition.

There is considerable patent and other intellectual property development activity in our industry. Our success depends in part upon our not infringing the intellectual property rights of others. However, our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry or, in some cases, our technology or products. From time to time, such third parties may claim that we are infringing their intellectual property rights, and we may actually be found to be infringing such rights. Moreover, we may be subject to claims of infringement with respect to technology that we acquire or license from third parties. The risk that we could be subject to infringement claims is increasing as the number of products and companies competing with our solution grows. Any claims or litigation could require the commitment of substantial time and resources and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty or licensing payments, indemnify our customers, distributors or other third parties, modify or discontinue the sale of our products, or refund fees, any of which would deplete our resources and adversely impact our business. We have in the past obtained, and may in the future obtain, licenses from third parties to forestall or settle potential claims that our products and technology infringe the intellectual property rights of others. Discussions and negotiations with such third parties, whether successful or unsuccessful, could result in substantial costs and the diversion of management resources, either of which could seriously harm our business.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our products, services or other contractual obligations. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity payments could harm our business, operating results, and financial condition. From time to time, we are requested by customers to indemnify them for breach of confidentiality with respect to personal data. Although we normally do not agree to, or contractually limit our liability with respect to, such requests, the existence of such a dispute with a customer may have adverse effects on our customer relationships and reputation.

We use open source software in our products, which could subject us to litigation or other actions.

We use open source software in our products and services and may use more open source software in the future. From time to time, companies that use open source software have faced claims challenging the use of such open source software and their compliance with the terms of the applicable open source license. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software, or claiming non-compliance with the applicable open source licensing terms. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition, or require us to devote additional research and development resources to change our products. In addition, some open source licenses require end-users who distribute or make available across a network products and services that include open source software to make available all or part of such software, which in some circumstances could include valuable proprietary code, at no cost, and/or license such code under the terms of the particular open source license. While we employ practices designed to monitor our compliance with the licenses of third-party open source software and protect our proprietary source code, we may inadvertently use third-party open source software in a manner that exposes us to claims of non-compliance with the applicable terms of such license, including claims for infringement of intellectual property rights or for breach of contract. Furthermore, there is an increasing number of open-source software license types, almost none of which has been tested in a court of law, resulting in a lack of guidance regarding the proper legal interpretation of such license types. If we inappropriately use open source software, we may be required to expend time and resources to re-engineer our products and services, discontinue the sale of our products, organize a legal defense against claims and allegations regarding our use of open source software, or take other remedial actions. In addition, the use of third-party open source software may expose us to greater risks than the use of third-party commercial software because open-source licensors generally do not provide warranties or controls on the functionality or origin of the software. Use of open source software may also present additional security risks because the public availability of such software may make it easier for hackers and other third-parties to determine how to compromise our platform. Any of the foregoing could be harmful to our business, financial condition, or operating results.

We are subject to governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in full compliance with applicable laws.

Our products are subject to export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our products must be made in compliance with these laws. If we fail to comply with these US export control laws and import laws, including US Customs regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. In addition, if our distributors fail to obtain appropriate import, export, or re-export licenses or authorizations, we may also be adversely affected through reputational harm and penalties. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming and is not guaranteed, and may result in the delay or loss of sales opportunities. Furthermore, the US export control laws and economic sanctions laws prohibit the shipment of certain products and services to US embargoed or sanctioned countries, governments and persons. Even though we take precautions to prevent our products from being provided to US sanctions targets, our products and services could be delivered to those targets or provided by our distributors despite such precautions. Any such shipment could have negative consequences, including government investigations, penalties, and reputational harm. In addition, various countries regulate the import of certain encryption technology, including through import permitting or licensing requirements, and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes to our products or changes in export and import regulations may create delays in the introduction and sale of our products in international markets, prevent our customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related laws, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products, or in our decreased ability to export or sell our products to existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, financial condition, and operating results.

Our investment portfolio is subject to general credit, liquidity, counterparty, market and interest rate risks, any of which could impair the market value of our investments and harm our financial results.

At September 30, 2020, we had $170.9 million in cash and cash equivalents. Although we follow an established investment policy and set of guidelines to manage our investment portfolio, our investments are subject to general credit, liquidity, counterparty, market, and interest rate risks. We liquidated a significant portion of our investment portfolio during the first quarter of 2020 to partially fund the cash consideration we paid in connection with our April 2020 acquisition of Saba and do not anticipate having a material investment portfolio for the foreseeable future.

Because the market value of fixed-rate debt securities may be adversely impacted by a rise in interest rates, our future investment income may fall short of expectations if interest rates rise. In addition, we may suffer losses if we are forced to sell securities that have experienced a decline in market value because of changes in interest rates. Currently, we do not use financial derivatives to hedge our interest rate exposure.

The fair value of our investments may change significantly due to events and conditions in the credit and capital markets. Any investment securities that we hold, or the issuers of such securities, could be subject to review for possible downgrade. Any downgrade in these credit ratings may result in an additional decline in the estimated fair value of our investments. Changes in the various assumptions used to value these securities and any increase in the perceived market risk associated with such investments may also result in a decline in estimated fair value.

In the event of adverse conditions in the credit and capital markets, and to the extent we make future investments, our investment portfolio may be impacted, and we could determine that some or all of our investments experienced an other-than-temporary decline in fair value, requiring impairment, which could adversely impact our financial position and operating results.

We may invest in companies for strategic reasons and may not realize a return on our investments.

We sometimes invest in, advise, and collaborate with cloud startups building innovative business applications that support the continued expansion of our market reach. We have made, and from time to time may continue to make, strategic investments in privately-held companies. The privately-held companies in which we may invest are inherently risky. The technologies and products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of all or a substantial part of our initial investment in these companies. The evaluation of privately-held companies is based on information that we request from these companies, which is not subject to the same disclosure regulations as US publicly traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from these companies.

Risks Related to Tax Issues

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.

As a multinational organization, we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws, or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest, and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and our operating results. If we are selected for future examinations that uncover incorrect tax positions, we could be subject to additional taxes, interest, and penalties.

Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our consolidated tax liability.

We conduct operations worldwide through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between our subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arms’ length and that contemporaneous documentation is maintained to support the transfer prices. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would increase our consolidated tax liability, which could adversely affect our financial condition, operating results, and cash flows.

Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition, or results of operations.

New income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations, or ordinances could be interpreted, changed, modified, or applied adversely to us. For example, US federal tax legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (the “Tax Act”), enacted many significant changes to the US tax laws. Future guidance from the US Internal Revenue Service and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. For example, legislation enacted on March 27, 2020, entitled the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), modified certain provisions of the Tax Act. In addition, it is uncertain if and to what extent various states will conform to the Tax Act, the CARES Act or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future US tax expense.

Our ability to use net operating loss carryforwards and certain other tax attributes to reduce future tax payments may be subject to limitations.

Our US federal net operating loss carryforwards generated in taxable years beginning before January 1, 2018, may be carried forward to offset future taxable income, if any, until such net operating loss carryforwards expire. Under the Tax Act, as modified by the CARES Act, US federal net operating losses incurred in taxable years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such US federal net operating losses in taxable years beginning after December 31, 2020 is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Act or the CARES Act.

In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50 percentage point change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership. We may therefore be limited in the portion of net operating loss carryforwards and other applicable tax attributes that we can use in the future to offset taxable income for US federal income tax purposes. In addition, at the state level, there may be periods during which the use of net operating losses is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.

Risks Related to Ownership of Our Common Stock

The trading price of our common stock may be volatile.

The trading price of our common stock has at times been volatile and could continue to be subject to significant fluctuations in response to various factors, some of which are beyond our control. In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the companies operating in such markets. The market price of our common stock may be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares, including as a result of factors unrelated to our operating performance and prospects. The market price of our common stock could be subject to wide fluctuations in response to a number of factors, including:

•our operating performance and the performance of other similar companies;

•the financial or non-financial metric projections we provide to the public, including the failure of the projections to meet the expectations of securities analysts or investors, and any changes in these projections or our failure to meet or exceed these projections;

•the overall performance of the equity markets;

•developments with respect to intellectual property rights;

•publication of unfavorable research reports about us or our industry or withdrawal of research coverage by securities analysts;

•speculation in the press or investment community;

•the size of our public float;

•natural disasters, outbreaks of pandemic diseases (such as COVID-19), or terrorist acts;

•actual or perceived data security incidents that we or our service providers may suffer;

•announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments; and

•global economic, legal, and regulatory factors unrelated to our performance.

In the past, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.

If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, the market price of our common stock and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, our business or our market. If one or more of the analysts who cover us downgrade our common stock or publish incorrect or unfavorable research about our business, the market price of our common stock would likely decline. In addition, if one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which could cause the market price of our stock or trading volume to decline.

The issuance of additional stock in connection with acquisitions, our stock incentive plans or otherwise will dilute all other stockholdings.

Our certificate of incorporation authorizes us to issue up to 1,000,000,000 shares of common stock and up to 50,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue all of these shares that are not already outstanding without any action or approval by our stockholders. We intend to continue to evaluate strategic acquisitions in the future. We may pay for such acquisitions, partly or in full, through the issuance of additional equity. For example, we issued 1,110,352 shares of our common stock in connection with our April 2020 acquisition of Saba. Any future issuance of shares in connection with our acquisitions, the exercise of stock options, the vesting of restricted stock units (“RSUs”) or otherwise would dilute the percentage ownership held by existing investors.

We cannot guarantee that our share repurchase program will be fully consummated or that it will enhance shareholder value or positively affect the trading price of our common stock.

In August 2019, our board of directors authorized a $150.0 million share repurchase program (the “2019 Share Repurchase Program”). As of September 30, 2020, we have repurchased an aggregate of $22.4 million in shares of our common stock under the 2019 Share Repurchase Program. Although our board of directors has authorized the 2019 Share Repurchase Program, the program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The 2019 Share Repurchase Program could affect the price of our common stock, increase volatility, and diminish our cash reserves. In addition, it may be suspended or terminated at any time, which may result in a decrease in the price of our common stock.

Conversion of our Convertible Notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their Convertible Notes, or may otherwise depress the price of our common stock.

The conversion of some or all of our Convertible Notes, to the extent we deliver shares upon conversion of the Convertible Notes, will dilute the ownership interests of existing stockholders. The Convertible Notes and the underlying shares issuable upon conversion of such notes may be sold in the public market upon issuance. Any sales of the Convertible Notes or our common stock issuable upon conversion of the Convertible Notes could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into shares of our common stock could depress the price of our common stock.

We do not expect to declare any dividends in the foreseeable future.

We have not historically declared dividends and do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our certificate of incorporation, our bylaws, and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our certificate of incorporation and our bylaws include provisions that:

•authorize “blank check” preferred stock, which could be issued by the board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

•create a classified board of directors whose members serve staggered three year terms (except that we began the process of phasing out our classified board of directors in 2018 and, starting at the 2021 annual meeting of stockholders, all of our directors elected by stockholders will be elected to one year terms);

•provide that our directors who have been elected to serve a three-year term (or any director appointed to fill a vacancy caused by the death, resignation, retirement, disqualification, or other removal of such director) may be removed only for cause until the expiration of such three-year term;

•eliminate the ability of stockholders to act by written consent;

•specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of the board, the chief executive officer, or the president;

•establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

•provide that vacancies on our board of directors may be filled only by a majority vote of directors then in office, even though less than a quorum;

•specify that no stockholder is permitted to cumulate votes at any election of directors; and

•require supermajority votes of the holders of our common stock to amend specified provisions of our charter documents.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.

Any provision of our certificate of incorporation, our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

During the three months ended September 30, 2020, no stock repurchases were made under our $150.0 million share repurchase program or otherwise. For information regarding our share repurchase program, refer to Note 10 – Stockholders' Equity of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

ITEM 3.Defaults Upon Senior Securities

Not applicable.

ITEM 4.Mine Safety Disclosures

Not applicable.

ITEM 5.Other Information

Not applicable.

ITEM 6.Exhibits

Exhibit

Number

Exhibit Description

Incorporated by Reference

Form

File No.

Exhibit

Filing Date

3.1

Amended and Restated Certificate of Incorporation of the Registrant

8-K

001-35098

3.1

June 20, 2018

3.2

Amended and Restated Bylaws of the Registrant

8-K

001-35098

3.2

June 20, 2018

31.1

Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1†

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

32.2†

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

101.INS††

Inline XBRL Instance Document (this instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH††

Inline XBRL Taxonomy Extension Schema Document

101.CAL††

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF††

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB††

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE††

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104††

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)




†			The certifications attached as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Cornerstone OnDemand, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
††			The financial information contained in these XBRL documents is unaudited.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Cornerstone OnDemand, Inc.
(Registrant)

/s/ Trish Coughlin
Trish Coughlin
Interim Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

Date: November 5, 2020