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