UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number: 001-35098
______________________________
Cornerstone OnDemand, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13-4068197
(I.R.S. Employer
Identification Number)
1601 Cloverfield Blvd.
Santa Monica, California 90404
(Address of principal executive offices and 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
Common Stock, par value $0.0001 per share
Name of each exchange on which registered
NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
______________________________
(NASDAQ Global Select Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý
No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the
“Exchange Act”). Yes ¨
No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ý
No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ý
No ¨
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
¨
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No ý
The aggregate market value of voting and non-voting common stock equity held by non-affiliates of the registrant, as of June 30, 2015, the last day of the
registrant’s most recently completed second fiscal quarter, was $859,871,773 (based on the closing price for shares of the registrant’s common stock as reported by
the NASDAQ Global Select Market on June 30, 2015).
On February 19, 2016 , 54,794,363 shares of the registrant’s common stock, $0.0001 par value, were outstanding.
Portions of the information called for by Part III of this Form 10-K are hereby incorporated by reference from the definitive Proxy Statement for the registrant’s
annual meeting of stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2015 .
DOCUMENTS INCORPORATED BY REFERENCE
CORNERSTONE ONDEMAND, INC.
2015 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PART II
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
Signatures
PART IV
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Page No.
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20
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37
37
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© Copyright 2016 Cornerstone OnDemand, Inc. All rights reserved. “Cornerstone,” “Cornerstone OnDemand,” the Cornerstone OnDemand, Inc. logo,
“CyberU” and other trademarks or service marks of Cornerstone OnDemand, Inc. appearing in this Annual Report on Form 10-K are the property of Cornerstone
OnDemand, Inc. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 10-K are the property of their respective
holders and should be treated as such.
TRADEMARKS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K 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 clients to enter into subscriptions for our
solutions; our ability to service those clients 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 accurately forecast revenue and
appropriately plan our expenses; market acceptance of enhanced solutions; alternate ways of addressing talent management needs or new technologies generally
by us and our competitors; continued acceptance of SaaS as an effective method for delivering talent management solutions and other business management
solutions; 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; our ability to exploit Big Data to drive increased demand for our products; 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 integrate our operations with those of recently acquired companies; 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 Annual Report on Form 10-K 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 I, 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.
Item 1.
Overview
Business
Cornerstone OnDemand, Inc. was incorporated on May 24, 1999 in the state of Delaware and began its principal operations in November 1999. Unless the
context requires otherwise, the words “Cornerstone,” “we,” “Company,” “us” and “our” refer to Cornerstone OnDemand, Inc. and its wholly owned subsidiaries.
Cornerstone is a leading global provider of talent management solutions delivered as Software-as-a-Service (“SaaS”). Our solutions support the management
of the entire employee lifecycle, with a focus on learning and development that is fundamental to the growth of employees and organizations.
Our Enterprise and Mid-Market solution is a unified cloud-based platform that addresses critical talent needs throughout the entire employee lifecycle, from
recruitment, onboarding, training and collaboration, to performance management, compensation, succession planning and analytics. The platform is composed of
several products, focused on recruiting, learning management, performance management and analytics. The platform also helps improve business execution
through integrating with an organization’s extended enterprise of clients, vendors and distributors by delivering training, certification programs and other content.
We introduced Cornerstone Edge and Cornerstone Insights in May 2015 to add flexibility and extensibility to our suite of applications while enabling clients,
collaborators and developers to derive more value out of their talent investments.
We also offer Cornerstone for Salesforce and Cornerstone Growth Edition. Cornerstone for Salesforce is a cloud-based learning solution developed natively
on the Salesforce.com platform. Cornerstone for Salesforce allows organizations to provide seamless access to sales enablement and just-in-time training
embedded within Salesforce. Cornerstone Growth Edition is a cloud-based learning and talent management solution targeted to organizations with 250 or fewer
employees.
Our clients include multi-national corporations, large domestic and foreign-based enterprises, mid-market companies, public sector organizations, healthcare
providers, higher education institutions, and non-profit entities. We sell our solutions 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.
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We have grown our business each of the last 14 years, and since 2002, we have averaged an annual dollar retention rate of approximately 95%, as described
in Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations, ” under the heading “ Metrics .” Since 2001, our implied
monthly recurring revenue from existing clients has been greater at the end of each year than at the beginning of the year. Our revenue has grown to $339.7 million
in 2015 from $263.6 million in 2014 and from $185.1 million in 2013 . As of December 31, 2015 , 2,595 clients used our Enterprise and Mid-Market solution to
empower more than 23.8 million users across 191 countries in 42 different languages.
The Market
Human capital is both a major asset and expense for all organizations. Based on the U.S. Bureau of Labor Statistics data as of September 2015, total
compensation paid to the United States civilian workforce of approximately 156.9 million people was expected to exceed $10.8 trillion in 2015.
Accordingly, organizations have long sought to optimize their investments in human capital. We believe that organizations face six major challenges in
maximizing the productivity of their internal and external human capital:
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Acquiring Talent. Increasingly seeking to fill open positions by recruiting internally and by leveraging the external networks of their employees, corporate
recruiting has evolved from a process that was principally driven by traditional sources such as inbound resume submissions and job board postings to one
that is inherently social in nature.
Developing Talent . Effectively orienting new hires and training employees throughout their careers to achieve their full potential, which has become
more difficult with the Millennial generation entering the workforce, increasingly distributed workforces and heightened compliance requirements.
Engaging Employees. Connecting with employees at all levels and locations of the organization to keep them motivated, which has become more
difficult with the rise of globalization and telecommuting.
Improving Business Execution. Ensuring the effective alignment of employee behavior with the organization’s objectives through goal management and
employee assessment and development, as well as by linking compensation to performance.
Building a Leadership Pipeline. Identifying, preparing and retaining individuals for leadership positions at all levels and across all parts of the
organization, which has become an acute challenge with the growing mobility and turnover of employees and the impending retirements of the Baby
Boomers.
Integrating with the Extended Enterprise of Customers, Vendors and Distributors. Delivering training, certification programs and resources to the
organization’s network of customers, vendors, distributors and other third parties that constitute the organization’s extended enterprise, which has become
more difficult with the rise of outsourcing and increasing globalization.
Until the advent of software technology in the 1970’s, written tracking systems were the only solution available for managing human capital. Software-based
solutions such as spreadsheet-based tracking systems, custom-built software applications, third-party human resource information systems and third-party software
applications provided by on-premise software vendors gradually became available. We refer to all of these approaches as hosted or on-premise solutions.
More recently, SaaS vendors dedicated to providing talent management software have emerged. We believe that just as organizations are increasingly
choosing SaaS solutions for business applications such as sales force management, they are also increasingly adopting SaaS talent management solutions.
We believe many of the existing solutions suffer from one or more of the following shortcomings:
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Narrow Functionality. As they only address specific stages of the employee lifecycle, many solutions lack sufficient breadth of functionality to maximize
employee productivity effectively.
Limited Configurability. Most solutions are rigid and limit the ability of organizations to match their diverse workflows or to adopt their desired talent
management practices.
Difficult to Use. Inputting, updating, analyzing and sharing information is often cumbersome, resulting in low employee adoption and usage.
Costly to Deploy, Maintain and Upgrade. Hosted or on-premise solutions require significant expense and time to deploy as well as require ongoing costs
associated with IT support, network infrastructure, maintenance and upgrades.
Inability to Scale. Many solutions are designed to support the needs of smaller organizations and have difficulty meeting the complex functional
requirements or the sizeable infrastructure demands of larger enterprises.
Given the limitations of existing offerings, we believe there is a market opportunity for comprehensive, unified solutions that help organizations manage all
aspects of their internal and external human capital and link talent management to their business strategy.
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The Cornerstone OnDemand Answer
Our Enterprise and Mid-Market solution is a comprehensive SaaS suite that consists of product offerings to help organizations manage their recruiting,
onboarding, learning, performance, succession, compensation and enterprise social collaboration processes.
Our suite includes a number of cross-product tools for talent management analytics and reporting, employee profile management, and e-learning content
aggregation and delivery. We also provide consulting services for configuration, integration and training for our suite. We believe that our Enterprise and Mid-
Market solution delivers the following benefits:
•
Comprehensive Functionality. Our suite provides a comprehensive approach to talent management by offering products to address all stages of the
employee lifecycle: recruiting, onboarding, learning, performance, succession, compensation and enterprise social collaboration processes. Employees use
our solutions throughout their careers to engage in performance processes such as goal management, performance reviews, competency assessments and
compensatory reviews; to complete job-specific and compliance-related training; to evaluate potential career changes, development plans or succession
processes; and to connect with co-workers by leveraging enterprise social networking tools.
Our clients can manage processes that span different talent management functions because our product offerings are unified. For example, our clients can
automatically identify skill gaps as part of an employee’s performance review, assign training to address those gaps and monitor the results of that training. Also,
clients can identify high potential employees for future leadership positions and place them in executive development programs.
We believe our comprehensive, unified suite allows our clients to align their talent management processes and practices with their broader strategic goals.
•
Flexible and Highly Configurable. Our suite offers substantial configurability that allows our clients to match the use of our software with most of their
specific business processes and workflows. Our clients can configure various features, functions and work flows in our suite by business unit, division,
department, region, location, job position, pay grade, cost center, or self-defined organizational unit. Our clients are able to adjust features to configure
specific processes, such as performance review workflows or training approvals, to match their existing or desired practices. This high level of
configurability means that custom coding projects generally are not required to meet the diverse needs of our clients.
Our clients can deploy the product offerings individually or in any combination. As a result, our clients have the flexibility to purchase solely those products
that solve their immediate talent management needs and can incrementally deploy additional products in the future as their needs evolve.
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Easy-to-Use, Personalized User Interface. Our suite employs an intuitive user interface and may be personalized for the end user, typically based on
position, division, pay grade, location, manager and particular use of the solution. This ease of use limits the need for end-user training, which we believe
increases user adoption rates and usage. While we typically train administrators, most clients do not need training on using our products.
Software-as-a-Service Solution Lowers the Total Cost of Ownership and Speeds Delivery. Our suite is accessible through a standard web browser and
does not require the large investments in implementation time, personnel, hardware, and consulting that are typical of hosted or on-premise solutions.
With a single code base to maintain, we are able to release improved functionality on a quarterly basis. This is a more rapid pace than most hosted or on-
premise solution providers can afford to deliver.
Scalable to Meet the Needs of Organizations. Our suite has been used by Fortune 100 companies since 2001. While the complex needs of these global
corporations required us to build a solution that can scale to support large, geographically-distributed employee bases, our suite is capable of supporting
deployments of various sizes. Today we service 23 multi-national corporations with over 150,000 active users each. Our largest deployment is for over
350 , 000 users.
Continued Innovation through Collaborative Product Development. We work collaboratively with our clients on an ongoing basis to develop almost
every part of our suite. The vast majority of our thousands of software features were designed with existing and prospective clients based on their specific
functional requests.
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Our Strategy
Our goal is to empower people, organizations, and communities with our comprehensive talent management solutions. Key elements of our strategy include:
Retain and Expand Business with Existing Clients. We believe our existing installed base of clients offers a substantial opportunity for growth.
Focus on Client Success, Retention and Growth. We believe focusing on our clients’ success will lead to our own success. We have developed a Client
Success Framework that governs our operational model. Since 2002, we have had an average annual dollar retention rate of approximately 95%. We
strive to maintain our strong retention rates by continuing to provide our clients with high levels of service and support and increasing functionality.
Sell Additional Products to Existing Clients. We believe there is a significant growth opportunity in selling additional functionality to our existing clients.
Many clients have added functionality subsequent to their initial deployments as they recognize the benefits of our unified suite, and as a result, more than
half of our clients today utilize the equivalent of two or more products. Still, we believe significant upsell opportunity remains within our existing client
base. Not only is our goal to sell these clients additional products and services, but we also believe there is an opportunity to sell many of them additional
products within our unified suite.
Strengthen Current Sales Channels. We intend to increase our investments in both direct and indirect sales channels to acquire new clients.
Invest in Direct Sales in North America. We believe that the market for talent management is large and remains significantly underpenetrated. As a result,
we plan to continue to grow both our enterprise and mid-market direct sales teams.
Expand and Strengthen Our Alliances. We intend to grow our distribution channels through key business alliances, including agreements with global
vendors such as Aon Hewitt, Appirio, Inc., Automatic Data Processing, Inc., Deloitte Consulting LLP, The Educe Group, Ellucian Company L.P.,
Kronos, Inc., Tribridge, Workday, Inc., and Xerox Corporation, as well as the continued expansion of our regional relationships with distributors like
CDP Group, Limited (China), eLearning99 (China), ISQ eLearning (Portugal), Kalleo Learning (South Africa), Logica plc (Europe), Neoris de Mexico,
S.A. de C.V. (Mexico), Neospheres SAS (France), Sage Software, Inc. (North America), T2 Optimise PTY Ltd. (Asia Pacific), Talentech (Israel) and
Xchanging HR Services Limited (United Kingdom).
Significantly Grow Our International Operation. We believe a substantial opportunity exists to continue to grow sales of our solutions internationally.
We intend to grow our Europe, Middle-East and Africa, or EMEA, and Asia-Pacific operations, which provide for direct sales, alliances, services and
support in the regions. We have grown our EMEA client base from one client at December 31, 2007 to 409 clients at December 31, 2015 and our Asia-
Pacific client base from two clients at December 31, 2009 to 119 clients at December 31, 2015 .
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Continue to Innovate and Extend Our Technological Leadership. We believe we have developed over the last decade a deep understanding of the talent
management challenges our clients face. We continually collaborate with our clients to build extensive functionality that addresses their specific needs and
requests. We plan to continue to leverage our expertise in talent management and client relationships to develop new products, features and functionality which
will enhance our solutions and expand our addressable market.
Make Cornerstone Built to Last. Our growth strategy since inception has been deliberate, disciplined 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 undergoing layoffs or business contraction. We plan to take the
same systematic approach in the future.
Acquisitions. In November 2014 we acquired Evolv Inc., or Evolv, a San Francisco based workforce planning and predictive analytics platform provider.
We feel the acquisition has accelerated our big data initiative by accelerating the roadmap for workforce planning and predictive analytics. In addition, we believe
the acquisition adds a team with deep machine learning and big data analytics expertise to our portfolio of talented professionals which is expected to create
synergies and continue to strengthen our core talent management solution.
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Evolv’s platform helps organizations utilize relevant internal and external data to objectively evaluate the skills, work experience and personalities of their
employees and job candidates. The acquisition of Evolv is expected to expand our clients’ ability to make intelligent workforce decisions by providing:
• Machine Learning Platform Technology . Evolv applies sophisticated predictive models and algorithms to large sets of data for extracting insights from
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the noise, identifying patterns and uncovering the true drivers of workforce performance.
Data Science. Evolv’s team of data scientists has applied several state-of-the-art statistical methodologies and econometric techniques to improve the
predictive capabilities of its solutions.
Big Data Infrastructure. Evolv has built highly scalable big data analytics leveraging modern Hadoop, HBase and Hive Big Data technologies to process
and analyze massive data sets.
In the future, we may seek to acquire or invest in additional businesses, products or technologies that we believe will complement or expand our solutions,
enhance our technical capabilities or otherwise offer growth opportunities.
Our Solutions
Our Enterprise and Mid-Market solution is a comprehensive talent management suite that our clients use to find, develop, connect, evaluate and engage their
human capital. We built this suite using a single code base and a multi-tenant, multi-user architecture that we host in our data centers. The suite consists of a
collection of product offerings to help organizations manage key phases of the employee life cycle from recruitment, onboarding, training, and collaboration, to
performance management, compensation, succession planning, and a product to manage training for their external networks of partners, suppliers, resellers,
distributors and customers. To complement our product suite, we offer a number of cross-product tools for analytics and reporting, employee profile management
and e-learning content aggregation.
Our Product Offerings
Cornerstone Recruiting. Our recruiting product offering supports the modern ways that businesses source, recruit and hire new employees. The recruiting
product offering is fully integrated with our existing talent management suite. It was built using Cornerstone's pure-cloud, multi-tenant architecture, leveraging a
common platform, workflow engine, and reporting and administration model. This architecture provides clients with faster deployments, greater flexibility to adapt
and change the application without cost or risk, and a seamless user experience across all Cornerstone applications. Clients can use the recruiting product offering
to:
post jobs across both traditional job boards and social networks;
create internal career centers and external career sites;
• manage job requisitions;
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• manage and enhance employee referral programs;
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identify existing employee connections with candidates;
quickly assess candidate skills and competencies;
collaborate with hiring managers and employees throughout the screening process;
search and compare internal and external candidates; and
build ongoing talent pools.
Cornerstone Onboarding. Our onboarding product offering delivers the resources, connections and tools at critical points across the employee lifecycle. The
onboarding product offering complements the recruiting product offering to reduce administrative burden and promote collaboration between employees,
managers, HR and across departments. Clients can use the onboarding product offering to:
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provide self-service portals where new hires can learn about the company and access critical information;
administer new hire forms from one centralized location;
track the entire onboarding process with the ability to set goals and reminders in order to accelerate time to productivity;
engage new hires by establishing virtual communities and connecting new hires with their colleagues; and
accommodate transitions across the full employee lifecycle.
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Cornerstone Learning. Our learning product offering helps clients deliver and manage enterprise training and development programs. It links employee
development to other parts of the talent management lifecycle, including performance management and succession planning. The learning product offering
supports all forms of training, including instructor-led training, e-learning and virtual classroom sessions. We have made tens of thousands of online training titles
from dozens of global e-learning providers accessible through the learning product offering to help clients reduce overall training expense and cost-effectively
migrate to blended learning curricula of online and instructor-led training. Clients can use the learning product offering to:
• manage local and global compliance programs, including the tracking of any recurring or non-recurring license, designation, certification, or other
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compliance-related training and continuing education requirements;
access thousands of e-learning classes from our existing off-the-shelf content providers;
create, publish and deliver the client’s own proprietary training content with our authoring tools;
automate the administration of instructor-led training sessions, and launch and track virtual classrooms through integrations with third-party tools such as
Cisco Webex and Microsoft LiveMeeting;
deliver sophisticated curricula that can include multiple sequenced parts, multiple types of training and enforcement of pre-requisites and follow-up
assignments;
report on costs, participation levels and evaluations of development programs through permission-based dashboards, standard reports and custom reports;
and
enable enterprise social collaboration through rich user profiles as well as the ability to participate in discussions, send messages, contribute to corporate
wikis, author blogs, subscribe to information feeds and download audio and videocasts.
Cornerstone Performance. Our performance product offering allows clients to direct and measure performance at the individual, departmental and
organizational levels through ongoing competency management, organizational goal setting, performance appraisal, and development planning. Performance data
can also be used by the learning product offering to set training priorities and to make informed workforce planning decisions. Clients can use the performance
product offering to:
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cascade, track and report goals across the organization to improve business execution and proactively manage organizational objectives;
identify competency and skill gaps within an organization through manager and peer assessments, using either the client’s own proprietary models or
third-party competency models;
automate the annual and interim review process, benefit from a configurable workflow engine to design review questions and steps, automatically include
the reviewee’s individual goals and competencies, provide managers with a comment assistant and calibrate review scores;
allow managers to work with employees to develop personalized development plans or dynamically create individualized development plans based on
competency gaps; and
view dashboards or generate reports and meaningful data on every phase of the performance management cycle.
Cornerstone Succession. Our succession product offering allows clients to proactively plan for organizational change. The succession product offering
serves both the employee looking for career advancement and the executive team planning for the future. Clients can use the succession product offering to:
• make informed decisions about succession planning, potential organizational changes and retention of high-potential employees at all hierarchical levels;
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develop succession plans that prepare employees for future roles and map development paths;
create interactive organizational charts that can reflect the current hierarchy of the organization and model for potential changes within the hierarchy; and
allow managers to visualize their organization in a grid to see performance and potential information.
Cornerstone Compensation. Our compensation product offering allows clients to reward their employees for hard work in direct relation to performance.
The compensation product offering enables clients to make more informed decisions about the allocation of base pay, bonus and equity awards. Clients can use the
compensation product offering to:
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develop a pay-for-performance culture, aligning compensation allocation decisions with actual employee performance and goal achievement;
coordinate all types of compensation programs, including salaries, merit increases, market adjustments and lump sum payments;
build and administer various incentive programs;
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pull key data around compensation adjustment guidelines; and
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• make informed compensation decisions by combing organizational data, performance data and compensation models.
Cornerstone Extended Enterprise. Our extended enterprise product offering helps clients extend talent management to their customers, vendors, and
distributors. The extended enterprise product offering enables clients to develop new profit centers, increase sales, cut support costs and boost channel productivity.
Clients can use the extended enterprise product offering to:
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administer for-profit training programs to their own customers more effectively, providing them with a delivery tool, an automated registration system
and e-commerce capabilities;
improve strategic partner enablement with better training, online best practice centers and more readily-available information on products and services;
increase customer engagement through social collaboration, virtual communities, educational programs and the enablement of customer-driven product
innovation initiatives;
• manage distributor certification programs; and
deliver training and targeted information to members of trade associations or other member-based organizations.
Cornerstone for Salesforce. Our Cornerstone for Salesforce product is a learning solution developed natively on the Salesforce.com platform. The
Cornerstone for Salesforce product allows organizations to improve sales performance by providing access to just-in-time training embedded within Salesforce.
Clients can use the Cornerstone for Salesforce product offering to:
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deliver just-in-time training and onboarding programs for sales and service teams, partners and customers with target specific content based on
opportunity records;
certify sales and partner knowledge while ensuring compliance standards are met with Salesforce’s configurable dashboard reporting for sales leadership;
and
assist sales leadership in identifying top performing reps and those in need of training development through a comprehensive view of a company’s sales
organization.
Cross-Product Tools
Our Enterprise and Mid-Market solution has a number of capabilities that cross each of our unified product offerings. These include:
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Analytics, Reporting, and Dashboards. Our Enterprise and Mid-Market solution employs a proprietary reporting engine. In addition to approximately 145
included standard reports, this solution includes a custom reporting tool that allows clients to create highly specific reports. This solution also includes
dashboard technology to present graphical views of complex data.
Talent Profiles. Managers can access integrated Talent Profiles to review key employee data in several locations across our Enterprise and Mid-Market
solution. Talent Profiles function as employee identification cards, detailing user record information, performance ratings, succession management data,
enterprise social collaboration activity and informal manager comments. These profiles are available throughout this solution where quick access to
information is desired, including in performance reviews, organizational charts, succession plans, compensation plans and user record editing.
E-Learning Content Aggregation. We have entered into relationships with many off-the-shelf e-learning content vendors. This enables us to provide
access to tens of thousands of e-learning classes for distribution across our Enterprise and Mid-Market solution. E-learning, like other forms of training,
can be delivered in conjunction with development plans, competency assessments, succession planning scenarios, talent pools and career path exploration.
Cornerstone Mobile. Cornerstone Mobile allows clients to access some of the products and features of our Enterprise and Mid-Market talent management
suite from their mobile device. Key capabilities of Cornerstone Mobile include enabling clients to view employee profiles, search the employee directory,
and access just-in-time video training.
Consulting Services
We offer comprehensive services to our clients to assist in the successful implementation of our solutions and to optimize our clients’ use of our solutions
during the terms of their engagements. Our consulting services are offered at fixed fees or on a time-and-material basis.
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With our SaaS model, we have eliminated the need for lengthy and complex technology integrations, such as customizing software code, deploying
equipment or maintaining unique delivery models or hardware infrastructure for individual clients. As a result, we typically deploy our Enterprise and Mid-Market
solution in significantly less time than required for similar deployments of hosted or on-premise software. Our consulting services include:
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Implementation Services. We deploy our Enterprise and Mid-Market solution to clients through a documented process of discovery, design, and
configuration. Most enterprise implementations require services for systems integration, data loading, and software configuration, as well as support with
change management. For mid-market clients, this solution can be implemented in a matter of weeks. For enterprise clients, implementation typically takes
three to four months.
Integration Services. We provide a range of services and self-service tools to load data into a client’s portal and to integrate our Enterprise and Mid-
Market solution with our client’s existing systems. Integration services include data feeds to and from HR information systems and enterprise resource
planning systems, single sign on, historical data loads and integration of proprietary content.
Content Services. We offer e-learning content consulting services, including training needs analysis, content selection and curriculum design. In addition,
we help clients manage their e-learning vendors, and we maintain an aggregated library of third-party online training classes in support of our clients.
Business Consulting Services. We provide business consulting services for existing and prospective clients, such as business process mapping, guidance
on industry best practices and project management services. We expect to add additional business consulting services in the future based on client
demand.
Educational Services. We provide product training to our clients during implementations and on an ongoing basis. We offer multiple forms of training,
including custom classroom training, virtual instructor-led training, and asynchronous online training. Our training covers all aspects of administering and
managing our Enterprise and Mid-Market solution. In addition, our Educational Services team offers live coaching and custom content development
support for clients.
Account Services
We are dedicated to the success of our clients. We have developed a Client Success Framework which governs our operational model, the structure of our
Account Services team and the types of services necessary at each stage of a client’s lifecycle.
Within this framework, we have developed the following roles with primary responsibility to our clients at various levels of their organizations:
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Account Managers who interact with executive-level sponsors and human resources executives at a client and are focused on the overall relationship,
sales to existing clients and client business concerns;
Client Success Managers who work directly with executive-level sponsors and human resources executives at our clients to maximize the value of their
investment in our Enterprise and Mid-Market solution; and
Product Specialists who interact with client administrators and are focused on features and functions of our Enterprise and Mid-Market solution.
We believe this lifecycle-driven approach to client support and client success has contributed directly to our high client retention rate and high rankings for
client satisfaction in independent research studies.
We offer support in multiple languages, at multiple levels, and through multiple channels, including global support coverage available 24 hours a day, seven
days a week. We use our own enterprise social collaboration product to provide our clients and distributors with a virtual community to collaborate on product
design, release management and best practices.
We monitor client satisfaction internally as part of formalized programs and at regular intervals during the client lifecycle, including during the transition
from sales to implementation, at the completion of a consulting project and daily based on interactions with the Account Services team.
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Our Customers
As of December 31, 2015 , 2,595 clients used our Enterprise and Mid-Market solution with approximately 23.8 million registered users across 191 countries
and 42 languages. Our clients represent a variety of different industries, including automotive, business services, education and publishing, financial services, food
and restaurants, healthcare, insurance, media and communications, non-profits, pharmaceuticals, public sector, retail, technology, and travel. No single client
accounted for 10% or more of our total revenue in 2015 , 2014 , or 2013 . Some of our significant clients across a variety of different industries who have agreed to
be named include:
Automotive
BMW AG
Jaguar Land Rover Automotive plc
PSA Peugeot Citroën
Business Services
Advantage Solutions
Deutsche Post AG
ID Logistics Group SA
Education & Publishing
Los Angeles Unified School District
Ohio State University
University of Rochester
Financial Services
BNP Paribas
Commonwealth Bank
Deutsche Bank
Food & Restaurants
Darden Restaurants, Inc.
Fomento Economico Mexicano SAB de CV
Wendy’s International, LLC
Healthcare
Dignity Health
Res-Care, Inc.
McKesson Corporation
Insurance
American International Group, Inc.
AXA
RSA Insurance Group plc
Media & Communications
CSC Holdings LLC
Millicom International Cellular S.A.
Virgin Media Limited
Non-Profits
American Red Cross
Teach for America, Inc.
United Nations High Commissioner for Refugees
Pharmaceuticals
Novartis International AG
Sanofi S.A.
F. Hoffmann-La Roche AG
Public Sector
State of North Carolina
U.S. Department of Commerce
U.S. Department of the Treasury
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Retail
Grupo Bimbo, S.A.B. de C.V.
Inter IKEA Systems B.V.
Unilever
Technology
Flextronics International
Hitachi, Ltd.
Royal Philips Electronics
Travel
MGM Resorts International
Princess Cruise Lines, Ltd.
Starwood Hotels & Resorts Worldwide Inc.
Technology, Operations and Development
Technology
Our Enterprise and Mid-Market solution is designed with an on-demand architecture which our clients access via a standard web browser. Our Enterprise
and Mid-Market solution uses a single code base, with all of our clients running on the current version of our software. From time to time, we may maintain a
marginally divergent version for a strategic client for a limited period of time, solely for our convenience. Our Enterprise and Mid-Market solution has been
specifically built to deliver:
a consistent, intuitive end-user experience to limit the need for product training and to encourage high levels of end-user adoption and engagement;
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• modularity and flexibility, by allowing our clients to activate and implement virtually any combination of the features we offer;
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high levels of configurability to enable our clients to mimic their existing business processes, workflows, and organizational hierarchies within our suite;
web services to facilitate the importing and exporting of data to and from other client systems, such as enterprise resource planning and human resource
information system platforms;
scalability to match the needs of the largest global enterprises and to meet future client growth; and
rigorous security standards and high levels of system performance and availability demanded by our clients.
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Our Enterprise and Mid-Market solution offers a localized user interface and currency conversion capabilities. It is currently available in the following
languages: Arabic, Bahasa (Malaysia), Bulgarian, Chinese Simplified, Chinese Traditional (Hong Kong), Croatian, Czech, Danish, Dutch, English (Australia),
English (UK), English (US), Estonian, Finnish, French (Canada), French (France), German, Greek, Hebrew, Hungarian, Indonesian, Italian, Japanese, Korean,
Latvian, Lithuanian, Norwegian, Polish, Portuguese (Brazil), Portuguese (Portugal), Romanian, Russian, Serbian, Slovakian, Slovenian, Spanish (Latin America),
Spanish (Spain), Swedish, Thai, Turkish, Ukrainian and Vietnamese.
Our Enterprise and Mid-Market solution is deployed using a multi-tenant and multi-user architecture, which provides our enterprise clients with their own
database. We employ a modularized architecture to balance the load of clients on separate sub-environments, as well as to provide a flexible method for scalability
without impacting other parts of the current environment. This architecture allows us to provide the high levels of uptime required by our clients. Our existing
infrastructure has been designed with sufficient capacity to meet our current and estimated near term future needs.
Security is of paramount importance to us due to the sensitive nature of employee data. We have designed our Enterprise and Mid-Market solution to meet
certain rigorous industry security standards and to help assure clients that their sensitive data is protected across the system. We ensure high levels of security by
segregating each client’s data from the data of other clients and by enforcing a consistent approach to roles and rights within the system. These restrictions limit
system access to only those individuals authorized by our clients. We also employ multiple standard technologies, protocols and processes to monitor, test and
certify the security of our infrastructure continuously, including automated scans, periodic security audits and penetration tests conducted by our clients and
commissioned by us from third parties.
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We are standardized on Microsoft .NET technologies and write the majority of our software in industry-standard software programming languages, such as
C#. We use Web 2.0 technologies, such as AJAX, extensively to enhance the usability, performance, and overall user experience of our Enterprise and Mid-Market
solution. Microsoft SQL Server is deployed for our relational database management system. Apart from these and other third-party components, our entire
Enterprise and Mid-Market solution has been specifically built and upgraded by our in-house development team.
Operations
We physically host our Enterprise and Mid-Market solution for our clients in two secure third-party data center facilities, one located in El Segundo,
California and the other located near London, United Kingdom. Both facilities are leased from Equinix, Inc. These facilities provide physical security, including
manned security 365 days a year, 24 hours a day, seven days a week, biometric access controls and systems security, redundant power and environmental controls.
We lease space for disaster recovery purposes from Equinix in Virginia and from TelecityGroup in Manchester, United Kingdom.
Our infrastructure includes firewalls, switches, routers, load balancers, and IDS/IPS from Palo Alto Networks, Cisco Systems and other widely commercially
available vendors to provide the networking infrastructure and high levels of security for the environment. We use industry standard blade and rack-mounted
servers to run our Enterprise and Mid-Market solution and Akamai Technologies’ Global Network of Edge Servers for content caching. We use solid state storage
and other storage technologies from leading vendors SanDisk, Pure Storage and HP.
Research and Development
The responsibilities of our research and development organization include product management, product development and quality assurance. Our research
and development organization is located primarily in our Santa Monica, California headquarters. Our development methodology, in combination with our SaaS
delivery model, allows us to release new and enhanced software features on a regular and predictable basis, currently quarterly. We follow a well-defined
communications protocol to support our clients with release management. We patch our software on a bi-weekly basis. Based on feedback from our clients and
prospects and pursuant to our own innovation, we continuously develop new functionality while enhancing and maintaining our existing product offerings. We do
not need to maintain multiple engineering teams to support different versions of the code because all of our clients are running on the current version of our
product offerings.
Our research and development expenses were $41.0 million in 2015 , $30.6 million in 2014 and $21.3 million in 2013 .
Sales and Marketing
Sales
We sell our software and services both directly through our sales force, and indirectly through our domestic and international network of distributors. We
currently service clients in a wide range of industries, including, among others business services, financial services, healthcare, insurance, manufacturing, retail,
and high technology. We have a number of direct sales teams organized by market segment, industry and geography, which are as follows:
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Strategic Accounts. We have a strategic accounts sales team focused on sales to some of the top 150 largest multi-national corporations.
Enterprise. Our enterprise sales team sells to large enterprises with 5,000 or more employees. This team is composed primarily of experienced solution
sales executives, with an average tenure of over 20 years in sales.
Nationals. Our nationals sales team sells to organizations with between 1,000 and 4,999 employees. This team is composed primarily of experienced
sales individuals, with an average tenure of over 15 years in sales.
• Majors. Our majors sales team sells to organizations with between 251 and 999 employees. This team is composed primarily of experienced sales
individuals, with an average tenure of 15 years in sales.
Growth Edition. Our Cornerstone Growth Edition sales team is targeted to clients with 250 or fewer employees.
Public Sector. Our public sector sales team targets federal, state and local government, as well as K-12 and higher education institutions.
Healthcare. Our healthcare sales team targets healthcare providers such as hospitals, healthcare equipment and services, pharmaceuticals, biotechnology
and related life science organizations.
EMEA. We have both enterprise and mid-market sales professionals based in core European markets. This team is composed primarily of experienced
sales individuals, with an average tenure of over 15 years in sales.
APAC. We have enterprise sales professionals based in core Asia-Pacific markets including Australia, China, India, and Japan.
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LATAM . We have enterprise sales professionals based in core Latin and South America markets including Mexico and Brazil.
Our direct sales team is supported by product specialists who provide technical and product expertise to facilitate the sales process. Our sales enablement
professionals provide on-boarding and ongoing professional development for the sales professionals to increase their effectiveness at selling in the field. We also
maintain a separate team of account managers responsible for renewals and up-sales to existing clients, as described above.
Marketing
We manage global demand generation programs, develop sales pipelines and enhance brand awareness through our marketing initiatives. Our marketing
programs target HR executives, technology professionals and senior business leaders. Our principal marketing initiatives include:
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Demand Generation. Our demand generation activities include lead generation through email and direct mail campaigns, participation in industry events,
securing event speaking opportunities, online marketing and search marketing.
Corporate Marketing. We market to our clients by leveraging product marketing, client success stories, thought leadership content, and brand awareness
advertising campaigns. Additionally, we host regional client user group meetings and we also co-market with our strategic distributors, including joint
press announcements and demand generation activities.
• Marketing Communications. We undertake media relations, corporate communications, industry analyst relations activities and social media outreach.
Strategic Relationships
We have entered into alliance agreements in order to expand our capabilities and geographic presence and provide our clients with access to specific types of
content. We have entered into relationships with various third party consulting firms, such as Aon Hewitt, Appirio Inc., Bluewater Learning Inc., The Educe Group
and Tribridge to assist in the successful implementation of our solutions and to optimize our clients’ use of our solutions during the terms of their engagements. We
utilize these firms to assist in delivery of implementation and integration services amongst other consulting services. As our business grows, we expect to continue
to utilize increasing amounts of these services.
Outsourcing and Distribution Relationships
We have developed a network of outsourcing, distribution, and referral relationships to expand our reach and provide product and services sales through
indirect channels. These include agreements with global vendors such as Aon Hewitt, Appirio Inc., Automatic Data Processing, Inc., Ellucian Company L.P., and
Xerox Corporation as well as regional distributors such as BSI Tecnologia in Brazil, CDP Group, Limited in China, eLearning99 in China, ISQ eLearning in
Portugal, Kalleo Learning in South Africa, Logica plc in Europe, Neoris de Mexico, S.A. de C.V. in Mexico, Neospheres SAS in France, Sage Software, Inc. in
North America, Xpert Learning in United Arab Emirates, T2 Optimise PTY Ltd. in Asia Pacific, Talentech Ltd. in Israel, and Xchanging HR Services Limited in
the United Kingdom. We expect to continue to add distributors to build our sales presence in certain geographic and vertical markets.
Consulting and Services Relationships
We have entered into alliance relationships with HR consulting firms to deliver consulting services, such as implementation and content development
services, to clients.
Content and Product Relationships
We have entered into distributor agreements with a wide range of vendors which provide off-the-shelf e-learning content and custom learning content
development services. Through this network, we are able to offer an extensive library of online training content to our clients through our Enterprise and Mid-
Market solution. Our content distributors for e-learning content include industry leaders as well as regional and vertically-focused online training providers. In
addition, we have agreements with providers of specific competency models for use by our clients directly in our Enterprise and Mid-Market solution.
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Competition
The market for talent management software specifically, and for human resource technology generally, is highly competitive, rapidly evolving and
fragmented. This market is subject to changing technology, shifting client needs and frequent introductions of new products and services.
Most of our sales efforts are competitive, often involving requests for proposals. We compete primarily on the basis of providing a comprehensive, fully
integrated suite for talent management as opposed to specific service offerings.
In the applicant tracking systems segment, which the recruiting and onboarding product offerings each serve, our principal competitors include companies
such as Oracle Corporation, and International Business Machines Corporation. We compete in this segment primarily on the basis of:
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the level of integration of our recruiting and onboarding product offerings within our talent management suite;
the social nature of our recruiting product offering, which leverages our clients’ ecosystems as well as integrations with leading social networks to offer
enhanced recruiting capabilities;
the ability to compare internal and external candidates to fill open positions and enable talent mobility;
the quality of our service and focus on client success;
our ability to provide scalability and flexibility for large global deployments; and
the ease of use of our recruiting and onboarding product offerings and overall user experience.
In the learning management systems segment, which the learning and extended enterprise product offerings each serve, our principal competitors include
companies such as Oracle Corporation, Saba Software, Inc., SAP America, Inc., and SkillSoft Corp. In this segment, we compete primarily based on:
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the quality of our service and focus on client success;
the ease of use of our learning and extended enterprise product offerings and overall user experience;
the breadth of our learning and extended enterprise product offerings to meet our clients’ current and evolving needs;
our ability to provide scalability and flexibility for large and complex global deployments;
our integration with third-party e-learning providers domestically and internationally; and
our ability to serve the extended enterprise of our clients’ partners, distributors, contractors, alumni, members, volunteers and customers.
In the performance management systems segment, which the performance, succession and compensation product offerings each serve, our principal
competitors include companies such as Halogen Software, Inc., Lumesse Limited, Oracle Corporation, Peoplefluent, Inc., and SAP America, Inc. These vendors
are, like us, largely SaaS providers. We compete in this segment primarily on the basis of:
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the criticality of learning and development to an effective performance management program, relying on our strengths in both learning and performance
management;
the quality of our service and focus on client success;
the breadth and depth of our product functionality;
the flexibility and configurability of our performance, succession and compensation product offerings to meet the changing content and workflow
requirements of our clients’ business units;
the level of integration, configurability, security, scalability and reliability of our performance, succession and compensation product offerings; and
our vision of unified talent management, combined with our ability to innovate and respond to client needs rapidly.
In addition, we occasionally compete with custom-built software that is designed to support the needs of a single organization, as well as with third-party
talent and human resource application providers that focus on specific aspects of talent management.
Many of our competitors and potential competitors have greater name recognition, longer operating histories and larger marketing budgets than we do. For
additional information, see “ Risk Factors—Risks Related to Our Business and Industry—The market in which we participate is intensely competitive, and if we do
not compete effectively, our operating results could be harmed ” and “ Risk Factors—Mergers of or other strategic transactions by our competitors could weaken
our competitive position or reduce our revenue.”
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Government Contracts
Many of our contracts with government agencies are subject to termination at the election of the government agency. While our government contracts
generally do not provide for renegotiation of fees at the election of the Government, it is possible that the government agency could request, and that we could
under certain circumstances agree to, the renegotiation of the payments otherwise payable under such contracts. However, we have not in the past renegotiated
significant payment terms under our government contracts. For additional information, see “ Risk Factors—We face risks associated with our sales to
governmental entities.”
The Cornerstone OnDemand Foundation
To demonstrate our commitment to empowering people and communities, we helped form the Cornerstone OnDemand Foundation, or the Foundation, in
2010. The Foundation seeks to empower communities in the United States and internationally by increasing the impact of the non-profit sector through the
utilization of our Enterprise and Mid-Market solution and capacity building strategies.
The Foundation focuses its efforts on the areas of education, workforce development and disaster relief. We have enlisted the help of our employees, clients
and distributors to support the Foundation in its efforts. The Foundation is designed to be self-sustaining over time through a variety of ongoing funding streams,
such as donations, sponsorships and distribution fees. The Foundation offers a number of programs to support the non-profit sector, including:
•
Strategic Partnership Program. The Foundation offers non-profit clients our Enterprise and Mid-Market solution and services at a discount, in certain
cases of up to 100%. We currently have direct agreements providing similar pricing with non-profit clients, including:
Education
Workforce Development
Disaster Relief
KIPP
Boys & Girls Clubs of America
Teach for America
Goodwill
United Way
Year Up
Feeding America
Oxfam
Save the Children
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HR Pro Bono Corps. In our experience, non-profits often lack the capacity or HR resources to invest in the training and development of their employees
and volunteers. In response, the Foundation formed an HR Pro Bono Corps in order to match non-profits in need of human capital management related
consulting with HR professionals from our global client base who are willing to consult on a voluntary basis.
NonprofitReady.org. This program offers non-profits the unique opportunity to access online training and development at no cost. Most non-profit
organizations lack the budget and the capacity to consistently and effectively invest in their people. Through NonprofitReady.org, the Foundation provides
relevant content including videos, webinars, whitepapers, and e-learning courses to organizations domestically and abroad. Non-profit professionals have
unlimited access to more than 200 resources customized for the nonprofit professional.
DisasterReady.org. In 2013, the Foundation launched DisasterReady.org, a free online training website specifically designed by experts in training,
capacity building and humanitarian assistance to help prepare aid workers for the demands they face in the field. Informed and supported by prominent aid
agencies such as Save the Children, IRC, UNHCR, CARE, IFRC, and World Vision, DisasterReady.org offers hundreds of cutting edge e-learning
courses, live and recorded webinars on key humanitarian issues, and related training resources focused on disaster preparedness and response.
Impact Grant Program. The Impact Grant program allows nonprofit organizations to achieve substantial social impact by using learning technology to
expand the reach and scale of their community programs and services. Through the Impact Grant program, the Foundation selects four nonprofit
organizations annually from around the globe to each receive a two-year grant equal to $1.0 million in value. Grantees are awarded unlimited usage of the
learning product offering as well as access to a range of pro bono business consulting services. Using the learning product offering, organizations can
effectively and efficiently scale their programs by automating the delivery of their training to clients, volunteers, partner agencies, and anyone else at any
time. Grantees include organizations such as The Alliance, The Ounce, and Darkness to Light.
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Proprietary Rights
To safeguard our proprietary and intellectual property rights, we rely upon a combination of patent, copyright, trade secret and trademark laws in the United
States and in other jurisdictions, and on contractual restrictions. Our key assets include our software code and associated proprietary and intellectual property
rights, in particular the trade secrets and know-how associated with our Enterprise and Mid-Market talent management solution which we developed internally
over the years. We were issued a patent for our software in 2003 which expires in 2021; we have since filed for additional patent protection, we own registered
trademarks and we will continue to evaluate the need for additional patents and trademarks. We have confidentiality and license agreements with employees,
contractors, clients, distributors and other third parties, which limit access to and use of our proprietary information and software.
Though we rely in part upon these legal and contractual protections, we believe that factors such as the skills and ingenuity of our employees, creation of
new modules, features, and functionality, collaboration with our clients, and frequent enhancements to our solutions are larger contributors to our success in the
marketplace.
Despite our efforts to preserve and protect our proprietary and intellectual property rights, unauthorized third parties may attempt to copy, reverse engineer,
or otherwise obtain portions of our product. Competitors may attempt to develop similar products that could compete in the same market as our products.
Unauthorized disclosure of our confidential information by our employees or third parties could occur. Laws of other jurisdictions may not protect our proprietary
and intellectual property rights from unauthorized use or disclosure in the same manner as the United States. The risk of unauthorized uses of our proprietary and
intellectual property rights may increase as we continue to expand outside of the United States.
Third-party infringement claims are also possible in our industry, especially as software functionality and features expand, evolve, and overlap with other
industry segments. Current and future competitors, as well as non-practicing patent holders, could claim at any time that some or all of our software infringes on
patents they now hold or might obtain or be issued in the future.
Seasonality
Our sales are seasonal in nature. We sign a higher percentage of agreements with new clients, as well as renewal agreements with existing clients, in the
fourth quarter of each year. In addition, within a given quarter, we sign a significant portion of these agreements during the last month, and often the last two
weeks, of that quarter. We believe this seasonality is driven by several factors, most notably the tendency of procurement departments at our clients to purchase
technology at the end of a quarter or calendar year, possibly in order to use up their available quarterly or annual funding allocations, or to be able to deploy new
talent management capabilities prior to the beginning of a new financial or performance period. As the terms of most of our client agreements are measured in full
year increments, agreements regardless of when executed, will generally come up for renewal at that same time in subsequent years.
Business Segment and Geographical Information
We operate in a single operating segment. For geographic financial information, see Note 13 to our consolidated financial statements, which is incorporated
herein by reference.
Working Capital Practices
Information about our working capital practices is included in Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of
Operations, ” under the heading “ Liquidity and Capital Resources ” and is incorporated herein by reference.
Employees
At December 31, 2015 , we had 1,645 employees, which is a 21% increase from 1,361 employees at December 31, 2014 . None of our employees are
covered by a collective bargaining agreement, and we have never experienced a strike or similar work stoppage. We consider our relations with our employees to
be strong. Internally, we strive to empower our people by using our Enterprise and Mid-Market solution to on-board, develop, connect, align, assess, retain and
promote our own employees.
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Additional Information
Our Internet address is www.cornerstoneondemand.com and our investor relations website is located at investors.cornerstoneondemand.com. We make
available free of charge through our investor relations website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such materials with, or furnish them to, the SEC. Information contained on, or that can be accessed through, our website is
not incorporated by reference into this report, and you should not consider information on our website to be part of this report.
The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. The public also may read and copy these filings at the SEC’s Public Reference Room at 100 F Street N.E., Washington, DC 20549.
Information about this Public Reference Room is available by calling (800) SEC-0330.
Item 1A.
Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K 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 Item 1. “ Business—Forward Looking Statements ” 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
We have a history of losses, and we cannot be certain that we will achieve or sustain profitability.
We have incurred losses since our inception. We experienced net losses of $85.5 million , $64.9 million , and $40.4 million in 2015 , 2014 and 2013 ,
respectively. At December 31, 2015 , our accumulated deficit was $386.9 million and total stockholders’ equity was $7.8 million . We expect to continue to incur
operating losses as a result of expenses associated with the continued development and expansion of our business. Our expenses include among others, sales and
marketing, research and development, consulting and support services and other costs relating to the development, marketing and sale and service of our solutions
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 achieving or sustaining profitability. In addition, our ability to achieve 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 achieve or sustain profitability on a quarterly or
annual basis.
Unfavorable conditions in our industry or the global economy, 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 clients. The revenue growth and potential
profitability of our business depends on demand for enterprise application software and services generally and for talent management solutions in particular. We
sell our Enterprise and Mid-Market solution 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 solutions at each of our clients, which in turn is
influenced by the employment and hiring patterns of our clients and potential clients. To the extent that economic uncertainty or weak economic conditions cause
our clients and potential clients to freeze or reduce their headcount, demand for our solutions may be negatively affected. Historically, economic downturns have
resulted in overall reductions in spending on information technology and talent management solutions as well as pressure from clients and potential clients for
extended billing terms, which occurred during the recent recession. If economic conditions deteriorate or do not materially improve, our clients and potential
clients may elect to decrease their information technology and talent management budgets by deferring or reconsidering product purchases, which would limit our
ability to grow our business and negatively affect our operating results.
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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 client. Factors that may influence the length and variability of our sales cycle include among others:
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the need to educate potential clients about the uses and benefits of our solutions;
the relatively long duration of the commitment clients make in their agreements with us;
the discretionary nature of potential clients’ purchasing and budget cycles and decisions;
the competitive nature of potential clients’ evaluation and purchasing processes;
the lengthy purchasing approval processes of potential clients;
the evolving functionality demands of potential clients;
fluctuations in the talent management needs of potential clients; and
announcements or planned introductions of new products by us or our competitors.
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, and in particular our bookings, for that period, and for any future periods in which revenue from such transaction would
otherwise have been recognized, may be adversely affected.
Our financial results may fluctuate due to other factors, including invoicing terms, some of which may be beyond our control.
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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 cycles and the size of advance payments relative to overall contract value in client agreements;
the extent to which new clients are attracted to our solutions to satisfy their talent management needs;
the timing and rate at which we sign agreements with new clients;
our access to service providers when we outsource client service projects and our ability to manage the quality and completion of the related client
implementations;
the timing and duration of our client implementations, which is often outside of our direct control, and our ability to provide resources for client
implementations and consulting projects;
the extent to which we retain existing clients and satisfy their requirements;
the extent to which existing clients renew their subscriptions to our solutions and the timing of those renewals;
the extent to which existing clients purchase or discontinue the use of additional solutions and add or decrease the number of users;
the extent to which our clients request enhancements to underlying features and functionality of our solutions and the timing of our delivery of these
enhancements to our clients;
the addition or loss of large clients, including through acquisitions or consolidations;
the number and size of new clients, as well as the number and size of renewal clients in a particular period;
the mix of clients among small, mid-sized and large organizations;
changes in our pricing policies or those of our competitors;
seasonal factors affecting demand for our solutions or potential clients’ purchasing decisions;
the financial condition and creditworthiness of our clients;
the amount and timing of our operating expenses, including those related to the maintenance and expansion of our business, operations and infrastructure;
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 solutions;
our ability to exploit Big Data to drive increased demand for our products;
continued strong demand for talent management in the U.S. and Europe;
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our ability to successfully integrate our operations with those of recently acquired privately-held companies;
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, clients or strategic partners;
our ability to manage our existing business and future growth, including in terms of additional headcount, additional clients, 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;
fluctuations in foreign currency exchange rates;
general economic, industry and market conditions; and
various factors related to disruptions in our SaaS hosting network infrastructure, defects in our solutions, privacy and data security, 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 and deferred revenue levels, 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.
Forecasts of our business growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure
you our business will grow at similar rates, or at all.
Our forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. These assumptions and
estimates include the timing and value of agreements with our customers, variability in the service delivery periods for our customers, impact of foreign currency
exchange rate fluctuations, and expected growth in our market. Our assumptions and estimates related to our business growth, including the performance of our
core business and emerging businesses and the demand for our solutions in the U.S., Europe and other regions, may prove to be inaccurate. Even if the markets
experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in
implementing our business strategy, which is subject to many risks and uncertainties.
Even if demand for talent management products and services increases generally, there is no guarantee that demand for SaaS solutions like ours will increase
to a corresponding degree.
The widespread adoption of our solutions depends not only on strong demand for talent management 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 talent management
functions at all, and it is unclear whether such organizations will ever adopt such functions and, if they do, whether they will desire SaaS talent management
solutions like ours. As a result, we cannot assure you that our SaaS talent management solutions will achieve and sustain the high level of market acceptance that is
critical for the success of our business.
Our business depends substantially on clients renewing their agreements with us, purchasing additional solutions from us or adding additional users. Any
decline in our clients renewing their agreements, purchasing additional products or adding additional users would harm our future operating results.
In order for us to improve our operating results, it is important that our clients renew their agreements with us when the initial contract term expires and also
purchase additional products or add additional users. Our clients have no obligation to renew their subscriptions after the initial subscription period, and we cannot
assure you that our clients will renew their subscriptions at the same or higher level of service, if at all. Every year, some of our clients elect not to renew their
agreements with us. Moreover, certain of our clients have the right to cancel their agreements for convenience, subject to certain notice requirements and, in some
cases, early termination fees. Our client renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with
our solutions, our pricing, the prices of competing products or services, mergers and acquisitions affecting our client base, reduced hiring by our clients or
reductions in our clients’ spending levels. If our clients 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.
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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 talent management software 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. In
addition, with the introduction of new technologies and market entrants, we expect competition to intensify in the future. If we fail to compete effectively, our
business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures. Similarly,
some competitors offer different billing terms, which has resulted in pressures on our billing terms. If we are unable to maintain our pricing levels and billing
terms, our operating results could be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced
margins, losses or the failure of our solution to achieve or maintain more widespread market acceptance, any of which could harm our business.
We face competition from paper-based processes and desktop software tools. We also face competition from 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, Halogen Software, Inc., International Business Machines Corporation, Lumesse AS, Oracle Corporation, Peoplefluent, Inc., Saba Software, Inc., SAP
America, Inc., and Skillsoft Corp. 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 client bases and major distribution agreements with consultants, system integrators and
distributors. Moreover, many software vendors could 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 talent management functions at a lower price point or with greater depth
than our solutions. 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 client requirements. Further, some potential clients, particularly large enterprises, may elect to develop their own internal solutions. For all of these
reasons, we may not be able to compete successfully against our current and future competitors.
Mergers of or other strategic transactions by our competitors could weaken our competitive position or reduce our revenue.
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 ability to compete effectively. For example, in February 2012, SAP America, Inc. acquired SuccessFactors, Inc.; in April 2012, Oracle Corporation
acquired Taleo Corporation; in August 2012 International Business Machines Corporation acquired Kenexa, Inc.; and in October 2014 Skillsoft Corp. acquired
SumTotal Systems, Inc. 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 solutions and limiting the number of consultants available to implement our solutions. Disruptions in our business caused by these events could
reduce our revenue.
Our business and operations are experiencing rapid 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.
We have experienced, and may continue to experience, rapid growth and organizational change, which has placed, and may continue to place, significant
demands on our management, operational and financial resources. For example, our headcount has grown from 1,361 employees on December 31, 2014 to 1,645
employees on December 31, 2015 . In addition, we have international offices in Australia, Brazil, France, Germany, Hong Kong, India, Israel, Japan, Netherlands,
New Zealand, Spain, Sweden and the United Kingdom. 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 of rapid innovation, teamwork and attention to client success that has been central to our growth so far. 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 solutions may suffer, which
could negatively affect our brand and reputation and harm our ability to retain and attract clients.
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For a detailed discussion of the risks related to our ability to expand our business internationally, manage growth in our SaaS hosting network infrastructure,
and expand parts of our organization to implement improved operational, financial and management controls and reporting systems, see the following risk factors “
—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.” and “—We currently have a limited number of international offices and are expanding our international
operations. Additionally, we do not have substantial experience in all international markets and may not achieve the results that we expect.”
We may acquire 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.
In April 2012, we acquired Sonar Limited, a SaaS talent management solution provider serving small businesses, and in November 2014, we acquired Evolv
Inc., a machine learning and data science platform provider. In the future, 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 or otherwise offer growth opportunities. The pursuit of potential
acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions,
whether or not they are ultimately consummated.
Other than our acquisitions of Sonar Limited and Evolv Inc., we do not have any experience in 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:
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unanticipated costs or liabilities associated with the acquisition;
incurrence of acquisition-related costs;
diversion of management’s attention from other business concerns;
harm to our existing relationships with distributors and clients as a result of the acquisition;
the potential loss of key employees;
exposure to claims and disputes by third parties, including intellectual property claims and disputes;
the use of resources that are needed 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, which must be assessed for
impairment at least annually, or to intangible assets, which are assessed for impairment 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.
Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. For
example, in our acquisition of Sonar Limited, we issued an aggregate of 46,694 shares of our common stock. In addition, if an acquired business fails to meet our
expectations, our operating results, business and financial condition may suffer.
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, 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. These assessments need to
include 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. Failure of our internal control over
financial reporting to be effective 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 control over financial reporting, we will be unable to
assert, and our auditors will be unable to affirm, that our internal control is effective, in which
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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.
Our systems collect, access, use and store personal and other client proprietary information. As a result, we are subject to security risks and are required to
invest significant resources to prevent or correct problems caused by security breaches. If a security breach occurs, our reputation could be harmed, our
business may suffer, and we could incur significant liability.
Our talent management solutions involve the storage and transmission of clients’ proprietary and confidential information over the Internet (including public
networks), and security breaches, unauthorized access, unauthorized usage, virus or similar breach or disruption could result in loss of this information, damage to
our reputation, early termination of our contracts, litigation, regulatory investigations or other liabilities. In addition, errors in the storage or transmission of such
information could compromise the security of that information. If our security measures are breached as a result of third-party action, employee error, malfeasance
or otherwise and, as a result, someone obtains unauthorized access to client data, our reputation will be damaged, our business may suffer and we could incur
significant liability. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises
or breaches of our security systems and the data stored in these systems. Because there is a time lag associated with developing adequate protections against such
new developments and techniques, unauthorized access or sabotage of our systems and the information processed in connection with our business may result. If an
actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and clients. Any violations of
privacy or information security could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and
adversely impact our operating results and financial condition, including our ability to make required reporting and disclosures as a public company. Moreover, if a
high-profile security breach occurs with respect to another SaaS provider, our clients and potential clients may lose trust in the security of the SaaS business model
generally, which could adversely impact our ability to retain existing clients 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 client agreements or a loss of clients, and adversely affect our business.
Our SaaS hosting network infrastructure is a critical part of our business operations. Our clients access our talent management solutions through a standard
web browser and depend on us for fast and reliable access to our solutions. Our software is proprietary, and we rely on third-party data center hosting facilities and
the expertise of members of our engineering and software development teams for the continued performance of our solutions. 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:
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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 client 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, clients may not be able to access their
data for 24 hours or more. There is a remote chance that client data from recent transactions may be permanently lost or otherwise compromised. Moreover, some
of our agreements include performance guarantees and service level standards that obligate us to provide credits or 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 solutions.
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We rely on various third-party consulting firms to deliver consulting services to our clients, and if these firms fail to deliver these services effectively, or if we
are unable to maintain existing relationships or enter into new relationships, it could impact the timing of the recognition of the revenue associated with such
services.
We rely on various third party consulting firms to assist us in the successful implementation of our solutions and to optimize our clients' use of our solutions
during the terms of their engagements. Further, if these firms fail to deliver these services to our customers in an effective and timely manner, we may suffer
reputational harm and our result of operations may be adversely impacted. Also, unfavorable global economic conditions may hurt our providers, making them less
effective or causing them to modify or cancel their relationships with us. 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 consulting services, which could impact the timing of the recognition of the revenue associated with
such services.
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
solutions. 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 solutions 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 solutions could result in errors or a failure of our solutions,
which could harm our business.
Defects in our solutions could affect our reputation, result in significant costs to us, and impair our ability to sell our solutions and related services.
Defects in our solutions could adversely affect our reputation, result in significant costs to us, and impair our ability to sell our solutions in the future. The
costs incurred in correcting any solution defects may be substantial and could adversely affect our operating results. Although we continually test our solutions for
defects and work with clients through our client support organization to identify and correct errors, defects in our solutions are likely to occur in the future. Any
defects that cause interruptions to the availability of our solutions could result in:
lost or delayed market acceptance and sales of our solutions;
early termination of client agreements or loss of clients;
credits or refunds to clients;
product liability suits against us;
diversion of development resources;
injury to our reputation; and
increased maintenance and warranty costs.
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While our client agreements typically contain limitations and disclaimers that purport to limit our liability for damages related to defects in our solutions,
such limitations and disclaimers may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.
If we fail to manage our SaaS hosting network infrastructure capacity, our existing clients may experience service outages and our new clients may experience
delays in the deployment of our talent management solutions.
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 clients. We also seek to maintain excess capacity to facilitate the rapid
provision of new client deployments and the expansion of existing client deployments. However, the provision of new hosting infrastructure requires significant
lead time. If we do not accurately predict our infrastructure capacity requirements, our existing clients may experience service outages that may subject us to
financial penalties, financial liabilities and client losses. If our hosting infrastructure capacity fails to keep pace with increased sales, clients may experience delays
as we seek to obtain additional capacity, which could harm our reputation and adversely affect our revenue growth.
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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 require 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, 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 solutions. 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 assure you that these relationships will result in improved
operating results.
Failure to effectively expand our direct sales teams and develop and expand our indirect sales channel will impede our growth.
We will need to continue to expand our sales and marketing infrastructure in order to grow our client base and our business. We plan to significantly expand
our direct sales teams and 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 direct and indirect sales channels do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain talented
sales personnel or if our new direct sales personnel are unable to achieve expected productivity levels in a reasonable period of time, we may not be able to
significantly increase our revenue and grow our business.
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, such as our chief executive officer.
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 client 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 clients or increase operating expenses as the attention of our remaining senior managers is diverted
to recruit replacements for the departed key employees.
In cases where we are asked by clients to deploy our solutions on their behalf, failure to effectively manage such client deployments by us or our third-party
service providers could adversely impact our business.
Clients have the option of implementing our solutions themselves or relying on us to do so on their behalf. In cases where we are asked to deploy a solution
for a client, we need to have a substantial understanding of such client’s business so that we can configure the solution in a manner that complements its existing
business processes and integrates the solution 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 us or our clients. In certain situations, we also work with third-party service providers in the deployment of our solutions, and we
may experience difficulties managing such third parties. Failure to successfully manage client deployments by us or our third-party service providers could harm
our reputation and cause us to lose existing clients, face potential client disputes or limit the rate at which new clients purchase our solutions.
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Because we recognize revenue from client subscriptions over the term of the agreement, 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 Enterprise
and Mid-Market solution. As a result, a significant portion of the revenue we report in each quarter is generated from client agreements entered into during
previous periods. Consequently, a decline in new or renewed subscriptions in any one quarter may not impact our revenue and financial performance in that
quarter, but will negatively affect our revenue and financial performance in future quarters. If a number of contracts expire and are not renewed in the same
quarter, our revenue will decline significantly in that quarter and subsequent quarters. In addition, 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 solutions may not be reflected in our short-term operating
results.
Because we generally recognize subscription revenue from our clients over the terms of their agreements but incur most costs associated with generating such
agreements upfront, rapid growth in our client base may put downward pressure on our operating income in the short term.
The expenses associated with generating client 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 clients 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.
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 client agreements for our solutions. We sign a significantly higher percentage of
agreements with new clients, and renewal agreements with existing clients, in the fourth quarter of each year and a significant portion of these agreements are
signed during the last month, and with respect to each quarter, often 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 client agreement,
which is generally three years. We expect this seasonality to continue, in the future, which may cause fluctuations in certain of our operating results and financial
metrics, and thus difficulties in predictability.
Integrated, comprehensive SaaS solutions such as ours represent a relatively recent approach to addressing organizations’ talent management challenges, and
we may be forced to change the prices we charge for our solutions, or the pricing model upon which they are based, as the market for these types of solutions
evolves.
Providing organizations with applications to address their talent management challenges through integrated, comprehensive SaaS solutions is a developing
market. The market for these solutions is therefore still evolving, and competitive dynamics may cause pricing levels, as well as pricing models generally, to
change, as the market matures and as existing and new market participants introduce new types of solutions and different approaches to enable organizations to
address their talent management needs. As a result, we may be forced to reduce the prices we charge for our solutions or the pricing model on which they are
based, and may be unable to renew existing client agreements or enter into new client agreements at the same prices and upon the same terms that we have
historically, which could have a material adverse effect on our revenue, gross margin and other operating results.
Existing or future laws and regulations relating to privacy or data security could increase the cost of our solutions and subject us or our clients to litigation,
regulatory investigations and other potential liabilities.
Our talent management solutions enable our clients to collect, manage and store a wide range of data related to every phase of the employee performance and
management cycle. The United States and various state governments have adopted or proposed limitations on the collection, distribution and use of personal
information. Several foreign jurisdictions, including the European Union, or EU, and the United Kingdom, China, Korea, Japan, Singapore, Australia and India,
have adopted legislation (including directives or regulations) that increase or change the requirements governing data collection and storage in these jurisdictions.
These laws and regulations are complex and change frequently, with new laws and regulations proposed frequently and existing laws and regulations subject to
different and conflicting interpretations. For example, the EU is considering adoption of a general data protection regulation that would supersede current EU data
protection legislation, impose more stringent EU data protection requirements, and provide for greater penalties for noncompliance. If our privacy or data security
measures fail to comply with current or future laws and regulations, we may be subject to litigation, regulatory investigations or other liabilities, as well as negative
publicity and a loss of business. Any of these matters could materially adversely affect our business, financial condition or operational results. Moreover, if future
laws and regulations limit our clients’ ability to use and share employee data or our ability to store, process and share data with our clients over the Internet,
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demand for our solutions could decrease, our costs could increase, and our operating results and financial condition could be harmed.
In particular, with regard to transfers of personal data, as such term is used in the EU, we historically have relied upon adherence to the U.S. Department of
Commerce’s Safe Harbor Privacy Principles and compliance with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks. The U.S.-EU Safe Harbor Framework,
which, together with the U.S.-Swiss Safe Harbor Framework, established the means for legitimizing the transfer of personal data by U.S. companies from the
European Economic Area, or EEA, to the U.S., was invalidated in October 2015 by a decision of the European Court of Justice (the “ECJ Ruling”). As a result of
the ECJ Ruling, the Swiss data protection regulator has questioned the status of the U.S.-Swiss Safe Harbor Framework. In light of these events, we may find it
necessary or desirable to make other changes to our personal data handling. U.S. and EU authorities reached a political agreement on February 2, 2016 regarding a
new potential means for legitimizing personal data transfers from the EEA to the United States, the EU-U.S. Privacy Shield, but it is unclear whether the EU-U.S.
Privacy Shield will be formally implemented and whether the EU-U.S. Privacy Shield will serve as an appropriate means for us to legitimize personal data
transfers from the EEA to the United States. We may be unsuccessful in establishing legitimate means for our transfer of personal data from the EEA or otherwise
responding to the ECJ Ruling, and we may experience reluctance or refusal by current or prospective European customers to use our solutions. Our response to the
ECJ Ruling may cause us to assume additional liabilities or incur additional expenses for implementing compliance requirements, and the ECJ Ruling and our
response could adversely affect our billings. We and those transferring personal data to us may face a risk of enforcement actions by data protection authorities in
the EEA until the time, if any, that personal data transfers to us and by us from the EEA are legitimized under applicable EU data protection law.
Evolving regulation of the Internet or changes in the infrastructure underlying the Internet may adversely affect our financial condition by increasing our
expenditures and causing client 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. Legislation has been proposed that may impact the way that Internet service providers treat
Internet traffic. The outcome of such proposals is uncertain but certain outcomes 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 clients’ demands or if hosting capacity becomes insufficient. If our clients
become frustrated with the speed at which they can utilize our solutions over the Internet, our clients may discontinue the use of our talent management solutions
and choose not to renew their contracts with us.
We currently have a limited number of international offices and are expanding our international operations. Additionally, we do not have substantial
experience in all international markets and may not achieve the results that we expect.
We currently have international offices in Australia, Brazil, France, Germany, Hong Kong, India, Israel, Japan, Netherlands, New Zealand, Spain, Sweden
and the United Kingdom, and we may expand our international operations into other countries in the future. International operations involve a variety of risks,
including:
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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 U.S.
Foreign Corrupt Practices Act and the U.K. Bribery Act;
greater difficulty in supporting and localizing our products;
unrest and/or changes in a specific country’s or region’s political or economic conditions;
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;
limited or unfavorable intellectual property protection; and
restrictions on repatriation of earnings.
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We have less significant experience in marketing, selling and supporting our products and services abroad than domestically. Our less significant experience
in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest
substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and operating
results will suffer.
If we fail to develop our brand cost-effectively, our business may suffer.
We believe that developing and maintaining awareness of the Cornerstone OnDemand brand in a cost-effective manner is critical to achieving widespread
acceptance of our existing and future solutions and is an important element in attracting new clients. 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. In the past, our efforts to build our brand have involved significant expenses.
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 Cornerstone OnDemand
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 clients or retain our existing clients to the extent necessary to realize a
sufficient return on our brand-building efforts, and our business could suffer.
We face risks associated with our sales to governmental entities.
The risks associated with doing business with governmental entities include, but are not limited to, the following:
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Selling to governmental entities can be more competitive, expensive and time-consuming than selling to private entities;
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 solutions may be influenced by public sector budgetary cycles and funding authorizations, with funding
reductions or delays having an adverse impact on public sector demand for our solutions; and
Government contracts are generally subject to audits and investigations, which we have no experience with, including 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.
While our experience dealing with governmental entities has so far been limited, to the extent that we become more reliant on contracts with government
clients in the future, our exposure to such risks could increase, which, in turn, could adversely impact our business.
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 clients and increase revenue from existing clients, we will need to
enhance and improve our existing solutions 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 successfully develop or acquire new features or products or enhance our existing
products to meet client needs, our business and operating results will be adversely affected.
In addition, because our solutions 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 solutions 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 solutions 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 talent management
solutions at lower prices, more efficiently or more conveniently, such technologies could adversely impact our ability to compete.
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We might require additional capital to support business growth, and this capital might 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 solutions, 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. 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.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our convertible notes, 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 notes and any future indebtedness we may incur and 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 notes 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 notes or future indebtedness.
The conditional conversion feature of the notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the notes is triggered, holders of notes will be entitled to convert the notes at any time during specified
periods at their option. If one or more holders elect to convert their notes, we would be required to settle a portion of our conversion obligation through the
payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable
accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material
reduction of our net working capital.
The accounting method for our convertible debt securities that may be settled in cash, such as the notes, may have a material effect on our reported financial
results.
In May 2008, the Financial Accounting Standards Board, which we refer to as FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting
Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20. Under ASC 470-20, an entity must separately account
for the liability and equity components of the convertible debt instruments (such as the notes) that may be settled entirely or partially in cash upon conversion in a
manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the notes is that the equity component is required to be
included in the additional paid-in capital section of stockholders' equity on our consolidated balance sheet, and the value of the equity component would be treated
as original issue discount for purposes of accounting for the debt component of the notes. As a result, we will be required to record a greater amount of non-cash
interest expense in current periods presented as a result of the amortization of the discounted carrying value of the notes to their face amount over the term of the
notes. We will report lower net income (or greater net loss) in our financial results because ASC 470-20 will require interest to include both the current period's
amortization of the debt discount and the instrument's coupon interest, which could adversely affect our reported or future financial results, the market price of our
common stock and the trading price of the notes.
In addition, convertible debt instruments (such as the notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury
stock method, the effect of which is that the shares issuable upon conversion of the notes are not included in the calculation of diluted earnings per share except to
the extent that the conversion value of the notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the
transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares,
are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the
treasury stock method in accounting for the shares issuable upon conversion of the notes, then our diluted earnings per share would be adversely affected.
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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 United States. 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 solutions. 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 solutions 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 clients, 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 clients 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 clients 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 client may have adverse effects on our client relationships and reputation.
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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 may use more open source software in the future. From time to time, there have been claims challenging
the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by
parties claiming ownership of what we believe to be open source software. 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, if we were to combine
our proprietary software products with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the
source code of our proprietary software products. If we inappropriately use open source software, we may be required to re-engineer our products, discontinue the
sale of our products or take other remedial actions.
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 solutions 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 solutions must be made in compliance with
these laws. If we fail to comply with these U.S. export control laws and import laws, including U.S. 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 U.S. export control laws and economic sanctions laws prohibit the shipment of certain products and services to U.S. embargoed or
sanctioned countries, governments and persons. Even though we take precautions to prevent our solutions from being shipped or provided to U.S. sanctions targets,
our solutions and services could be shipped 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 solutions or could
limit our clients’ ability to implement our solutions in those countries. Changes to our solutions or changes in export and import regulations may create delays in
the introduction and sale of our solutions in international markets, prevent our clients with international operations from deploying our solutions or, in some cases,
prevent the export or import of our solutions 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 solutions, or in our decreased ability to export or sell our solutions to existing or potential clients with
international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business,
financial condition and operating results.
Fluctuations in the exchange rate of foreign currencies could result in foreign currency gains and losses.
We currently have foreign sales denominated in Australian Dollars, Brazilian Reals, Canadian Dollars, Chinese Yuan, Euros, Great British Pounds, Indian
Rupees, Japanese Yen, New Zealand Dollars, and South African Rand and may in the future have sales denominated in the currencies of additional countries. In
addition, we incur a portion of our operating expenses in Great British Pounds and Euros and, to a much lesser extent, in Australian Dollars, Brazilian Reals,
Canadian Dollars, Chinese Yuan, Danish Krone, Hong Kong Dollars, Indian Rupees, Israeli New Shekels, Japanese Yen, New Zealand Dollars, Norwegian
Kroner, Polish Zloty, Singapore Dollar, Swedish Krona and Swiss Franc. Further, our overseas subsidiaries’ results are also impacted by exchange rates affecting
the carrying value of U.S. Dollar denominated intercompany loans with us. Fluctuations in the exchange rates of these foreign currencies negatively impact our
business, financial condition and operating results. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency
exposure, we may not be able to completely eliminate the impact of fluctuations in the exchange rates.
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported operating
results.
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.
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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 December 31, 2015 , we had $107.7 million in cash and cash equivalents and $199.5 million in short-term and long-term investments in marketable
securities, consisting of corporate bonds, money market funds backed by United States Treasury Bills, U.S. treasury securities and agency securities. 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, which have been exacerbated by the recent financial and credit crisis, rising bankruptcy filings in the United States, and
the ongoing debt-ceiling debate.
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 .
In November 2013, we launched a strategic initiative created to invest in, advise and collaborate with promising cloud startups building innovative business
applications that support the continued expansion of our market reach. From time to time we may make direct investments in privately held companies. For
example, in June 2014, September 2014, May 2015, July 2015 and December 2015, we made strategic investments in privately-held companies. The privately held
companies in which we may invest are considered 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 U.S. 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.
To the extent that our pre-tax income or loss becomes relatively modest, our ability to conclude that a control deficiency is not a material weakness or that an
accounting error does not require a restatement could be adversely affected.
Under the Sarbanes-Oxley Act of 2002, our management is required to assess the impact of control deficiencies based upon both quantitative and qualitative
factors, and depending upon that analysis we classify such identified deficiencies as either a control deficiency, significant deficiency or a material weakness. One
element of our analysis of the significance of any control deficiency is its actual or potential financial impact. This assessment will vary depending on our level of
pre-tax income or loss. For example, a smaller pre-tax income or loss will increase the likelihood of a quantitative assessment of a control deficiency as a
significant deficiency or material weakness.
To the extent that our pre-tax income or loss is relatively small, if management or our independent registered public accountants identify an error in our
interim or annual financial statements, it is more likely that such an error may be determined to be a material weakness or be considered a material error that could,
depending upon the complete quantitative and qualitative analysis, result in our having to restate previously issued financial statements.
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
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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.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited if we experience a change in ownership, or if taxable income
does not reach sufficient levels.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than
50% 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 and
subsequent shifts in our stock ownership. As a result, we may be limited in the portion of net operating loss carryforwards that we can use in the future to offset
taxable income for U.S. Federal income tax purposes.
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:
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our operating performance and the performance of other similar companies;
the financial projections we provide to the public, 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 or terrorist acts;
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.
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In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action
litigation has often been initiated against these companies. This litigation, if initiated against us, could result in substantial costs and a diversion of our
management’s attention and resources.
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 covers 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. Any issuance of shares in connection with our acquisitions, the
exercise of stock options, the vesting of restricted stock units or otherwise would dilute the percentage ownership held by existing investors.
Conversion of our convertible notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their notes, or
may otherwise depress the price of our common stock.
The conversion of some or all of our convertible notes will dilute the ownership interests of existing stockholders to the extent we deliver shares upon
conversion of any of the notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices
of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could be used
to satisfy short positions, or anticipated conversion of the 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 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.
Investors seeking cash dividends should not purchase our common stock.
Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.
Our certificate of incorporation, 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 bylaws include provisions that:
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authorize “blank check” preferred stock, which could be issued by the board 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;
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 our directors may be removed only for cause;
provide that vacancies on our board of directors may be filled only by a majority 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.
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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 or 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 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
Our principal offices are located in Santa Monica, California, where we occupy approximately 108,000 square feet of office space under operating leases that
expire in January 2019. We have additional established offices in Amsterdam, Auckland, Bangalore, Düsseldorf, Hong Kong, London, Madrid, Mumbai, Munich,
New Delhi, Paris, San Francisco, São Paulo, Stockholm, Sunnyvale, Sydney, Tel Aviv, and Tokyo to support our international operations. We believe that our
facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate planned expansion of our
operations. Our foreign subsidiaries lease office space for their operations, including their local sales and professional services personnel.
Item 3.
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 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 flow. 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 4.
Mine Safety Disclosure
Not applicable.
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Our Common Stock and Related Stockholder Matters
Our common stock has been traded on the NASDAQ Global Select Market under the symbol “CSOD” since March 17, 2011. Prior to that time, there was no
public market for our common stock. The following table sets forth for the periods indicated the high and low closing sale prices for our common stock as reported
on the NASDAQ Global Select Market.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders of Record
Fiscal 2015
Fiscal 2014
High
Low
High
Low
$
37.48 $
28.89 $
60.86 $
35.91
38.79
36.48
27.83
32.66
30.63
49.65
46.20
36.82
45.96
34.59
34.41
27.55
As of January 31, 2016 there were 27 holders of record of our common stock. Because many of our shares of common stock are held of record by brokers
and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by such record holders.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. Any future determination as to the
declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial
condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
37
STOCK PRICE PERFORMANCE GRAPH
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or
incorporated by reference into any filing of Cornerstone OnDemand, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such filing.
The following graph compares (i) the cumulative total stockholder return on our common stock from March 17, 2011 through December 31, 2015 with
(ii) the cumulative total return of the NASDAQ Global Market Index and (iii) the NASDAQ Computer & Data Processing Index over the same period, assuming
the investment of $100 in our common stock and in both of the other indices on March 17, 2011 and the reinvestment of all dividends. As discussed above, we
have never declared or paid a cash dividend on our common stock and do not anticipate declaring or paying a cash dividend in the foreseeable future.
COMPARISON OF CUMULATIVE TOTAL RETURN OF CORNERSTONE ONDEMAND*
*
Returns are based on historical results and are not necessarily indicative of future performance. See the disclosure in Part I, Item 1A. “Risk Factors.”
Cornerstone OnDemand
NASDAQ Global Market Index
NASDAQ Computer & Data Processing
Index
$
$
$
March 17,
2011
December 31,
2011
December 31,
2012
December 31,
2013
December 31,
2014
December 31,
2015
100.00 $
100.00 $
95.65 $
86.60 $
154.85 $
100.04 $
279.55 $
166.92 $
184.58 $
176.96 $
181.07
176.93
100.00 $
101.97 $
114.69 $
151.33 $
181.41 $
192.74
38
The comparisons shown in the graph are based upon historical data. We caution that the stock price performance shown in the graph above is not necessarily
indicative of, nor is it intended to forecast, the potential future performance of our common stock.
Equity Compensation Plan Information
The information required by this item will be included in our Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2015 , and is incorporated herein by reference.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 6.
Selected Financial Data
The statement of operations data for the three years ended December 31, 2015 , 2014 , and 2013 and the balance sheet data at December 31, 2015 and 2014 ,
respectively, are derived from, and qualified by reference to, our audited financial statements included elsewhere in this Annual Report on Form 10-K. The
statements of operations data for the two years ended December 31, 2012 and 2011 and the balance sheet data at December 31, 2013, 2012 and 2011, respectively,
are derived from our audited financial statements not included in this Annual Report on Form 10-K.
The selected consolidated financial data below are not necessarily indicative of future performance and should be read in conjunction with Item 7, “
Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the consolidated financial statements and related notes thereto
included in Item 8 of this Annual Report on Form 10-K.
39
Consolidated statements of operations data:
Gross revenue (1)
Common stock warrant charge (1)
Net revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Amortization of certain acquired intangible assets
Total operating expenses
Loss from operations
Other income (expense):
Interest income (expense) and other income
(expense), net
Change in fair value of preferred stock warrant
liabilities (2)
Loss before provision for income taxes
Income tax (provision) benefit
Net loss
Accretion of redeemable preferred stock
Net loss attributable to common stockholders
Net loss per share attributable to common
stockholders, basic and diluted (3)
Weighted average common shares outstanding, basic
and diluted
$
$
$
2015
2014
Years Ended December 31,
2013
(in thousands)
2012
2011
$
339,651 $
263,568 $
185,129 $
117,914 $
—
339,651
109,864
229,787
—
263,568
77,684
185,884
—
185,129
53,548
131,581
207,026
162,552
109,737
40,991
49,877
600
298,494
(68,707)
30,618
41,802
828
235,800
(49,916)
21,260
33,572
1,004
165,573
(33,992)
—
117,914
34,591
83,323
73,563
14,886
25,912
739
115,100
(31,777)
75,522
(2,500)
73,022
21,285
51,737
45,773
10,149
15,122
—
71,044
(19,307)
(15,628)
(14,128)
(6,562)
(402)
(1,853)
—
(84,335)
(1,181)
—
(64,044)
(855)
—
(40,554)
128
—
(32,179)
789
(85,516) $
(64,899) $
(40,426) $
(31,390) $
—
—
—
—
(85,516) $
(64,899) $
(40,426) $
(31,390) $
(42,559)
(63,719)
(181)
(63,900)
(5,208)
(69,108)
(1.58) $
(1.22) $
(0.79) $
(0.63) $
(1.74)
54,171
53,267
51,427
49,929
39,824
(1) During the second quarter of 2011, we recorded a $2.5 million reduction of revenue associated with common stock warrants. There were no such reductions
of revenue in any other periods presented. We have presented gross revenue excluding non-cash common stock warrant charges because these charges do
not relate to sales activity in the period, and we do not consider the issuance of warrants to be indicative of our core operating performance.
In connection with our IPO in March 2011, all of our warrants to purchase shares of preferred stock were exercised, and all outstanding shares of preferred
stock were converted into shares of common stock on a one-for-one basis. At that time, the preferred stock warrant liabilities were reclassified to additional
paid-in capital. As a result after the first quarter of 2011, we no longer record any change in the fair value of these liabilities in our statements of operations.
(2)
(3) See Note 2 and Note 4 to our consolidated financial statements for a description of the method used to compute basic and diluted net loss per share
attributable to common stockholders.
40
Consolidated balance sheet data:
Cash and cash equivalents
Property and equipment, net
Working capital, excluding deferred revenue
Total assets
Debt, current portion
Deferred revenue, current and non-current portion
Capital lease obligations, net of current portion
Debt, net of current portion
Total stockholders’ equity
2015
2014
At December 31,
2013
(in thousands)
2012
2011
$
107,691 $
166,557 $
109,583 $
76,442 $
27,021
334,664
561,545
—
252,139
—
232,583
7,822
21,424
356,553
505,655
351
191,336
—
225,094
35,502
14,436
369,499
451,355
519
138,822
218
218,357
52,895
7,947
115,294
171,834
916
92,252
1,227
1,836
46,648
85,409
3,663
112,094
135,362
265
55,880
1,056
409
62,460
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the financial statements and the related notes set
forth in Item 8. “Financial Statements and Supplementary Data.” The following discussion also contains forward-looking statements that involve a number of risks
and uncertainties. See Part I, “Special Note Regarding Forward-Looking Statements” for a discussion of the forward-looking statements contained below and
Part I, Item 1A. “Risk Factors” for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such
forward-looking statements.
Overview
We provide talent management solutions delivered as Software-as-a-Service, or SaaS. Our solutions support the management of the entire employee
lifecycle, with a focus on learning and development that is fundamental to the growth of employees and organizations.
Our Enterprise and Mid-Market solution is a unified cloud-based platform that addresses critical talent needs throughout the entire employee lifecycle, from
recruitment, onboarding, training and collaboration, to performance management, compensation, succession planning and analytics. The platform is composed of
several products, focused on recruiting, learning management, performance management and analytics. The platform also helps improve business execution
through integrating with an organization’s extended enterprise of clients, vendors and distributors by delivering training, certification programs and other content.
We introduced Cornerstone Edge and Cornerstone Insights in May 2015 to add flexibility and extensibility to our suite of applications while enabling clients,
collaborators and developers to derive more value out of their talent investments.
We also provide consulting services for configuration and training, as well as third-party e-learning content for use with our solution. After the initial
purchase of our solution, we continue to market and sell to our existing clients, who may renew their subscriptions, add additional products, broaden the
deployment of the solution across their organizations and increase usage of the solution over time.
We also offer Cornerstone for Salesforce and Cornerstone Growth Edition. Cornerstone for Salesforce is a cloud-based learning solution developed natively
on the Salesforce.com platform. Cornerstone for Salesforce allows organizations to provide seamless access to sales enablement and just-in-time training
embedded within Salesforce. Cornerstone Growth Edition is a cloud-based talent management solution with learning and performance product offerings targeted to
organizations with 250 or fewer employees. We currently do not include the number of clients and users of our Cornerstone for Salesforce and Cornerstone Growth
Edition solutions in our client and user count metrics as we believe the client and user count metrics for our Enterprise and Mid-Market solution give a better
indication of our overall performance.
We currently have approximately 2,600 clients who use our Enterprise and Mid-Market solution to empower more than 23.8 million users across 191
countries in 42 different languages. For 2015 and 2014 , no single client or distributor accounted for more than 10% of our revenue. The number of clients using
our Enterprise and Mid-Market solution has grown from 105 at December 31, 2007 to 1,631 at December 31, 2013, 2,153 at December 31, 2014 and 2,595 at
December 31, 2015 .
41
We generate most of our revenue from the sale of our solutions pursuant to multi-year client agreements. Client agreements for our Enterprise and Mid-
Market solution typically 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 client. We generally price our Enterprise and Mid-Market solution based on the number of products purchased and
the permitted number of users with access to each product. We expect to price Cornerstone Edge based on usage and to generate platform fees from independent
software vendors that build or integrate applications on our platform. We also generate revenue from consulting services for configuration, training, and consulting,
as well as from the resale or hosting of third-party e-learning content.
We sell our solutions through our direct sales teams and, to a lesser extent, indirectly through our distributors. We intend to continue to invest in our direct
sales and distribution activities to address our market opportunity.
We generally recognize revenue from subscriptions ratably over the term of the client agreement and revenue from consulting services as the services are
performed. In certain instances, our clients request enhancements to the underlying features and functionality of our Enterprise and Mid-Market solution, and in
these instances, revenue from subscriptions is recognized over the remaining term of the agreement once the additional features are delivered to the client. We
generally invoice our clients a portion of the annual subscription fees upfront for multi-year subscriptions and upfront for consulting services. For amounts not
invoiced in advance for multi-year subscriptions or consulting services, we invoice under various terms over the subscription and service periods. We record
amounts invoiced for annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our balance sheet. With
the growth in the number of clients, our revenue has grown to $339.7 million for the year ended December 31, 2015 from $263.6 million for the same period in
2014 .
We have historically experienced seasonality in terms of when we enter into client agreements. We usually sign a significantly higher percentage of
agreements with new clients, as well as renewal agreements with existing clients, in the fourth quarter of each year. In addition, within a given quarter, we typically
sign a large portion of these agreements during the last month, and often the last two weeks, of that quarter. We believe this seasonality is driven by several factors,
most notably the tendency of procurement departments at our enterprise clients to purchase technology at the end of a quarter or calendar year, possibly in order to
use up their available quarterly or annual funding allocations, or to be able to deploy new talent management capabilities prior to the beginning of a new financial
or performance period. As the terms of most of our client agreements are measured in 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 recognize subscription revenue over the term of the client 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 clients, the timing of when we invoice new clients, the timing of when we invoice existing clients for annual subscription periods,
and the timing of when we recognize revenue. We expect this seasonality to continue in the future, which may cause fluctuations in certain of our operating results
and financial metrics, and thus limit our ability to predict future results.
We believe the market for talent management remains large and underpenetrated, providing us with significant growth opportunities. We expect businesses
and other organizations to continue to increase their spending on talent management solutions in order to maximize the productivity of their employees, manage
changing workforce demographics and ensure compliance with global regulatory requirements. Historically, many of these software solutions have been human
resource applications running on hardware located on organizations’ premises. We have seen many of these organizations increasingly choose SaaS for their talent
management solutions and we anticipate that trend will continue.
We have focused on growing our business to pursue what we believe is a significant market opportunity, and we plan to continue to invest in building for
growth. As a result, we expect our cost of revenue and operating expenses to increase in future periods. Sales and marketing expenses are expected to increase, as
we continue to expand our direct sales teams, increase our marketing activities, and grow our international operations. Research and development expenses are
expected to increase as we continue to improve the existing functionality for our solutions. We also believe that we must invest in maintaining a high degree of
client service and support that is critical for our continued success. We plan to continue our policy of implementing best practices across our organization,
expanding our technical operations and investing in our network infrastructure and services capabilities in order to support continued future growth. We also
expect to incur additional general and administrative expenses as a result of our growth.
42
Our 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. In addition to those described in the “ Risk Factors ” section of this Annual Report on Form 10-K, such factors include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to attract new clients;
the timing and rate at which we enter into agreements for our solutions with new clients;
the timing and duration of our client implementations, which is often outside of our direct control, and our ability to provide resources for client
implementations and consulting projects;
the extent to which our existing clients renew their subscriptions for our solutions and the timing of those renewals;
the extent to which our existing clients purchase additional products or add incremental users;
the extent to which our clients request enhancements to underlying features and functionality of our solutions and the timing for us to deliver the
enhancements to our clients;
changes in the mix of our sales between new and existing clients;
changes to the proportion of our client base that is comprised of enterprise or mid-sized organizations;
seasonal factors affecting the demand for our solutions;
our ability to manage growth, including in terms of new clients, additional users, additional headcount and new geographies;
our ability to expand our enterprise and mid-market sales teams;
our ability to maintain stable and consistent quota attainment rates;
our ability to exploit Big Data to drive increased demand for our products;
continued strong demand for talent management in the U.S. and internationally;
the timing and success of solutions offered by our competitors;
changes in our pricing policies and those of our competitors;
our ability to successfully integrate our operations with those of recently acquired privately-held companies; and
general economic and market conditions including fluctuations in foreign exchange rates.
One or more of these factors may cause our operating results to vary widely. As such, we believe that our results of operations may vary significantly in the
future and that period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.
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. We generally recognize subscription revenue over the contract period, and as a result of our revenue recognition policy and the seasonality of
when we enter into new client agreements, revenue from client agreements signed in the current period may not be fully reflected in the current period. As
a result, revenue increases period over period are primarily from contracts that existed prior to the beginning of that period.
Bookings . Under our revenue recognition policy, we generally recognize subscription revenue from our client agreements ratably over the terms of those
agreements. For this reason, the major portion of our revenue for a period will be from client agreements signed in prior periods rather than from new
business activity during the current period. In order to assess our business performance with a metric that more fully reflects current period business
activity, we track bookings, which is a non-GAAP financial measure we define as the sum of revenue and the change in the deferred revenue balance for
the period. We include changes in the deferred revenue balance to calculate bookings so it better reflects new business activity in the period as evidenced
by prepayments or billings under our billing policies arising from acquisition of new clients, sales of additional products to existing clients, the addition of
incremental users by existing clients and client renewals. Bookings are affected by our billing terms, and any changes in those billing terms may shift
bookings between periods. Due to the seasonality of our sales, bookings growth is inconsistent from quarter to quarter throughout a calendar year. For a
reconciliation of bookings to revenue, please see “ Results of Operations – Revenue and Metrics .”
43
•
•
•
Annual dollar retention rate . We define annual dollar retention rate as the implied monthly recurring revenue under client agreements at the end of a
fiscal year, divided by the implied monthly recurring revenue, for that same client base, at the end of the prior fiscal year and excluding implied monthly
recurring revenue from clients of our Cornerstone for Salesforce and Cornerstone Growth Edition solutions. This ratio does not reflect implied monthly
recurring revenue for new clients added between the end of the prior fiscal year and the end of the current fiscal year. Beginning in 2013, incremental
sales up to and not exceeding the original renewal amount to the existing client base are included in this ratio. We define implied monthly recurring
revenue as the total amount of minimum recurring revenue to which we have a contractual right under each of our client agreements over the entire term
of the agreement, but excluding non-recurring support, consulting and maintenance fees, divided by the number of months in the term of the agreement.
Implied monthly recurring revenue is substantially comprised of subscriptions to our Enterprise and Mid-Market solution. We believe that our annual
dollar retention rate is an important metric to measure the long-term value of client agreements and our ability to retain our clients.
Number of clients . We believe that our ability to expand our client 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 client count includes contracted clients for our Enterprise and Mid-Market solution as of
the end of the period and excludes clients of our Cornerstone for Salesforce and Cornerstone Growth Edition solutions.
Number of users. Since our clients generally pay fees based on the number of users of our solutions within their organizations, we believe the total number
of users is an indicator of the growth of our business. Our user count includes active users for our Enterprise and Mid-Market solution and excludes users
of our Cornerstone for Salesforce and Cornerstone Growth Edition solutions.
Key Components of Our Results of Operations
Sources of Revenue and Revenue Recognition
Our solutions are 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 Solutions. Clients pay subscription fees for access to our solutions for a specified period of time, typically three years for our
Enterprise and Mid-Market solution and annual or three-year periods for our Cornerstone for Salesforce and Cornerstone Growth Edition solutions. Fees
are based on a number of factors, including the number of products purchased and the number of users having access to a solution. We generally
recognize revenue from subscriptions ratably over the term of the agreements.
Consulting Services. We offer our clients assistance in implementing our solutions and optimizing their use. Consulting services include application
configuration, system integration, business process re-engineering, change management and training services. Services are billed either on a time-and-
material or a fixed-fee basis. These services are generally purchased as part of a subscription arrangement and are typically performed within the first
several months of the arrangement. Clients may also purchase consulting services at any other time. Our consulting services are performed by us directly
or by third-party service providers we engage. Clients may also choose to perform these services themselves or engage their own third-party service
providers. We generally recognize revenue from fixed fee consulting services using the proportional performance method over the period the services are
performed and as time is incurred for time-and-material arrangements.
E-learning Content. We resell third-party on-line training content, which we refer to as e-learning content, to our clients. We also host other e-learning
content provided by our clients. We generally recognize revenue from the resale of e-learning content as it is delivered and recognize revenue from
hosting as the hosting services are provided.
Our client agreements generally include both subscription to access our solutions and related consulting services, and may also include e-learning content.
Our agreements generally do not contain any cancellation or refund provisions other than in the event of our default.
44
Cost of Revenue
Cost of revenue consists primarily of costs related to hosting our solutions; personnel and related expenses, including stock-based compensation, for network
infrastructure, IT support, consulting services and on-going client support; payments to external service providers contracted to perform implementation services;
depreciation of data centers; amortization of capitalized software costs; amortization of developed technology and software license rights; 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 consulting services are significantly higher as a percentage of revenue than the costs associated
with providing access to our solutions due to the labor costs to provide the consulting services.
Operating Expenses
Our operating expenses 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; and allocated overhead.
We intend to continue to invest in sales and marketing and expect spending in these areas to increase as we continue to expand our business both
domestically and internationally. We expect sales and marketing expenses will continue to increase in absolute dollars and to continue to be among the
most significant components of our operating expenses.
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.
We have focused our research and development efforts on continuously improving our solutions. We believe that our research and development activities
are efficient because we benefit from maintaining a single software code base for each of our solutions. We expect research and development expenses to
increase in absolute dollars in the future, as we scale our research and development department and expand our network infrastructure.
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; other corporate
expenses; and allocated overhead. We expect our general and administrative expenses to increase in absolute dollars as we continue to expand our
operations.
Amortization of Certain Acquired Intangible Assets. Amortization of certain acquired intangibles consists of amortization of acquisition-related
intangibles, including customer relationships, non-compete agreements, patents, trade names and trademarks.
Other Income (Expense)
•
•
•
Interest Income . Interest income consists primarily of interest income from investment securities partially offset by amortization of investment premiums.
We expect interest income to vary depending on the level of our investments in marketable securities, which include corporate bonds, agency bonds and
U.S. treasury securities, in the years ended December 31, 2015 , 2014 and 2013.
Interest Expense. Interest expense consists primarily of interest expense from our convertible debt, accretion of debt discount, amortization of debt
issuance costs and capital lease payments.
Other, Net. Other, net consists of income and expense associated with fluctuations in foreign currency exchange rates, fair value adjustments to strategic
investments and other non-operating expenses. We expect other income (expense) to vary depending on the movement in foreign currency exchange rates
and the related impact on our foreign exchange gain (loss).
Income Tax (Provision) Benefit
The income tax provision is related to foreign and certain state income taxes. As we have recorded a full valuation allowance against our United States,
United Kingdom, New Zealand, Hong Kong and Brazil net deferred tax assets, we have not recorded a provision for United States, United Kingdom, New Zealand,
Hong Kong and Brazil income taxes. Certain foreign subsidiaries and branches of ours provide intercompany services and are compensated on a cost-plus basis,
and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.
45
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with
accounting principles generally accepted in the United States. 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 and Deferred Revenue
We recognize revenue when: (i) persuasive evidence of an arrangement for the sale of our solutions or consulting services exists, (ii) our solutions have been
made available or delivered, or our services have been performed, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The
timing and amount we recognize as revenue is determined based on the facts and circumstances of each client arrangement. Evidence of an arrangement consists of
a signed client agreement. We consider that delivery of our software has commenced once we provide the client with log-in information to access and use our
solutions. If non-standard acceptance periods or non-standard performance criteria exist, revenue recognition commences upon the satisfaction of the acceptance or
performance criteria, as applicable. Our fees are fixed based on stated rates specified in each client agreement. We assess collectability based in part on an analysis
of the creditworthiness of each client, as well as other relevant economic or financial factors. If we do not consider collection reasonably assured, we defer the
revenue until the fees are actually collected. We record amounts that have been invoiced to our clients in accounts receivable and as either deferred revenue on our
balance sheet or revenue on our statement of operations, depending on whether the revenue recognition criteria have been met.
The majority of our client arrangements include multiple deliverables, such as subscriptions to our software solutions accompanied by consulting services.
Therefore, we recognize revenue in accordance with the guidance for arrangements with multiple deliverables under Accounting Standards Update 2009-13 “
Revenue Recognition (Topic 605)—Multiple-Deliverable Revenue Arrangements—a Consensus of the Emerging Issues Task Force ,” or ASU 2009-13. As our
clients do not have the right to the underlying software code of our solutions, our revenue arrangements are outside the scope of software revenue recognition
guidance.
For such arrangements, we first assess whether each deliverable has value to the client on a standalone basis. Our solutions have standalone value because
once we give a client access, they are fully functional and do not require any additional development, modification or customization. Our consulting services have
standalone value because third-party service providers, distributors or our clients themselves can perform these services without our involvement. The consulting
services we provide are to assist clients with the configuration and integration of our solutions. The performance of these services does not require highly
specialized individuals.
Based on the standalone value of our deliverables, and, since clients generally do not have a right of return with respect to the included consulting services,
we allocate revenue among the separate deliverables under the relative selling price method using the selling price hierarchy established in ASU 2009-13. This
hierarchy requires the selling price of each deliverable in a multiple deliverables arrangement to be based on, in descending order of preference, (i) vendor-specific
objective evidence of fair value, or VSOE, (ii) third-party evidence of fair value, or TPE, or (iii) management’s best estimate of the selling price, or BESP.
We are not generally able to determine VSOE or TPE for our deliverables because we sell them separately and within a sufficiently narrow price range only
infrequently, and because we have determined that there are no third-party offerings reasonably comparable to our solutions. Accordingly, we determine the selling
prices of subscriptions to our solutions, consulting services and e-learning content based on BESP. In determining BESP for subscriptions to our solutions, we
consider the size of client arrangements, as measured by number of users; whether the sales are made by our direct sales team or distributors; and whether the sales
are to a domestic or an international client. We group sales of our solutions into multiple categories based on these criteria. We then compute an average selling
price for each group. This average selling price represents our BESP for that type of client arrangement. For consulting services, we analyze both bundled
arrangements that include subscriptions to our solutions and consulting services, as well as standalone purchases
46
of different types of consulting services made subsequent to the original subscription. For these consulting services arrangements, we then examine the actual rate
per hour we charge or, for fixed fee arrangements, the implied average rate per hour based on the fixed fee divided by the estimated hours to complete the service.
The BESP is then the product of this average rate per hour and our estimate of the hours needed to complete the services. For e-learning content, we estimate BESP
by reviewing fees for content in order to establish an average annual fee per user that reflects the cost we incur to acquire the related content from third-party
providers. Additionally, we estimate BESP by reviewing fees for content-hosting by reviewing the selling price of gigabytes sold in order to establish a fee on a per
user or bandwidth basis.
The determination of BESP for our deliverables as described above requires us to make significant estimates and judgments, including the comparability of
different subscription arrangements and consulting services and estimates of the hours required to complete various types of services. In addition, we consider
other factors including:
•
•
Nature of the deliverables. For example, in categorizing our subscriptions into meaningful groupings for determining BESP, we consider the number and
type of products the client purchased. For consulting services, we consider the type of consulting service and the estimated hours required to complete the
service or average selling price for fixed fee services based on our historical experience.
Location of our clients. Our pricing is different for domestic and international clients, and therefore in determining BESP of subscriptions to our solutions,
we evaluate domestic arrangements separately from international arrangements.
•
• Market conditions and competitive landscape for the sale. Our pricing and discounting varies based on the economic environment and competition. We
consider these factors in determining the grouping of comparable services and the periods over which we compare arrangements to compute the BESP.
Internal costs. Our pricing for consulting services and e-learning content considers our internal costs to provide the consulting services and the third-party
purchase costs of e-learning content.
Size of the arrangement. Discounting generally increases as the relative size of an arrangement increases, and we take this into consideration in the
grouping of our clients to determine BESP. Our discounting for multiple-deliverable arrangements varies based on the extent and type of the consulting
services and content included with the subscriptions in the arrangement.
•
The determination of BESP is made through consultation with our senior management. We update our estimates of BESP on an ongoing basis as events and
circumstances require, and we update our determination to use BESP on a periodic basis, including assessing whether we can determine VSOE or TPE.
After we determine the fair value of revenue allocable to each deliverable based on the relative selling price method, we recognize the revenue for each
based on the type of deliverable. For subscriptions to our solutions, we recognize the revenue on a straight-line basis over the term of the client agreement, which is
typically three years. For consulting services, we generally recognize revenue using the proportional performance method over the period the services are
performed.
In a limited number of cases, the client’s intended use of a solution requires enhancements to its underlying features and functionality. In some of these
cases, revenue is recognized as one unit of accounting on a straight-line basis from the point at which the enhancements have been made to the solution through the
remaining term of the agreement. In other cases where the enhancement is not required for the client’s intended use, revenue is recognized separately for the
enhancement and the solution. The enhancement revenue is recognized based on the allocated value on a straight-line basis once the enhancement has been made
to the solution.
For arrangements in which we resell third-party e-learning content to our clients or host client or third-party e-learning content provided by the client, we
recognize revenue in accordance with accounting guidance as to when to report gross revenue as a principal and when to report net revenue as an agent. We
recognize e-learning content revenue in the gross amount that we invoice our client when: (i) we are the primary obligor, (ii) we have latitude to establish the price
charged and (iii) we bear the credit risk in the transaction. For arrangements involving our sale of e-learning content, we charge our clients for the content based on
pay-per-use or a fixed rate for a specified number of users and recognize the gross amount invoiced as revenue as the content is delivered. For arrangements where
clients purchase e-learning content directly from a third-party, or provide it themselves, and we integrate the content into our solutions, we charge a hosting fee. In
such cases, we recognize the amount invoiced for hosting as the content is delivered, excluding any portion we invoice that is attributable to fees the third-party
charges for the content.
47
Commission Expense
We defer commissions paid to our sales force because these amounts are recoverable from future revenue from the non-cancelable client agreements that
give rise to the commissions. We defer expense recognition upon payment and amortize expense to sales and marketing expenses over the term of the client
agreement in proportion to the revenue that is recognized. Commissions are direct and incremental costs of our client agreements and we generally commence
payment of commissions within 45 to 75 days after the execution of client agreements.
Stock-based Compensation
We account for stock-based awards granted to employees and directors by recording compensation expense based on the awards’ estimated fair values. We
grant stock options and restricted stock units that vest over time based on the continuing employment of the employee, as well as restricted stock units that vest
based on meeting certain performance targets. We expect that our expense related to stock-based compensation will increase over time.
We estimate the fair value of our restricted stock units based on the closing price of our common stock as of the date of grant. We estimate the fair value of
our stock options as of the date of grant using the Black-Scholes option-pricing model. Determining the fair value of stock options under this model requires
judgment, including estimating (i) the value per share of our common stock, (ii) volatility, (iii) the term of the awards, (iv) the dividend yield and (v) the risk-free
interest rate. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, based on management’s judgment and
subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the model change significantly, stock-based
compensation recorded for future awards may differ materially from that recorded for awards granted previously.
We use the average volatility of similar publicly traded companies as an estimate for our volatility. For purposes of determining the expected term of the
awards in the absence of sufficient historical data relating to stock option exercises for our company, we apply a simplified approach in which the expected term of
an award is presumed to be the mid-point between the vesting date and the expiration date of the award. The risk-free interest rate for periods within the expected
life of an award, as applicable, is based on the United States Treasury yield curve in effect during the period the award was granted. Our estimated dividend yield is
zero, as we have not declared dividends and do not currently intend to declare dividends in the foreseeable future.
Once we have determined the estimated fair value of our stock-based awards, we recognize the portion of that value that corresponds to the portion of the
award that is ultimately expected to vest, taking estimated forfeitures into account. This amount is recognized as an expense over the vesting period of the award
using the straight-line method for awards which contain only service conditions, and using the graded vesting method based upon the probability of the
performance condition being met for awards which contain performance conditions. We estimate forfeitures based upon our historical experience and, for each
period, review the estimated forfeiture rate and make changes as factors affecting the forfeiture rate calculations and assumptions change.
In addition, we have issued performance-based restricted stock units that are dependent on market conditions and performance goals, and others that are
solely dependent on market conditions, established by the Board of Directors, for a predetermined period. The fair value of the performance-based awards are
determined using a Monte-Carlo simulation model that factors in the probability of the award vesting. For performance-based awards, the fair value is not
determined until all of the terms and conditions of the award are established.
48
Information related to our stock-based compensation activity, including weighted-average grant date fair values and associated Black-Scholes option-pricing
model assumptions associated with time-based options, is as follows:
Stock options granted (in thousands)
Weighted-average exercise price
Weighted-average grant date fair value per share of stock options granted
Weighted-average Black-Scholes model assumptions:
Estimated fair value of common stock
$
$
$
Estimated volatility
Estimated dividend yield
Expected term (years)
Risk-free rate
Year Ended December 31,
2015
2014
2013
570
34.63
14.64
$
$
2,209
44.16
21.72
$
$
34.63
$
44.16
$
41.8%
—
6.0
1.8%
49.9%
—
6.0
1.9%
2,394
43.32
21.52
43.32
51.5%
—
6.0
1.5%
As of December 31, 2015 , we had approximately $43.7 million of unrecognized employee related stock-based compensation, net of estimated forfeitures,
relating to stock options that we expect to recognize over a weighted-average period of approximately 2.2 years . Unrecognized compensation expense related to
nonvested restricted stock units was $68.6 million at December 31, 2015 , which is expected to be recognized as expense over the weighted-average period of 3.2
years. Additionally, during 2014, we granted certain performance-based restricted stock units. Unrecognized compensation expense related to performance-based
restricted stock units was $4.3 million at December 31, 2015 , which is expected to be recognized as expense over the weighted-average period of 2.0 years. The
amount of compensation cost relating to performance awards may change in future periods to the extent that another target level becomes probable of achievement.
Stock-based compensation expense is expected to increase in 2016 compared to 2015 as a result of our existing unrecognized stock-based compensation and
as we issue additional stock-based awards to continue to attract and retain employees.
Allowance for Doubtful Accounts
On a quarterly basis we evaluate the need to establish an allowance for doubtful accounts, by analyzing our clients’ creditworthiness. Our evaluation and
analysis includes specific identification and review of all outstanding accounts receivable balances, review of our historical collection experience with each client,
and consideration of overall economic conditions, as well as of any specific facts and circumstances that may indicate that a specific client receivable is not
collectible. We make judgments as to our ability to collect outstanding receivables and establish an allowance when collection becomes doubtful. At December 31,
2015 and 2014 , our allowance for doubtful accounts was $2.6 million and $2.2 million , respectively, based on our evaluation and analysis. If our future actual
collections are lower than expected, our cash flows and future results of operations could be negatively impacted.
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
solutions, 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, and who devote time to, 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 and enhancements to our solutions 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 an estimated useful life of the software of
typically three years, commencing when the software is ready for its intended use.
49
Goodwill
Goodwill is not amortized, but instead is required to be tested for impairment annually and under certain circumstances. We perform such testing of goodwill
in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
carrying amount. Events or changes in circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the
business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner we use the
acquired assets or the strategy we have for our overall business, significant negative industry or economic trends, or significant underperformance relative to
expected historical or projected future results of operations.
As part of the annual impairment test, we may conduct an assessment of qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. If we elect not to perform the qualitative assessment or we determine that it is more likely than not that the fair
value of a reporting unit is less than its carrying amount, we then conduct the first step of a two-step impairment test. The first step of the test for goodwill
impairment compares the fair value of the applicable reporting unit with its carrying value. Fair value was determined using a market approach, which includes
consideration of the Company’s own market capitalization.
If the fair value of a reporting unit is less than the reporting unit's carrying value, we perform the second step of the test for impairment of goodwill. During
the second step, we compare the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill. The estimate of implied fair value of
goodwill may require valuations of certain internally generated and unrecognized intangible assets and other assets and liabilities. If the carrying value of the
goodwill exceeds the calculated implied fair value, the excess amount will be recognized as an impairment loss.
Management reorganized Cornerstone Growth Edition, formerly Cornerstone Small Business, resulting in a change in the reporting unit in 2014. Consistent
with our impairment analysis at December 31, 2014, we had one reporting unit for purposes of the impairment analysis as of December 31, 2015 . Management
recorded goodwill related to the Evolv acquisition in November 2014, which was considered in the impairment analysis. Based on the results of the annual
impairment test, the fair value of the reporting unit exceeded its carrying value by a significant amount, and therefore no impairment of goodwill existed at
December 31, 2015 .
Intangible Assets
Identifiable intangible assets primarily consist of trade names and intellectual property and acquisition-related intangibles, including developed technology,
customer relationships, non-compete agreements, patents, trade names and trademarks. We determine the appropriate useful life of our intangible assets by
performing an analysis of expected cash flows of the acquired assets. Intangible assets are amortized over their estimated useful lives ranging from two to ten
years, generally using the straight-line method, which approximates the pattern in which the economic benefits are consumed.
We evaluate the recoverability of our 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. Such triggering events or changes in circumstances may include: a significant decrease in
the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, a significant adverse change in
legal factors or in the business climate, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse
deterioration in the amount of revenue or cash flows expected to be generated from an asset group, an accumulation of costs significantly in excess of the amount
originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses
associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life. We perform impairment testing at the asset group level that represents the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an
asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset
group, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted
future cash flows. There were no impairment charges related to the identified intangible assets in the years ended December 31, 2015 and 2014 .
50
Investments in Marketable Securities
Our available-for-sale investments in marketable securities are recorded at fair value, with any unrealized gains and losses, net of taxes, reported as a
component of stockholders’ equity until realized or until a determination is made that an other-than-temporary decline in market value has occurred. If we
determine that an other-than-temporary decline has occurred for debt securities that we do not then currently intend to sell, we recognize the credit loss component
of an other-than-temporary impairment in other income (expense) and the remaining portion in other comprehensive income (loss). The credit loss component is
identified as the amount of the present value of cash flows not expected to be received over the remaining term of the security, based on cash flow projections. In
determining whether an other-than-temporary impairment exists, we consider: (i) the length of time and the extent to which the fair value has been less than cost;
(ii) the financial condition and near-term prospects of the issuer of the securities; and (iii) our intent and ability to retain the security for a period of time sufficient
to allow for any anticipated recovery in fair value. The cost of marketable securities sold is determined based on the specific identification method and any realized
gains or losses on the sale of investments are reflected as a component of interest income or expense. In addition, we classify marketable securities as current or
non-current based upon the maturity dates of the securities. At December 31, 2015 , we had $199.5 million of investments in marketable securities.
Strategic Investments
In December 2015, we invested an aggregate of $0.3 million in equity securities of two privately-held companies. In July 2015, we invested $0.2 million in
equity securities of a privately-held company, and agreed to invest an additional $0.3 million in equity securities of such privately-held company upon
achievement of certain milestones. In May 2015, we invested $0.5 million in equity securities of a privately-held company. In September 2014, we invested $0.4
million in equity securities of a privately-held company. We accounted for these investments using the cost method of accounting, as we do not have significant
influence or a controlling financial interest over these entities. These investments are subject to periodic impairment reviews and are considered to be impaired
when a decline in fair value is judged to be other-than-temporary. These investments are included in long-term investments on the Consolidated Balance Sheet.
In June 2014, we invested $0.5 million in a debt security of a privately-held company. We accounted for this debt security using fair value accounting with
any changes in value recorded in other income (expense) in the accompanying Consolidated Statement of Operations. As of December 31, 2015 , we estimated the
fair value of our investment in the debt security to be $0.2 million based upon the probability-weighted present value under various possible future event scenarios,
taking into account the likelihood and timing of such events. This investment is included in short-term investments on the Consolidated Balance Sheet.
Senior Convertible Notes
In accounting for senior convertible notes (the “Notes”) at issuance, we separated the Notes into debt and equity components pursuant to the accounting
standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The fair value of the debt component was estimated using
an interest rate, with terms similar to the Notes, excluding the conversion feature. The carrying amount of the liability component was calculated by measuring the
fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amount of the Notes over the fair value of the debt
component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to interest expense over the
term of the Notes using the interest method. The amount recorded to additional paid-in capital is not to be remeasured as long as it continues to meet the conditions
for equity classification.
51
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 bases 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 valuation allowances, we consider our projected future taxable income and the availability of tax planning strategies. We have recorded a full
valuation allowance to reduce our United States, United Kingdom, New Zealand, Hong Kong and Brazil net deferred tax assets to zero, because we have
determined that it is not more likely than not that any of our United States, United Kingdom, New Zealand, Hong Kong and Brazil net deferred tax assets will be
realized. If in the future we determine that we will be able to realize any of our United States, United Kingdom, New Zealand, Hong Kong and Brazil 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.
We have assessed our income tax positions and recorded tax benefits for all years subject to examination, based upon our evaluation of the facts,
circumstances and information available at each period end. For those tax positions where we have determined there is a greater than 50% likelihood that a tax
benefit will be sustained, we have recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that
has full knowledge of all relevant information. For those income tax positions where we have determined there is a less than 50% likelihood that a tax benefit will
be sustained, no tax benefit has been recognized in our financial statements.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2 of notes to consolidated financial statements included in this Annual Report on
Form 10-K.
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.
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Amortization of certain acquired intangibles
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other, net
Other income (expense), net
Loss before income tax (provision) benefit
Income tax (provision) benefit
Net loss
2015
$
Year Ended
December 31,
2014
2013
339,651 $
109,864
229,787
263,568 $
77,684
185,884
207,026
40,991
49,877
600
298,494
(68,707)
894
(12,506)
(4,016)
(15,628)
(84,335)
(1,181)
162,552
30,618
41,802
828
235,800
(49,916)
720
(12,157)
(2,691)
(14,128)
(64,044)
(855)
$
(85,516) $
(64,899) $
52
185,129
53,548
131,581
109,737
21,260
33,572
1,004
165,573
(33,992)
357
(6,563)
(356)
(6,562)
(40,554)
128
(40,426)
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
Revenue (in thousands)
Bookings (in thousands)
Annual dollar retention rate
Number of clients
Number of users (in millions)
$
$
At or For Year Ended December 31,
2015
2014
2013
339,651
400,454
$
$
95.4%
2,595
23.8
263,568
316,082
$
$
93.7%
2,153
18.1
185,129
231,699
94.6%
1,631
14.1
Revenue increased $76.1 million , or 29% , for the year ended December 31, 2015 as compared to the same period in 2014 . The increase was the result of a
$51.5 million increase in revenue from existing clients, specifically, revenue from client agreements that were entered into prior to January 1, 2015. In addition,
revenue increased by $24.6 million from client agreements that were entered into during the year ended December 31, 2015 .
Revenue increased by $78.4 million, or 42%, for the year ended December 31, 2014 as compared to the same period in 2013. The increase was primarily the
result of a $64.8 million increase in revenue from existing clients, specifically, revenue from client agreements that were entered into prior to January 1, 2014. In
addition, revenue increased by $13.6 million from the client agreements that were entered into during the year ended December 31, 2014.
The rate at which revenue increased year over year declined in the current period, from a 42% revenue increase from the year ended December 31, 2013 to
the year ended December 31, 2014 to a 29% revenue increase from the year ended December 31, 2014 to the year ended December 31, 2015. Our growth rate can
depend on a variety of factors, such as the size, volume and complexity of our agreements with our customers, our ability to work with our customers to implement
and deliver our solutions, our ability to upsell and renew our existing customers, the success of our alliance and partnership arrangements, and the expansion of our
business through emerging markets.
The following table sets forth our revenue based on the location of our clients for each of the periods indicated (dollar amounts in thousands):
Revenue for United States
Percentage of total revenue for United States
Revenue for all other countries
Percentage of total revenue for all other countries
At or For Year Ended December 31,
2015
2014
2013
228,724
$
67%
110,927
$
33%
339,651
$
180,834
$
69%
82,734
$
31%
263,568
$
128,983
70%
56,146
30%
185,129
$
$
$
Bookings increased $84.4 million , or 27% for the year ended December 31, 2015 as compared to the same period in 2014 , reflecting the increase in revenue
for the period, plus an increase in deferred revenue at December 31, 2015 from December 31, 2014 compared to the increase at December 31, 2014 from
December 31, 2013 . The growth rates for revenue and bookings are not correlated with each other in a given period due to the seasonality of when we enter into
client agreements, the varied timing of billings, the recognition of subscription revenue generally on a straight-line basis over the term of each client agreement,
and the recognition of consulting revenue generally on a proportional performance basis over the period the services are performed.
As discussed above under the heading “ Metrics ,” bookings is a non-GAAP financial measure defined as the sum of revenue and the change in the deferred
revenue balance for the period. Management uses bookings in analyzing its financial results and believes it is useful to investors, as a supplement to the
corresponding GAAP measure, 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 bookings differently or not at all, which
may reduce its usefulness as a comparative measure.
53
The following table presents a reconciliation of revenue to bookings for each of the periods presented (in thousands):
Revenue
Deferred revenue at December 31, 2014
Deferred revenue at December 31, 2015
Change in deferred revenue
Bookings
Revenue
Deferred revenue at December 31, 2013
Deferred revenue at December 31, 2014
Change in deferred revenue
Bookings
Revenue
Deferred revenue at December 31, 2012
Deferred revenue at December 31, 2013
Change in deferred revenue
Bookings
$
$
$
Deferred
Revenue
Balance
Year Ended
December 31, 2015
$
339,651
191,336
252,139
Deferred
Revenue
Balance
60,803
400,454
Year Ended
December 31, 2014
263,568
$
$
138,822
191,336
Deferred
Revenue
Balance
52,514
316,082
Year Ended
December 31, 2013
185,129
$
$
92,252
138,822
$
46,570
231,699
We believe our revenue and bookings growth is a result of our continued investment in and development of our direct sales team. We believe these
investments have enabled us to achieve greater sales coverage and better sales execution. In addition, we have increased our marketing activities which we believe
has improved brand awareness and created higher demand for our solutions. We have also continued to enhance our Enterprise and Mid-Market solution, which we
believe has encouraged existing clients to buy multiple products with their initial purchase and add additional products and users over the term of their agreement.
Our number of clients grew 21% at December 31, 2015 compared to December 31, 2014 . Our number of users increased 32% at December 31, 2015
compared to December 31, 2014 .
Cost of Revenue, Gross Profit and Gross Margin
Cost of revenue
Gross profit
Gross margin
Year Ended December 31,
2015
2014
2013
$
$
109,864
229,787
$
$
68%
(dollars in thousands)
77,684
185,884
$
$
71%
53,548
131,581
71%
Cost of revenue increased $32.2 million , or 41% , in 2015 as compared to 2014 , principally attributable to $8.5 million in increased costs related to
outsourced consulting services, $7.3 million in increased amortization of software obtained through the acquisition of Evolv, $5.8 million in increased employee-
related costs due to higher headcount, $3.8 million in increased allocated overhead such as rent, IT costs, depreciation and amortization and employee benefits
costs, $2.8 million in increased amortization of capitalized software, $1.5 million in increased reseller and referral fee, and $1.3 million in increased third-party
content costs. These costs were incurred to service our existing clients and support our continued growth. The remaining increase relates to various other costs
associated with generating revenue from our clients.
54
Cost of revenue increased $24.1 million, or 45%, in 2014 as compared to 2013, principally attributable to $10.5 million in increased costs related to
outsourced consulting services, $4.1 million in increased allocated overhead such as rent, IT costs, depreciation and amortization and employee benefits costs, $2.7
million in increased employee-related costs due to higher headcount, $2.1 million in increased amortization of capitalized software mainly due to the additional
amortization of software obtained through the acquisition of Evolv, $2.0 million in increased third-party content costs, and $1.1 million in increased reseller and
referral fees. These costs were incurred to service our existing clients and support our continued growth. The remaining increase relates to various other costs
associated with generating revenue from our clients.
The following table presents our estimate of remaining amortization expense for each of the succeeding fiscal years for finite-lived intangible assets that
existed at December 31, 2015 (in thousands):
2016
2017
Total
$
$
9,282
7,431
16,713
Estimated remaining amortization expense of $9.1 million and $7.4 million will be recorded in cost of revenue for 2016 and 2017 , respectively. The
remaining estimated amortization expense will be recorded in amortization of certain acquired intangible assets within operating expenses.
Sales and Marketing
Sales and marketing
Percent of revenue
Year Ended December 31,
2015
2014
2013
$
207,026
$
(dollars in thousands)
162,552
$
61%
62%
109,737
59%
Sales and marketing expenses increased $44.5 million , or 27% , in 2015 as compared to 2014 . The increase was attributable to the expansion of our sales
force as well as increased sales commissions and increases in marketing programs to address additional opportunities in new and existing markets. Total headcount
in sales and marketing at December 31, 2015 increased compared to December 31, 2014, contributing to an increase in employee-related costs of $34.1 million. In
addition, we incurred increased costs associated with outsourced marketing programs and events of $4.5 million, overhead costs, such as rent, IT costs, and
depreciation and amortization, of $3.4 million, and increased travel costs associated with our direct sales teams of $1.6 million.
Sales and marketing expenses increased $52.8 million, or 48%, in 2014 as compared to 2013. The increase was attributable to the expansion of our sales
force as well as increased sales commissions and increases in marketing programs to address additional opportunities in new and existing markets. Total headcount
in sales and marketing at December 31, 2014 increased compared to December 31, 2013, contributing to an increase in employee-related costs of $37.9 million. In
addition, we incurred increased travel costs associated with our direct sales teams of $5.4 million, overhead costs, such as rent, IT costs, and depreciation and
amortization, of $5.1 million, and increased costs associated with outsourced marketing programs and events of $4.3 million.
Research and Development
Research and development
Percent of net revenue
Year Ended December 31,
2015
2014
2013
$
40,991
$
(dollars in thousands)
30,618
$
12%
12%
21,260
11%
Research and development expenses increased $10.4 million , or 34% , in 2015 as compared to 2014 . The increase was principally due to an increase in
research and development headcount at December 31, 2015 compared to December 31, 2014 to maintain and improve the functionality of our solutions. As a
result, we incurred increased employee-related costs of $9.0 million. The remaining increase primarily relates to allocated overhead costs.
55
Research and development expenses increased $9.4 million, or 44%, in 2014 as compared to 2013. The increase was principally due to an increase in
research and development headcount at December 31, 2014 compared to December 31, 2013 to maintain and improve the functionality of our solutions. As a
result, we incurred increased employee-related costs of $6.9 million. The remaining increase primarily relates to allocated overhead costs.
We capitalize a portion of our software development costs related to the development and enhancements of our solutions, which are then amortized to cost of
revenue. The timing of our capitalizable development and enhancement projects may affect the amount of development costs expensed in any given period. We
capitalized $16.5 million , $11.4 million and $7.9 million of software development costs and amortized $9.1 million , $6.3 million and $4.3 million in 2015 , 2014
and 2013 , respectively.
General and Administrative
General and administrative
Percent of net revenue
Year Ended December 31,
2015
2014
2013
$
49,877
$
(dollars in thousands)
41,802
$
15%
16%
33,572
18%
General and administrative expenses increased $8.1 million , or 19% , in 2015 as compared to 2014 . The increase was driven by higher costs to support our
growing business. We incurred increased employee-related costs of $5.2 million as a result of increased headcount and stock-based compensation awards at
December 31, 2015 compared to December 31, 2014. General and administrative expenses are expected to increase with the growth of our company.
General and administrative expenses increased $8.2 million, or 25%, in 2014 as compared to 2013. The increase was driven by higher costs to support our
growing business. We incurred increased employee-related costs of $4.1 million as a result of increased headcount and stock-based compensation awards at
December 31, 2014 compared to December 31, 2013. In addition, we incurred $1.3 million in costs related to the acquisition of Evolv Inc. General and
administrative expenses are expected to increase with the growth of our company.
Amortization of certain acquired intangible assets
Amortization of certain acquired intangible assets
$
600 $
828 $
1,004
Amortization of certain acquired intangibles decreased $0.2 million for the year ended December 31, 2015 as compared to the same period in 2014 due to
certain intangible assets acquired through our April 2012 acquisition of Sonar Limited being fully amortized in 2014.
Year Ended December 31,
2015
2014
2013
(dollars in thousands)
Other Income (Expense)
Interest income
Interest expense
Other, net
Other income (expense), net
Year Ended December 31,
2015
2014
(in thousands)
2013
$
$
894 $
720 $
(12,506)
(4,016)
(12,157)
(2,691)
(15,628) $
(14,128) $
357
(6,563)
(356)
(6,562)
Interest income for the year ended December 31, 2015 increased by $0.2 million as compared to the same period in 2014 due to the increase in interest
income earned on purchase of investment securities net of purchased premium amortization in the year ended December 31, 2015 .
56
Interest expense for the year ended December 31, 2015 increased $0.3 million as compared to the same period in 2014 due to an increase in interest expense
for our convertible notes. Refer to the section titled “Liquidity and Capital Resources” below for additional information on the convertible notes.
Other, net is primarily comprised of foreign exchange gains and losses related to transactions denominated in foreign currencies and unrealized gains and
losses related to our intercompany loans and certain cash accounts. Other, net for the year ended December 31, 2015 included a $0.4 million unrealized loss related
to the fair value adjustment to our strategic investment. Foreign exchange gains and losses for the years ended December 31, 2015 , 2014 and 2013 , respectively,
were primarily driven by fluctuations in the Euro and U.S. Dollar in relation to the British Pound.
Income Tax (Provision) Benefit
Year Ended December 31,
2015
2014
(in thousands)
2013
Income tax (provision) benefit
$
(1,181) $
(855) $
128
We have recorded a full valuation allowance against our United States, United Kingdom and New Zealand net deferred tax assets and therefore have not
recorded a (provision) benefit for income taxes for any of the years presented, other than provisions for certain foreign and state current income taxes. The tax
benefits in 2013 were primarily related to reversing taxable differences in New Zealand, which did not have a valuation allowance.
Liquidity and Capital Resources
In June 2013, we issued $253 million of 1.5% convertible notes due July 1, 2018 (the “Notes”) and concurrently entered into convertible notes hedges and
separate warrant transactions. The Notes mature on July 1, 2018, unless earlier converted. Upon conversion of any Notes, we will deliver cash up to the principal
amount, and we have the right to settle any amounts in excess of the principal in cash or shares. We received proceeds of $246.0 million from the issuance of the
Notes, net of associated fees, received $23.2 million from the issuance of the warrants and paid $49.5 million for the note hedges. The Notes are classified as a
non-current liability on our consolidated balance sheet as of December 31, 2015 .
In November 2014, we used $43.3 million in cash in connection with our acquisition of Evolv Inc. At December 31, 2015 , our principal sources of liquidity
were $107.7 million of cash and cash equivalents, investments in marketable securities of $199.5 million , and $104.7 million of accounts receivable.
We intend to use our cash for general corporate purposes, including potential future acquisitions or other transactions. Depending on certain growth
opportunities, we may choose to accelerate investments in sales and marketing, research and development, technology and services, which may require the use of
proceeds for such additional expansion and expenditures. Based on our current level of operations and anticipated growth, we believe our future cash flows from
operating activities and existing cash and cash equivalents will provide adequate funds for our ongoing operations and general corporate purposes for at least the
next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue, billings 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 solution. To the extent that existing cash and cash from operations are not sufficient to fund our future
activities, we may need to raise additional funds or utilize our cash resources. Although we are not currently a party to any agreement or letter of intent with respect
to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future,
which could also require us to seek additional financing or utilize our cash resources.
57
The following table sets forth a summary of our cash flows for the periods indicated (in thousands):
Net cash provided by operating activities
Net cash (used in) provided by investing activities
Net cash provided by financing activities
Net Cash Provided by Operating Activities
2015
$
43,796 $
(110,939)
11,005
Year Ended
December 31,
2014
33,009 $
15,005
10,840
2013
17,431
(213,445)
228,928
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 of $43.8 million during 2015 was a result of the continued growth of our business and our continued investments for
further growth. In the year ended December 31, 2015 , $81.0 million, or 95%, of our net loss of $85.5 million consisted of non-cash items, including $43.1 million
of stock-based compensation, $27.5 million of depreciation and amortization, $8.7 million of accretion of debt discount and amortization of debt issuance costs,
$1.6 million of unrealized foreign exchange losses, and purchased premium net of amortization of $0.3 million related to investment securities. Cash provided by
operating activities includes a $64.8 million increase in deferred revenue due to increased billings during the year ended December 31, 2015, a $14.7 million
increase in accrued liabilities primarily due to the timing of payments, and an increase in accounts payable of $4.4 million attributable to increased expenses
associated with our growth. Cash provided by operating activities is partially offset by a $21.8 million increase in accounts receivable attributable to higher billings
in the fiscal year 2015 due to an increased number of clients, a $10.3 million increase in deferred commissions due to increased sales, a $2.6 million increase in
prepaid and other assets primarily due to the timing of payments to vendors, and decrease in other liabilities of $0.9 million .
Cash provided by operating activities during 2014 of $33.0 million was a result of the continued growth of our business and our continued investments for
further growth. In the year ended December 31, 2014, $59.5 million, or 92%, of our net loss of $64.9 million consisted of non-cash items, including $33.7
million of stock-based compensation, $15.1 million of depreciation and amortization, $8.3 million of accretion of debt discount and amortization of debt issuance
costs, $1.7 million of unrealized foreign exchange losses, and amortization of a purchased premium of $0.8 million related to investment securities. Cash provided
by operating activities includes a $55.2 million increase in deferred revenue due to increased billings during the year ended December 31, 2014, a $6.4
million increase in accrued liabilities primarily due to the timing of payments, an increase in accounts payable of $4.6 million attributable to increased expenses
associated with our growth, and $1.2 million decrease in prepaid and other assets primarily due to the timing of payments to vendors. Cash provided by operating
activities is partially offset by a $18.7 million increase in accounts receivable attributable to higher billings in the fiscal year 2014 due to an increased number of
clients, a $10.1 million increase in deferred commissions due to increased sales, and decrease in other liabilities of $0.3 million.
Cash provided by operating activities during 2013 of $17.4 million was a result of the continued growth of our business and our continued investments for
further growth. In the year ended December 31, 2013, $32.2 million, or 80%, of our net loss of $40.4 million consisted of non-cash items, including $20.8
million of stock-based compensation, $9.7 million of depreciation and amortization, and $4.3 million of accretion of debt discount and amortization of debt
issuance costs. These non-cash expenses were partially offset by a purchased premium of $2.0 million related to investment securities, net of amortization. Cash
provided by operating activities includes a $45.2 million increase in deferred revenue due to increased billings during the year ended December 31, 2013, a $6.8
million increase in accrued liabilities primarily due to the timing of payments, an increase in accounts payable of $5.1 million attributable to increased expenses
associated with our growth, and an increase in other liabilities of $0.7 million. Cash provided by operating activities is partially offset by a $19.0 million increase
in accounts receivable attributable to higher billings in the fiscal year 2013 due to an increased number of clients, a $7.1 million increase in deferred commissions
due to increased sales, and a $6.1 million increase in prepaid and other assets due to an increase in business activity associated with the growth of our business and
the timing of payments to vendors.
58
Net Cash (Used in) Provided by Investing Activities
Our primary investing activities have consisted of 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. In November of 2014 we
purchased the privately held company, Evolv Inc. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.
Cash used in investing activities during 2015 of $110.9 million was primarily due to $220.4 million in purchases of investment securities, $15.6 million in
purchases of additional equipment, and $13.3 million of investments in our capitalized software during the period. Cash used in investing activities was partially
offset by $138.4 million related to cash received from the maturities and sales of investment securities. Our investments in fixed assets consisted of corporate
office renovations, purchases of additional furniture and equipment for our expanding infrastructure and workforce. In July 2013 we began to invest the proceeds
of our convertible notes in investment securities. In December 2015, July 2015, May 2015, September 2015 and June 2014, we made strategic investments in
privately-held companies. At December 31, 2015 , we had a total of $1.6 million in strategic investments.
Cash provided by investing activities during 2014 of $15.0 million was primarily due to $203.1 million related to cash received from the maturities and sales
of investment securities. Cash provided by investing activities was partially offset by $124.2 million in purchases of investment securities, $43.3 million used in
our acquisition of Evolv Inc.,$11.0 million in purchases of additional equipment, and $9.5 million of investments in our capitalized software during the period.
We used $213.4 million of cash in investing activities in the year ended December 31, 2013, primarily due to $204.0 million in purchases of investment
securities, $8.8 million in purchases of additional equipment, and $6.9 million of investments in our capitalized software during the period. Cash used in investing
activities was partially offset by a $6.2 million increase related to cash received from the maturities and sales of investment securities.
Net Cash Provided by Financing Activities
Cash provided by financing activities of $11.0 million in the year ended December 31, 2015 was primarily due to proceeds from stock option exercises and
employee stock purchase plan of $11.6 million . These proceeds were partially offset by our payments of $0.2 million on our capital lease and financing obligations
and repayment of our credit facility of $0.4 million .
Cash provided by financing activities of $10.8 million in the year ended December 31, 2014 was primarily due to proceeds from stock option exercises
of $12.3 million. These proceeds were partially offset by our payments of $0.9 million on our capital lease and financing obligations and repayment of our credit
facility of $0.6 million.
Cash provided by financing activities of $228.9 million in the year ended December 31, 2013 was primarily due to proceeds from the Notes of $245.7
million and proceeds from the issuance of warrants of $23.2 million, and proceeds from stock option exercises of $13.4 million. These proceeds were partially
offset by our payment for the convertible note hedges of $49.5 million and repayment of our credit facility of $4.0 million.
59
Contractual Obligations
Our principal commitments consist of obligations for outstanding debt, leases for our office space, contractual commitments for professional service projects
and third party consulting firms. The following table summarizes our contractual obligations at December 31, 2015 (in thousands):
Long-term debt obligations including interest
$
3,795 $
260,590 $
— $
Capital lease obligations
Operating lease obligations
Other contractual obligations (1)
33
22,880
48,296
33
7,802
19,017
—
14,497
23,679
—
581
5,600
$
335,594 $
30,647 $
298,766 $
6,181 $
—
—
—
—
—
Less than 1 Year
Total
264,385 $
Payments Due by Period
1-3 Years
3-5 Years
More than 5
Years
(1) Other contractual obligations include agreements with various third party service providers whereby we have committed to assign certain dollar amounts
or hours of professional service projects related to implementation and other services for our clients.
At December 31, 2015 , liabilities for unrecognized tax benefits of $0.4 million , which are attributable to foreign income taxes and interest and penalties, are
not included in the table above because, due to their nature, there is a high degree of uncertainty regarding the time of future cash outflows and other events that
extinguish these liabilities.
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.
During 2015, we amended a standby letter of credit in association with a building lease. In addition, we maintain standby letters of credit in association with
other contractual arrangements. The total amount outstanding is $1.9 million at December 31, 2015 .
Item 7A.
Quantitative and Qualitative Disclosures About Market Risks
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 and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct
business. To reduce certain of these risks, we monitor the financial condition of our large clients 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, U.S.
treasury, agency 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. To date, we have not used derivative instruments to mitigate the impact of our
market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or speculative purposes.
Interest Rate Risk
At December 31, 2015 , we had cash and cash equivalents of $107.7 million and investments of $199.5 million , which primarily consisted of corporate
bonds, U.S. treasury and agency securities, money market funds backed by United States Treasury Bills and other debt securities. The carrying amount of our cash
equivalents reasonably approximates fair value due to the short maturities of these instruments.
The primary objectives of our 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. Our investments are exposed to market risk due to fluctuations in interest rates,
which may affect our interest income and the fair market value of our investments. Due to the nature of our investment portfolio, however, we do not believe an
immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio. We therefore do not expect our
operating results or cash flows to be materially affected by a sudden change in market interest rates.
60
We do not believe our cash equivalents, corporate bonds, U.S. treasury securities and agency securities have significant risk of default or illiquidity. While
we believe these cash investments do not contain excessive risk, we cannot provide assurance 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 provide assurance 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 U.S. Dollar. Our historical revenue
has primarily been denominated in U.S. Dollars, and a significant portion of our current revenue continues to be denominated in U.S. Dollars. However, we expect
an increasing portion of our future revenue to be denominated in currencies other than the U.S. Dollar, primarily the Euro and British Pound. To a lesser extent, we
also have revenue denominated in Australian Dollars, Brazilian Reals, Canadian Dollars, Indian Rupees, Japanese Yen, New Zealand Dollars, Singapore Dollars,
South African Rand, and other foreign currencies. Our operating expenses are generally denominated in the currencies of the countries in which our operations are
located, primarily the United States and, to a lesser extent, the United Kingdom, other European Union countries, Australia, Brazil, Canada, China, Hong Kong,
India, Israel, Japan and New Zealand. 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. Our other income (expense) is also impacted by the re-
measurement of U.S. 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 or a weakening U.S. Dollar can increase the costs of our international expansion. To date, we
have not entered into any foreign currency hedging contracts although we may do so in the future. The effect of an immediate 10% adverse change in foreign
exchange rates on foreign-denominated accounts at December 31, 2015 , including our intercompany loans with our subsidiaries, would result in a foreign currency
loss of approximately $6.6 million.
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 attempt to mitigate this
risk through credit monitoring procedures.
61
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
62
PAGE
63
64
65
66
67
68
70
To the Board of Directors and Stockholders of Cornerstone OnDemand, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and
cash flows present fairly, in all material respects, the financial position of Cornerstone OnDemand, Inc. and its subsidiaries at December 31, 2015 and 2014, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal
Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal
control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes on the balance sheet in 2015.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 25, 2016
63
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
December 31, 2015
December 31, 2014
Assets
$
107,691 $
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Deferred commissions
Prepaid expenses and other current assets
Total current assets
Capitalized software development costs, net
Property and equipment, net
Long-term investments
Intangible assets, net
Goodwill
Other assets, net
Total Assets
Liabilities:
Accounts payable
Accrued expenses
Liabilities and Stockholders’ Equity
$
$
Deferred revenue, current portion
Capital lease obligations, current portion
Debt, current portion
Other liabilities
Total current liabilities
Convertible notes, net
Other liabilities, non-current
Deferred revenue, net of current portion
Total liabilities
Commitments and contingencies (Note 15)
Stockholders’ Equity:
Common stock, $0.0001 par value; 1,000,000 shares authorized, 54,704 and 53,826 shares issued and
outstanding at December 31, 2015 and 2014
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
136,841
104,686
35,910
15,297
400,425
23,089
27,021
64,247
16,713
25,894
4,156
561,545 $
18,954 $
44,111
237,679
33
—
2,663
303,440
232,583
3,240
14,460
553,723
5
394,089
(386,882)
610
7,822
166,557
116,106
84,499
26,236
13,007
406,405
15,719
21,424
3,938
27,282
25,894
4,993
505,655
16,737
29,476
180,598
236
351
3,052
230,450
225,094
3,871
10,738
470,153
5
336,692
(301,366)
171
35,502
505,655
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
64
$
561,545 $
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Amortization of certain acquired intangible assets
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other, net
Other income (expense), net
Loss before income tax (provision) benefit
Income tax (provision) benefit
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic and diluted
2015
Years Ended
December 31,
2014
2013
$
339,651 $
263,568 $
109,864
229,787
207,026
40,991
49,877
600
298,494
(68,707)
894
(12,506)
(4,016)
(15,628)
(84,335)
(1,181)
77,684
185,884
162,552
30,618
41,802
828
235,800
(49,916)
720
(12,157)
(2,691)
(14,128)
(64,044)
(855)
$
$
(85,516) $
(1.58) $
54,171
(64,899) $
(1.22) $
53,267
185,129
53,548
131,581
109,737
21,260
33,572
1,004
165,573
(33,992)
357
(6,563)
(356)
(6,562)
(40,554)
128
(40,426)
(0.79)
51,427
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
65
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Net loss
Other comprehensive income, net of tax:
Foreign currency translation adjustment
Net change in unrealized (losses) gains on investments
Other comprehensive income, net of tax
Total comprehensive loss
2015
Years Ended
December 31,
2014
2013
(85,516) $
(64,899) $
(40,426)
686
(247)
439
308
(187)
121
3
130
133
(85,077) $
(64,778) $
(40,293)
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
66
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Balance as of December 31, 2012
50,690 $
5 $
242,767 $
(196,041) $
(83)
$
46,648
Common
Stock
Shares
Par
Value
Additional
Paid-In
Capital
(Deficit)
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Issuance of common stock upon the exercise
of options
Vesting of early exercised options
Vesting of restricted stock units
Tax benefits from employee stock plans
Stock-based compensation
Equity component of convertible notes
Net loss
Other comprehensive income, net of tax
1,566
—
214
—
—
—
—
—
—
—
—
—
—
—
—
—
13,432
28
—
29
21,769
11,282
—
—
—
—
—
—
—
—
(40,426)
—
Balance as of December 31, 2013
52,470 $
5 $
289,307 $
(236,467) $
Issuance of common stock upon the exercise
of options
Vesting of restricted stock units
Stock-based compensation
Net loss
Other comprehensive income, net of tax
1,154
202
—
—
—
—
—
—
—
—
12,142
—
35,243
—
—
—
—
—
(64,899)
—
Balance as of December 31, 2014
53,826 $
5 $
336,692 $
(301,366) $
Issuance of common stock upon the exercise
of options
Vesting of restricted stock units
Shares issued under employee stock
purchase plan
Stock-based compensation
Net loss
Other comprehensive income, net of tax
Balance as of December 31, 2015
565
200
113
—
—
—
—
—
—
—
—
—
8,448
—
3,035
45,914
—
—
—
—
—
—
(85,516)
—
54,704 $
5 $
394,089 $
(386,882) $
—
—
—
—
—
—
—
133
50
$
—
—
—
—
121
171
$
—
—
—
—
—
439
610
$
13,432
28
—
29
21,769
11,282
(40,426)
133
52,895
12,142
—
35,243
(64,899)
121
35,502
8,448
—
3,035
45,914
(85,516)
439
7,822
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
67
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Accretion of debt discount and amortization of debt issuance costs
Purchased investment premium, net of amortization
Net foreign currency loss
Stock-based compensation expense
Deferred income taxes
Changes in operating assets and liabilities, net of effects from acquisition:
Accounts receivable
Deferred commissions
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Deferred revenue
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investments
Maturities of investments
Purchases of property and equipment
Capitalized software costs
Cash paid for acquisition, net of cash acquired
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net
Payments for convertible note hedges
Proceeds from the issuance of warrants
Proceeds from the issuance of debt
Repayment of debt
Principal payments under capital lease obligations
Proceeds from employee stock plans
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Years Ended December 31,
2015
2014
2013
$
(85,516) $
(64,899) $
(40,426)
27,512
8,691
262
1,584
43,081
(105)
(21,837)
(10,296)
(2,575)
4,444
14,724
64,774
(947)
43,796
(220,383)
138,360
(15,633)
(13,283)
—
(110,939)
—
—
—
—
(352)
(202)
11,559
11,005
(2,728)
(58,866)
166,557
$
107,691 $
68
15,086
8,274
816
1,656
33,680
(7)
(18,674)
(10,097)
1,245
4,562
6,446
55,216
(295)
33,009
(124,191)
203,078
(11,025)
(9,529)
(43,328)
15,005
—
—
—
—
(559)
(886)
12,285
10,840
(1,880)
56,974
109,583
166,557 $
9,700
4,273
(2,031)
242
20,840
(865)
(19,046)
(7,085)
(6,057)
5,082
6,828
45,230
746
17,431
(203,959)
6,182
(8,762)
(6,906)
—
(213,445)
245,664
(49,537)
23,225
1,914
(4,038)
(1,747)
13,447
228,928
227
33,141
76,442
109,583
Supplemental cash flow information:
Cash paid for interest
Cash paid for income taxes
Proceeds from employee stock plans received in advance of stock issuance
Non-cash investing and financing activities:
Assets acquired under capital leases and other financing arrangements
Capitalized assets financed by accounts payable and accrued expenses
Capitalized stock-based compensation
$
$
$
$
$
1,915 $
1,520 $
193
— $
705 $
2,833 $
3,880 $
546 $
—
— $
2,925 $
1,563 $
2,294
485
—
88
1,175
941
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
69
CORNERSTONE ONDEMAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION
Company Overview
Cornerstone OnDemand, Inc. (“Cornerstone” or the “Company”) was incorporated on May 24, 1999 in the state of Delaware and began its principal
operations in November 1999 .
The Company is a leading global provider of learning and talent management solutions delivered as Software-as-a-Service (“SaaS”). The Company’s
Enterprise and Mid-Market solution is a comprehensive and unified cloud-based suite that addresses critical talent needs throughout the entire employee lifecycle,
from recruitment, onboarding, training and collaboration, to performance management, compensation, succession planning and analytics.
The Company’s solutions are designed to enable organizations to meet the challenges they face in empowering and maximizing the productivity of their
human capital. These challenges include hiring and developing employees throughout their careers, engaging all employees effectively, improving business
execution, cultivating future leaders, and integrating with an organization’s extended enterprise of clients, vendors and distributors by delivering training,
certification programs and other content. The Company’s management has determined that the Company operates in one segment as it only reports financial
information on an aggregate and consolidated basis to the Company’s chief executive officer, who is the Company’s chief operating decision maker.
Office Locations
The Company is headquartered in Santa Monica, California and has offices in Amsterdam, Auckland, Bangalore, Düsseldorf, Hong Kong, London, Madrid,
Mumbai, Munich, New Delhi, Paris, San Francisco, São Paulo, Stockholm, Sunnyvale, Sydney, Tel Aviv, and Tokyo.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Cornerstone OnDemand, Inc., and its wholly owned subsidiaries. All significant
inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
On an on-going basis, management evaluates its estimates, including among others those related to: (i) the realization of tax assets and estimates of tax
liabilities and reserves, (ii) the recognition and disclosure of contingent liabilities, (iii) the collectability of accounts receivable, (iv) the evaluation of revenue
recognition criteria, including the determination of standalone value and estimates of the selling price of multiple-deliverables in the Company’s revenue
arrangements, (v) fair values of investments in marketable securities and strategic investments carried at fair value, (vi) the fair values of acquired assets and
assumed liabilities in business combinations, (vii) the useful lives of property and equipment, capitalized software and intangible assets, (viii) impairment of long-
lived assets, including goodwill, (ix) the amount and period of amortization of the commission payments to record to expense in proportion to the revenue that is
recognized, (x) assumptions used in the Black-Scholes option pricing model to determine the fair value of stock options, and (xi) assumptions used in the valuation
of various types of performance-based awards. These estimates are based on historical data and experience, as well as various other factors that management
believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. The Company engages third-party valuation specialists to assist with the allocation of the purchase price in business
combinations. Such estimates required the selection of appropriate valuation methodologies and models, and significant judgment in evaluating ranges of
assumptions and financial inputs.
70
Business Combinations
The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of the
acquisition. Purchase accounting results in assets and liabilities of an acquired business being 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 Company performs valuations of assets acquired and liabilities assumed for an acquisition and allocates the purchase price to its respective net tangible
and intangible assets. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates
including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. The
Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired
and liabilities assumed in a business combination.
Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in the
consolidated statement of operations. Transaction costs were $1.3 million for the year ended December 31, 2014. There were no transaction costs for the years
ended December 31, 2015 and 2013.
Revenue Recognition
The Company derives its revenue from the following sources:
•
•
•
Subscriptions to the Company’s solutions —Clients pay subscription fees for access to the Company’s solutions for a specified period of time, typically
three years for the Company’s Enterprise and Mid-Market solution or annually or three-year periods for the Company’s Cornerstone for Salesforce and
Cornerstone Growth Edition solutions. Fees are based on a number of factors, including the number of solutions purchased and the number of users having
access to a solution. The Company generally recognizes revenue from subscriptions ratably over the term of the agreement.
Consulting services —The Company offers its clients assistance in implementing its solutions and optimizing their use. Consulting services include
application configuration, system integration, business process re-engineering, change management, and training services. Services are billed either on a
time-and-material or a fixed-fee basis. These services are generally purchased as part of a subscription arrangement. Clients may also purchase consulting
services at any other time. Consulting services are performed by the Company directly or by third-party professional service providers the Company
engages. Clients may also choose to perform these services themselves or engage their own third-party service providers. The Company generally
recognizes revenue from fixed fee consulting services using the proportional performance method over the period the services are performed and as time is
incurred for time-and-material arrangements.
E-learning content —The Company resells third-party on-line training content, referred to as e-learning content, to its clients. In addition, the Company
also hosts other e-learning content provided by its clients. The Company generally recognizes revenue from the resale of e-learning content as it is
delivered and recognizes revenue from hosting as the hosting services are provided.
The Company recognizes revenue when: (i) persuasive evidence of an arrangement for the sale of the Company’s solutions or consulting services exists,
(ii) the solutions have been made available or delivered, or services have been performed, (iii) the sales price is fixed or determinable, and (iv) collectability is
reasonably assured. The timing and amount the Company recognizes as revenue is determined based on the facts and circumstances of each client arrangement.
Evidence of an arrangement consists of a signed client agreement. The Company considers that delivery of a solution has commenced once it provides the client
with log-in information to access and use the solution. If non-standard acceptance periods or non-standard performance criteria exist, revenue recognition
commences upon the satisfaction of the non-standard acceptance or performance criteria, as applicable. Standard acceptance or performance clauses relate to the
Company’s solutions meeting certain perfunctory operating thresholds. Fees are fixed based on stated rates specified in the client agreement. If collectability is not
considered reasonably assured, revenue is deferred until the fees are collected. The majority of client arrangements include multiple deliverables, such as
subscriptions to the Company’s software solutions and consulting services. The Company therefore recognizes revenue in accordance with the guidance for
arrangements with multiple deliverables under Accounting Standards Update (“ASU”) 2009-13 “ Revenue Recognition (Topic 605)—Multiple-Deliverable
Revenue Arrangements—a Consensus of the Emerging Issues Task Force ,” or ASU 2009-13. As clients do not have the right to the underlying software code for
the solutions, the Company’s revenue arrangements are outside the scope of software revenue recognition guidance. The Company’s agreements generally do not
contain any cancellation or refund provisions other than in the event of the Company’s default.
71
For multiple-deliverable revenue arrangements, the Company first assesses whether each deliverable has value to the client on a standalone basis. The
Company has determined that the solutions have standalone value, because, once access is given to a client, the solutions are fully functional and do not require
any additional development, modification or customization. Consulting services have standalone value because third-party service providers, distributors or clients
themselves can perform these services without the Company’s involvement. The consulting services assist clients with the configuration and integration of the
Company’s solutions. The performance of these services generally does not require highly specialized or skilled individuals and are not essential to the
functionality of the solutions.
Based on the standalone value of the deliverables, and since clients do not have a general right of return relative to the included consulting services, the
Company allocates revenue among the separate deliverables in an arrangement under the relative selling price method using the selling price hierarchy established
in ASU 2009-13. This hierarchy requires the selling price of each deliverable in a multiple deliverable arrangement to be based on, in descending order: (i) vendor-
specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of fair value (“TPE”) or (iii) management’s best estimate of the selling price
(“BESP”).
The Company is generally not able to determine VSOE or TPE for its deliverables, because the deliverables are sold separately and within a sufficiently
narrow price range only infrequently, and because management has determined that there are no third-party offerings reasonably comparable to the Company’s
solutions. Accordingly, the selling prices of subscriptions to the solutions and consulting services is based on BESP. The determination of BESP requires the
Company to make significant estimates and judgments. The Company considers numerous factors, including the nature of the deliverables themselves; the
geography, market conditions and competitive landscape for the sale; internal costs; and pricing and discounting practices. The determination of BESP is made
through consultation with senior management. The Company updates its estimates of BESP on an ongoing basis as events and as circumstances may require.
After the contract value is allocated to each deliverable in a multiple deliverable arrangement based on the relative selling price method, revenue is
recognized for each deliverable based on the pattern in which the revenue is earned. For subscriptions to the solutions, revenue is recognized on a straight-line
basis over the subscription term, which is typically three years. For consulting services, revenue is recognized using the proportional performance method over the
period the services are performed. For e-learning content and hosting, revenue is recognized ratably over the period the content is delivered or hosting service is
provided.
In a limited number of cases, the client’s intended use of a solution requires enhancements to its underlying features and functionality. In some of these
cases, revenue is recognized as one unit of accounting on a straight-line basis from the point at which the enhancements have been made to the solution, through
the remaining term of the agreement. In other cases where the enhancement is not required for the client’s intended use, revenue is recognized separately for the
enhancement and the solution. The enhancement revenue is recognized based on the allocated value on a straight-line basis once the enhancement has been made
to the solution.
For arrangements in which the Company resells third-party e-learning training content to clients or hosts client or third-party e-learning training content
provided by the client, revenue is recognized in accordance with accounting guidance as to when to report gross revenue as a principal or report net revenue as an
agent. The Company recognizes third-party content revenue at the gross amount invoiced to clients when (i) the Company is the primary obligor, (ii) the Company
has latitude to establish the price charged, and (iii) the Company bears the credit risk in the transaction. For arrangements involving the sale of third-party content,
clients are charged for the content based on pay-per-use or a fixed rate for a specified number of users, and revenue is recognized at the gross amount invoiced as
the content is delivered. For arrangements where clients purchase third-party content directly from a third-party vendor, or provide it themselves, and the Company
integrates the content into a solution, the Company charges a fee per user or fee based on estimated bandwidth. In such cases, the fees are recognized at the net
amount charged by the Company for hosting services as the content is delivered.
The Company records amounts that have been invoiced to its clients in accounts receivable and in either deferred revenue or revenue depending on whether
the revenue recognition criteria described above have been met. Deferred revenue that will be recognized during the succeeding twelve month period from the
respective balance sheet date is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
72
Cost of Revenue
Cost of revenue consists primarily of costs related to hosting the Company’s solutions; personnel and related expenses, including stock-based compensation,
and related expenses for network infrastructure, IT support, consulting services and on-going client support staff; payments to external service providers;
amortization of capitalized software costs, developed technology and licensing fees; and referral fees. In addition, the Company allocates a portion of overhead,
such as rent, IT costs, depreciation and amortization and employee benefits costs, to cost of revenue based on headcount. Costs associated with providing
consulting services are recognized as incurred when the services are performed. Out-of-pocket travel costs related to the delivery of professional services are
typically reimbursed by the client and are accounted for as both revenue and expense in the period in which the cost is incurred.
Commission Payments
The Company defers commissions paid to its sales force and related payroll taxes because these amounts are recoverable from the future revenue from the
non-cancelable client agreements that gave rise to the commissions. Commissions are deferred on the balance sheet and are recognized as sales and marketing
expense over the term of the client agreement in proportion to the revenue that is recognized. Commissions are considered direct and incremental costs to client
agreements and the Company generally commences payment of commissions within 45 to 75 days after execution of client agreements.
During the years ended December 31, 2015 , 2014 , and 2013 , the Company deferred $42.0 million , $31.7 million and $22.8 million , respectively, of
commissions on the balance sheet. During the years ended December 31, 2015 , 2014 and 2013 , the Company recognized $32.3 million , $22.1 million and $15.5
million in commissions expense to sales and marketing expense, respectively. As of December 31, 2015 and 2014 , deferred commissions on the Company’s
consolidated balance sheets totaled $35.9 million and $26.2 million , respectively.
Research & Development
Research and development expenses consist primarily of personnel and related expenses for the Company’s 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
expenses, other than software development costs qualifying for capitalization, are expensed as incurred. The Company’s research and development expenses were
$41.0 million in 2015 , $30.6 million in 2014 and $21.3 million in 2013 .
Advertising
Advertising expenses for 2015 , 2014 , and 2013 were $5.4 million , $3.7 million , and $2.0 million , respectively, and are expensed as incurred.
Stock-Based Compensation
The Company accounts for stock-based compensation awards granted to employees and directors by recording compensation expense based on the awards’
estimated fair value. The Company estimates the fair value of its restricted stock units based on the closing price of its common stock as of the date of grant. The
Company estimates the fair value of its stock options as of the date of grant using the Black-Scholes option-pricing model. The resulting fair value, net of estimated
forfeitures, is recognized over the period during which an employee is required to provide service in exchange for the award, the vesting period, which is generally
four years. The Company recognizes the fair value of stock-based compensation for awards which contain only service conditions on a straight-line basis over the
vesting period of the awards.
The Black-Scholes option pricing model requires assumptions, estimated volatility, risk-free rate, expected term and estimated dividend yield. The
assumptions used in calculating the fair value of stock options represents the Company’s best estimates, based on management judgment. The Company uses the
average volatility of similar publicly traded companies as an estimate for estimated volatility. The Company determines the expected term of awards which contain
only service conditions using the simplified approach, in which the expected term of an award is presumed to be the mid-point between the vesting date and the
expiration date of the award, as the Company does not have sufficient historical data relating to stock-option exercises. For awards granted which contain
performance conditions the Company estimates the expected term based on estimates of post-vesting employment termination behavior taking into account the life
of the award. The risk-free interest rate for periods within the expected or contractual life of the option, as applicable, is based on the United States Treasury yield
curve in effect during the period the options were granted. The estimated dividend yield is zero, as the Company has not declared, and does not currently intend to
declare, dividends in the foreseeable future.
73
The following information represents the weighted average of the assumptions used in the Black-Scholes option-pricing model for stock options:
Risk-free interest rate
Expected term (in years)
Estimated dividend yield
Estimated volatility
For the Years Ended December 31,
2015
2014
2013
1.8%
6.0
—%
41.8%
1.9%
6.0
—%
49.9%
1.5%
6.0
—%
51.5%
The Company recognizes the fair value of stock-based compensation for awards which contain performance conditions based upon the probability of the
performance conditions being met, net of estimated forfeitures, using the graded vesting method. Estimated forfeitures are based upon the Company’s historical
experience and the Company revises its estimates, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.
The Company estimates the fair value of its performance-based restricted stock units, which include a market-based condition such as performance of the
Company’s stock, using a Monte Carlo simulation model that factors in the probability of the award vesting. The Company recognizes the fair value of stock-based
compensation for awards which contain market-based conditions using the graded vesting method regardless of whether the award actually vests. For performance-
based awards, the fair value is not determined until all of the terms and conditions are established.
The Company accounts for stock-based compensation for its 2010 Employee Stock Purchase Plan (“ESPP”) by recording compensation expense based on
the awards’ estimated fair value. The fair value of each stock purchase right granted under the ESPP was estimated on the date of grant using the Black-Scholes
option-pricing model and this value is recognized on a straight-line basis over the offering period.
The following information represents the weighted average of the assumptions used in the Black-Scholes option-pricing model for ESPP:
Risk-free interest rate
Expected term (in years)
Estimated dividend yield
Estimated volatility
For the Years Ended December 31,
2015
2014
2013
0.3%
0.5
—%
33.5%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Due to the full valuation allowance provided on its net deferred tax assets, the Company has not recorded any significant tax benefit attributable to stock-
based compensation expense as of December 31, 2015 and 2014 .
Capitalized Software Costs
The Company capitalizes the costs associated with software developed or obtained for internal use, including costs incurred in connection with the
development of its solutions, when the preliminary project stage is completed, management has decided to make the project a part of its 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 and who devote time to 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 and enhancements to the solutions 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 an estimated useful life
of the software of three years , commencing when the software is ready for its intended use. The Company does not transfer ownership of, or lease its software to
its clients.
During the years ended December 31, 2015 , 2014 and 2013 , the Company capitalized $16.5 million , $11.4 million and $7.9 million , respectively, of
software development costs to the balance sheet. During the years ended December 31, 2015 , 2014 and 2013 , the Company amortized $9.1 million , $6.3 million
and $4.3 million to cost of revenue, respectively. Based on the Company’s capitalized software costs at December 31, 2015 , estimated amortization expense of
$10.9 million , $8.0 million , $4.0 million and $0.2 million is expected to be recognized in 2016 , 2017 , 2018 and 2019 , respectively.
74
Comprehensive Loss
Comprehensive loss encompasses all changes in equity other than those arising from transactions with stockholders, and consists of net loss, currency
translation adjustments and unrealized gains or losses on investments. For the years ended December 31, 2015 , 2014 and 2013 , accumulated other comprehensive
income (loss) comprised a cumulative translation adjustment and also included net unrealized gains (losses) on investments.
Income Taxes
The Company uses 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 bases
differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In
determining the need for valuation allowances, the Company considers projected future taxable income and the availability of tax planning strategies. The
Company has recorded a full valuation allowance to reduce its United States, United Kingdom, New Zealand, Hong Kong and Brazil net deferred tax assets to
zero, as it has determined that it is not more likely than not that these deferred tax assets will be realized.
The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon its evaluation of the facts,
circumstances and information available at each period end. For those tax positions where the Company has determined there is a greater than 50% likelihood that
a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. For those income tax positions where it is determined there is less than 50% likelihood that a tax
benefit will be sustained, no tax benefit has been recognized.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and
so near their maturity that they present insignificant risk of changes in value, including investments with original or remaining maturities from the date of purchase
of three months or less. At December 31, 2015 and 2014 , cash and cash equivalents consisted of cash balances of $45.7 million and $76.0 million , respectively,
and money market funds backed by United States Treasury securities of $62.0 million and $90.6 million , respectively.
Investments in Marketable Securities
The Company’s available-for-sale investments in marketable securities are recorded at fair value, with any unrealized gains and losses, net of taxes, reported
as a component of stockholders’ equity until realized or until a determination is made that an other-than-temporary decline in market value has occurred. If the
Company determines that an other-than-temporary decline has occurred for debt securities that the Company does not then currently intend to sell, the Company
recognizes the credit loss component of an other-than-temporary impairment in other income (expense) and the remaining portion in other comprehensive income
(loss). The credit loss component is identified as the amount of the present value of cash flows not expected to be received over the remaining term of the security,
based on cash flow projections. In determining whether an other-than-temporary impairment exists, the Company considers: (i) the length of time and the extent to
which the fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer of the securities; and (iii) the Company’s intent and
ability to retain the security for a period of time sufficient to allow for any anticipated recovery in fair value. The cost of marketable securities sold is determined
based on the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of interest income or expense.
In addition, the Company classifies marketable securities as current or non-current based upon the maturity dates of the securities. At December 31, 2015 and 2014
, the Company had $199.5 million and $119.2 million , respectively, of investments in marketable securities.
75
Strategic Investments
In December 2015, the Company invested an aggregate of $0.3 million in equity securities of two privately-held companies. In July 2015, the Company
invested $0.2 million in equity securities of a privately-held company, and agreed to invest an additional $0.3 million in equity securities of such privately-held
company upon achievement of certain milestones. In May 2015, the Company invested $0.5 million in equity securities of a privately-held company. In
September 2014, the Company invested $0.4 million in equity securities of a privately-held company. The Company accounted for each of these investment using
the cost method of accounting, as we do not have significant influence or a controlling financial interest over these entities. These investments are subject to
periodic impairment reviews and are considered to be impaired when a decline in fair value is judged to be other-than-temporary. These investments are included
in long-term investments on the Consolidated Balance Sheets.
In June 2014, the Company invested $0.5 million in a debt security of a privately-held company. The Company accounted for this debt security as an
available-for-sale investment at fair value, and elected to record any changes in value in other income (expense) in the accompanying Consolidated Statement of
Operations. As of December 31, 2015 , the Company estimated the fair value of its investment in the debt security to be $0.2 million based upon the probability-
weighted present value under various possible future event scenarios, taking into account the likelihood and timing of such events. This investment is included in
short-term investments on the Consolidated Balance Sheets.
Restricted Cash
Included in current and non-current other assets at December 31, 2015 and 2014 were restricted cash of $0.1 million and $0.1 million , respectively, in
relation to a standby letter of credit in British Pounds for a foreign sales arrangement with a customer in the United Kingdom.
Allowance for Doubtful Accounts
The Company bases its allowance for doubtful accounts on its historical collection experience and a review in each period of the status of the then-
outstanding accounts receivable.
A reconciliation of the beginning and ending amount of allowance for doubtful accounts for the years ended December 31, 2015 , 2014 and 2013 , is as
follows (in thousands):
Beginning balance, January 1
Additions and adjustments
Write-offs
Ending balance, December 31
Property and Equipment, Net
2015
2014
2013
2,177 $
1,021 $
1,368
(967)
2,084
(928)
2,578 $
2,177 $
464
968
(411)
1,021
$
$
Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line
method based upon the estimated useful lives of the assets, generally two to seven years (See Note 7 ).
The Company leases equipment under capital lease arrangements. The assets and liabilities under capital lease are recorded at the lesser of the present value
of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the asset under lease. Assets under capital lease are
depreciated using the straight-line method over the lesser of the estimated useful life of the asset or the term of the lease.
Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or lease terms. Repair and maintenance costs
are charged to expense as incurred, while renewals and improvements are capitalized.
Impairment of Long Lived Assets
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. Such triggering events or changes in circumstances may include: a significant
decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, a significant
adverse change in legal factors or in the business climate, the impact of competition or other factors that could affect the value of a long-lived asset, a significant
adverse deterioration in the amount of revenue or cash flows expected to be generated from an asset group,
76
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future
operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a
long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company performs impairment testing
at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If
events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows
attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair
value is recorded. Fair value is determined based upon estimated undiscounted future cash flows. There were no impairment charges related to identifiable long
lived assets in the years ended December 31, 2015 and 2014 .
Intangible Assets
Identifiable intangible assets primarily consist of trade names and intellectual property and acquisition-related intangibles, including developed technology,
customer relationships, non-compete agreements, trade names and trademarks. The Company determines the appropriate useful life of its intangible assets by
performing an analysis of expected cash flows of the acquired assets. Intangible assets are amortized over their estimated useful lives ranging from two to ten
years, generally using the straight line method which approximates the pattern in which the economic benefits are consumed.
Goodwill
Goodwill is not amortized, but instead is required to be tested for impairment annually and under certain circumstances. The Company performs such testing
of goodwill in the fourth quarter of each year, or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. Events or changes in circumstances which could trigger an impairment review include a significant adverse change in legal factors or in
the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the
Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends, or significant
underperformance relative to expected historical or projected future results of operations.
As part of the annual impairment test, the Company may conduct an assessment of qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If the Company elects not to perform the qualitative assessment or it determines that it is more likely
than not that the fair value of a reporting unit is less than its carrying amount, it then conducts the first step of a two-step impairment test. The first step of the test
for goodwill impairment compares the fair value of the applicable reporting unit with its carrying value. Fair value was determined using a market approach, which
includes consideration of the Company’s own market capitalization.
If the fair value of a reporting unit is less than the reporting unit’s carrying value, the Company performs the second step of the test for impairment of
goodwill in which the Company compares the implied fair value of the reporting unit’s goodwill with the carrying value of that goodwill. The estimate of implied
fair value of goodwill may require valuations of certain internally generated and unrecognized intangible assets and other assets and liabilities. If the carrying value
of the goodwill exceeds the calculated implied fair value, the excess amount will be recognized as an impairment loss. Based on the results of the annual
impairment test, no impairment of goodwill existed at December 31, 2015 .
Senior Convertible Notes
In accounting for senior convertible notes (the “Notes”) at issuance, the Company separated the Notes into debt and equity components pursuant to the
accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The fair value of the debt component was
estimated using an interest rate, with terms similar to the Notes, excluding the conversion feature. The carrying amount of the liability component was calculated
by measuring the fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amount of the Notes over the fair
value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to interest
expense over the term of the Notes using the interest method. The amount recorded to additional paid-in capital is not to be remeasured as long as it continues to
meet the conditions for equity classification.
77
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. 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.
Observable inputs are based on market data obtained from independent sources.
Concentration of Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents, restricted cash, and
accounts receivable. The Company’s cash and cash equivalents are deposited with several financial institutions and, at times, may exceed federally insured limits,
as applicable. The Company performs ongoing credit evaluations of its clients.
For the years ended December 31, 2015 , 2014 and 2013 , no single client comprised more than 10% of the Company’s revenue. No single client had an
accounts receivable balance greater than 10% of total accounts receivable at December 31, 2015 or 2014 .
Foreign Currency Transactions and Translation
Transactions in foreign currencies are translated into U.S. Dollars at the rates of exchange in effect at the date of the transaction. Unrealized transaction
(losses) gains were approximately $(0.9) million , $(1.7) million and $(0.3) million for the years ended December 31, 2015 , 2014 and 2013 , respectively, and are
included in other, net within other income (expense), net, in the accompanying consolidated statements of operations.
The Company has entities in various countries. For entities where the local currency is different than the functional currency, the local currency financial
statements have been remeasured from the local currency into the functional currency using the current exchange rate for monetary accounts and historical
exchange rates for nonmonetary accounts, with exchange differences on remeasurement included in other income (loss). To the extent that the functional currency
is different than the U.S Dollar, the financial statements have then been translated into U.S. Dollars using period-end exchanges rates for assets and liabilities and
average exchanges rates for the results of operations. Foreign currency translation gains and losses are included as a component of Accumulated other
comprehensive income or loss in the Consolidated Balance Sheets.
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued a new accounting standards update which eliminates the current requirement
to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax
assets and liabilities as noncurrent. This guidance will be effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal
years. The Company early adopted the new guidance retroactively in the year ended December 31, 2015. The adoption of this guidance did not have a significant
impact on the Company’s disclosures or the results of operations or financial position.
In April 2015, the FASB issued a new accounting standards update that provides additional guidance to customers about whether a cloud computing
arrangement includes a software license. The guidance will be effective for reporting periods beginning after December 15, 2015 and interim periods within those
fiscal years. The Company does not anticipate that the adoption of this guidance will have a significant impact on its results of operations or financial position.
In April 2015, the FASB issued a new accounting standards update to simplify presentation of debt issuance costs, which requires that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt
discounts. The guidance will be effective for reporting periods beginning after December 15, 2015 and interim periods within those fiscal years. The Company
does not anticipate that the adoption of this guidance will have a significant impact on its results of operations or financial position.
78
In February 2015, the FASB issued a new accounting standards update amending the consolidation guidance for Variable Interest Entities, which could
change consolidation conclusions. The new standard is effective for reporting periods beginning after December 15, 2015. The Company early adopted the new
guidance in the year ended December 31, 2015. The adoption of this guidance did not have a significant impact on the Company’s disclosures and the results of
operations or financial position.
In May 2014, the FASB issued a new accounting standards update that provides principles for recognizing revenue for the transfer of promised goods or
services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a
one-year deferral of the effective date for the new standard. As a result, the guidance will be effective for reporting periods beginning after December 15, 2017.
Early adoption is permitted beginning January 1, 2017. The Company is currently evaluating the accounting, transition and disclosure requirements of the standard
and cannot currently estimate the financial statement impact of adoption.
3. BUSINESS ACQUISITION
2014 Business Acquisition
On November 3, 2014, the Company completed the acquisition of Evolv Inc., (“Evolv”), a San Francisco based SaaS company. Evolv’s platform has been
developed with big data architecture and machine learning algorithms to perform predictive and prescriptive analytics and has broad data capturing capabilities that
are used to help companies solve workforce management challenges. The acquisition was completed pursuant to a merger whereby Evolv became a wholly owned
subsidiary of the Company. In connection with the merger, the Company paid total purchase consideration of approximately $43.4 million .
The acquisition has been accounted for under the acquisition method of accounting in accordance with the FASB’s Accounting Standards Codification
(“ASC”) Topic 805, Business Combinations . As such, the Evolv assets acquired and liabilities assumed are recorded at their acquisition-date fair values.
Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an expense in the period in which the
costs are incurred. Any excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed is allocated to goodwill, which is not
deductible for tax purposes. Goodwill is attributable primarily to expected synergies and other benefits, including the acquired workforce, from combining Evolv
with the Company. The Company acquired Evolv to allow clients to leverage the power of big data analytics to make better workforce decisions.
The Company’s allocation of the total purchase consideration as of November 3, 2014 is summarized below (in thousands):
Cash and cash equivalents
Account receivables
Prepaid expenses and other current assets
Property and equipment
Intangibles - Developed technology
Goodwill
Total assets acquired
Accounts payable
Accrued expenses
Deferred revenue
Total liabilities assumed
Total purchase price
The developed technology is being amortized on a straight-line basis over 3 years.
79
$
$
107
979
194
77
26,184
17,701
45,242
712
619
477
1,808
43,434
Unaudited Pro Forma Financial Information
The following table reflects the unaudited pro forma consolidated results of operations as if the Evolv acquisition had taken place on January 1, 2013, after
giving effect to certain adjustments including the amortization of acquired intangible assets and the elimination of the Company’s and Evolv’s non-recurring
acquisition-related expenses (in thousands):
Revenue
Net loss
For the Years Ended
December 31,
2014
2013
Pro Forma
Pro Forma
$
$
268,771 $
(85,521) $
190,551
(64,474)
The unaudited pro forma information presented does not purport to be indicative of the results that would have been achieved had the acquisition been
consummated as of January 1, 2013 nor of the results which may occur in the future. The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The unaudited pro forma information does not include any adjustments for any restructuring activities,
operating efficiencies or cost savings.
4.
NET LOSS PER SHARE
The following table presents the basic and diluted loss per share (in thousands, except per share amounts):
Net loss
Weighted-average shares of common stock outstanding
Net loss per share — basic and diluted
For the Years Ended December 31,
2015
2014
2013
$
$
(85,516) $
54,171
(1.58) $
(64,899) $
53,267
(1.22) $
(40,426)
51,427
(0.79)
The following table presents the number of anti-dilutive shares excluded from the calculation of diluted net loss per share (in thousands):
Options to purchase common stock and restricted stock units
Shares issuable pursuant to employee stock purchase plan
Convertible notes
Common stock warrants
Other restricted common stock
Total shares excluded from net loss per share
2015
December 31,
2014
2013
10,860
77
4,682
4,682
—
20,301
8,554
—
4,682
4,682
—
17,918
7,730
—
4,682
4,682
12
17,106
Under the treasury stock method, the convertible notes and common stock warrants will have a dilutive impact on net earnings per share when the average
stock price for the period exceeds the respective conversion prices and the Company has net income. The Company also entered into note hedge transactions
(“Note Hedges”) in connection with the convertible notes with respect to its common stock to minimize the impact of potential economic dilution upon conversion
of the convertible notes. The Note Hedges were outstanding as of December 31, 2015 . Since the beneficial impact of the Note Hedges were anti-dilutive, they
were excluded from the calculation of diluted net income (loss) per share. See Note 9 of the Notes to Consolidated Financial Statements.
5. INVESTMENTS
The Company’s investments in available-for-sale 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 principle objective of capital preservation and maintaining liquidity that is
sufficient to meet cash flow requirements.
80
The following is a summary of investments in marketable securities, including cash equivalents, as of December 31, 2015 and 2014 (in thousands):
Money market funds
Corporate bonds
Agency bonds
U.S. treasury securities
Money market funds
Corporate bonds
Agency bonds
U.S. treasury securities
Amortized Cost
Basis
Unrealized Gains
Unrealized Losses
Fair Value
December 31, 2015
61,986 $
56,205
85,572
58,004
261,767 $
— $
3
—
2
— $
(99)
(111)
(98)
61,986
56,109
85,461
57,908
5 $
(308) $
261,464
Amortized Cost
Basis
Unrealized Gains
Unrealized Losses
Fair Value
December 31, 2014
90,569 $
43,031
64,210
12,000
209,810 $
— $
—
1
—
1 $
— $
(42)
(15)
(1)
90,569
42,989
64,196
11,999
(58)
$
209,753
$
$
$
$
As of December 31, 2015 , the Company’s investment in corporate bonds, agency bonds and U.S. treasury securities had a weighted-average maturity date of
approximately eight months . Unrealized gains and losses on investments were not significant, and the Company does not believe the unrealized losses represent
other-than-temporary impairments as of December 31, 2015 . No marketable securities held have been in a continuous unrealized loss position for more than 12
months as of December 31, 2015 .
Strategic Investments
In December 2015, the Company invested an aggregate of $0.3 million in equity securities of two privately-held companies. In July 2015, the Company
invested $0.2 million in equity securities of a privately-held company, and agreed to invest an additional $0.3 million in equity securities of such privately-held
company upon achievement of certain milestones. In May 2015, the Company invested $0.5 million in equity securities of a privately-held company. In
September 2014, the Company invested $0.4 million in equity securities of a privately-held company. The Company accounted for each of these investments using
the cost method of accounting, as the Company does not have significant influence or a controlling financial interest over these entities. These investments are
subject to periodic impairment reviews and are considered to be impaired when a decline in fair value is judged to be other-than-temporary. As of December 31,
2015 , the Company determined there were no impairments of these investments.
In June 2014, the Company invested $0.5 million in a debt security of a privately-held company. The Company accounted for this debt security as an
available-for-sale security at fair value, which was determined to be $0.2 million as of December 31, 2015 .
81
6. GOODWILL AND INTANGIBLE ASSETS
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 as of December 31, 2015 and 2014 (in thousands):
Developed technology
Customer relationships
Software license rights
Total
December 31, 2015
December 31, 2014
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
29,984 $
(13,732) $
16,252 $
29,984 $
(4,054) $
25,930
2,400
1,654
(2,242)
(1,351)
158
303
2,400
1,654
(1,642)
(1,060)
758
594
34,038 $
(17,325) $
16,713 $
34,038 $
(6,756) $
27,282
In November 2014, the Company recorded additional finite-lived intangible assets totaling $26.2 million , related to developed technology from the
acquisition of Evolv (see Note 3 ).
Total amortization expense from finite-lived intangible assets were $10.6 million , $3.5 million and $2.3 million for the years ended December 31, 2015 ,
2014 and 2013 , respectively. Amortization expense of $10.0 million , $2.7 million and $1.3 million for the years ended December 31, 2015 , 2014 and 2013 ,
respectively, related to developed technology and software license rights was recorded in cost of revenue and the remainder in “Amortization of certain acquired
intangible assets” in the accompanying Consolidated Statements of Operations.
The following table presents the Company’s estimate of remaining amortization expense for finite-lived intangible assets that existed at December 31, 2015
(in thousands):
2016
2017
Total
$
$
9,282
7,431
16,713
Estimated remaining amortization expense of $9.1 million and $7.4 million , will be recorded in cost of revenue for 2016 and 2017 , respectively. The
remaining estimated amortization expense will be recorded in amortization of acquired intangible assets within operating expenses.
Goodwill
The following table presents the changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2014 (in thousands):
Goodwill as of December 31, 2013
Goodwill from Evolv acquisition
Goodwill as of December 31, 2014
Adjustments
Goodwill as of December 31, 2015
82
$
$
$
8,193
17,701
25,894
—
25,894
7.
OTHER BALANCE SHEET AMOUNTS
The balance of property and equipment, net is as follows (in thousands):
Computer equipment and software
Furniture and fixtures
Leasehold improvements
Renovation in progress
Less: accumulated depreciation and amortization
Total property and equipment, net
Useful Life
2015
2014
December 31,
2 – 5 years $
7 years
2 – 6 years
n/a
$
26,870 $
3,648
9,972
179
40,669
(13,648)
27,021 $
Depreciation expense for the years ended December 31, 2015 , 2014 and 2013 was $7.6 million , $5.2 million , $3.2 million , respectively.
The balance of accrued expenses is as follows (in thousands):
Accrued bonuses
Accrued commissions
Other accrued expenses
Total accrued expenses
December 31,
2015
2014
$
$
11,402 $
13,619
19,090
44,111 $
22,352
2,910
8,453
703
34,418
(12,994)
21,424
7,811
10,088
11,577
29,476
8.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets and liabilities measured at fair value on a recurring basis include the following as of December 31, 2015 and 2014 (in thousands):
Cash equivalents
Corporate bonds
Agency bonds
U.S. treasury securities
Strategic investments
December 31, 2015
December 31, 2014
Fair Value
Level 1
Level 2
Level 3
Fair Value
Level 1
Level 2
Level 3
$
61,986 $
61,986 $
— $
— $
90,569 $
90,569 $
— $
56,109
85,461
57,908
150
—
—
—
—
56,109
85,461
57,908
—
—
—
—
150
42,989
64,196
11,999
500
—
—
—
—
42,989
64,196
11,999
—
$
261,614 $
61,986 $
199,478 $
150 $
210,253 $
90,569 $
119,184 $
—
—
—
—
500
500
The Company’s cash equivalents at December 31, 2015 and 2014 consisted of money market funds backed by U.S. Treasury securities. Cash equivalents are
classified as Level 1.
As of December 31, 2015 , corporate bonds, agency bonds and U.S. treasury securities were classified within Level 2 of the fair value hierarchy. The bonds
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, 2015 , no adjustments were made to such pricing information.
Strategic Investments
The Company’s investments in privately-held companies are shown in the accompanying Consolidated Balance Sheets in short-term investments and
accompanying Consolidated Statements of Cash Flows in purchases of investments. The investment in debt securities is considered Level 3 in the fair value
hierarchy as it has been valued using significant unobservable inputs or data from various valuation approaches and is measured each reporting period at fair value.
83
The following table presents a reconciliation of the investment in debt securities measured at fair value using significant unobservable inputs (Level 3) as of
December 31, 2015 (in thousands):
Balance as of December 31, 2014
Fair value adjustment
Balance as of December 31, 2015
Senior Convertible Notes
$
$
500
(350)
150
The Company’s senior convertible notes are shown in the accompanying Consolidated Balance Sheets at their original issuance value, net of unamortized
discount, and are not re-measured to fair value each period. The approximate fair value of the Company’s convertible notes as of December 31, 2015 was $250.5
million . The fair value of the convertible notes was estimated on the basis of quoted market prices, which, due to limited trading activity, are considered Level 2 in
the fair value hierarchy.
9.
DEBT AND OTHER FINANCING ARRANGEMENTS
Senior Convertible Notes
In 2013, the Company issued senior convertible notes (the “Notes”) raising gross proceeds of $253.0 million .
The Notes are governed by an Indenture, dated June 17, 2013 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The
Notes mature on July 1, 2018, unless earlier repurchased or converted, and bear interest at a rate of 1.50% per year payable semi-annually in arrears on January 1
and July 1 of each year, commencing January 1, 2014.
The Notes are convertible at an initial conversion rate of 18.5046 shares of the Company’s common stock per $1,000 principal amount of Notes, which
represents an initial conversion price of approximately $54.04 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 and
a liquidation of the Company. Upon conversion, the Company will deliver cash for the principal amount, and the Company has the right to settle any amounts in
excess of the principal in cash or shares.
Prior to April 1, 2018, the Notes are only convertible upon satisfaction of certain conditions as follows:
•
•
•
during any calendar quarter after September 30, 2013, if the last reported sale price of common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is
greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the
Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of
common stock and the conversion rate on each such trading day; or
upon the occurrence of specified corporate events as defined in the Indenture.
Holders of the Notes may convert their Notes at any time on or after April 1, 2018, until the close of business on the second scheduled trading day
immediately preceding the maturity date.
The holders of the Notes may require the Company to repurchase all or a portion of their Notes at a cash repurchase price equal to 100% of the principal
amount of the Notes being repurchased, plus accrued and unpaid interest, upon a fundamental change and events of default, including non-payment of interest or
principal and other obligations under the Indenture.
84
In accounting for the Notes at issuance, the Company separated the Notes into debt and equity components pursuant to the accounting standards for
convertible debt instruments that may be fully or partially settled in cash upon conversion. The fair value of the debt component was estimated using an interest
rate for nonconvertible debt, with terms similar to the Notes, excluding the conversion feature. The carrying amount of the liability component was calculated by
measuring the fair value of a similar liability that does not have an associated convertible feature. The excess of the principal amount of the Notes over the fair
value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to interest
expense over the term of the Notes using the interest method. The amount recorded to additional paid-in capital is not to be remeasured as long as it continues to
meet the conditions for equity classification. Upon issuance of the $253.0 million of Notes, the Company recorded $214.3 million to debt and $38.7 million to
additional paid-in capital for the debt discount.
The Company incurred transaction costs of approximately $7.3 million related to the issuance of the Notes. In accounting for these costs, the Company
allocated the costs to the debt and equity components in proportion to the allocation of proceeds from the issuance of the Notes to such components. Transaction
costs allocated to the debt component of $6.2 million are deferred as an asset and amortized to interest expense over the term of the Notes. The transaction costs
allocated to the equity component of $1.1 million were recorded to additional paid-in capital. The transaction costs allocated to the debt component were recorded
as deferred offering costs in other noncurrent assets.
The net carrying amount of the liability component of the Notes as of December 31, 2015 consists of the following (in thousands):
Principal amount
Unamortized debt discount
Net carrying value
$
$
253,000
(20,417)
232,583
The following table presents the interest expense recognized related to the Notes for years ended December 31, 2015 , 2014 and 2013 (in thousands):
Contractual interest expense at 1.5% per annum
Amortization of debt issuance costs
Accretion of debt discount
Total
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Year Ended
December 31,
2013
$
$
3,795 $
1,202
7,489
12,486 $
3,795 $
1,145
7,129
12,069 $
2,045
591
3,681
6,317
The net proceeds from the Notes were approximately $246.0 million after payment of the initial purchasers' offering expenses. The Company used
approximately $49.5 million of the net proceeds of the Notes offering to pay the cost of the Note Hedges described below, which was partially offset by $23.2
million of the proceeds from the Company's sale of the Warrants also described below.
Note Hedges
Concurrent with the issuance of the Notes, the Company entered into note hedges (the “Note Hedges”) with certain bank counterparties, with respect to its
common stock. The Company paid $49.5 million for the Note Hedges. The Note Hedges cover approximately 4.7 million shares of the Company's common
stock at a strike price of $54.04 per share, and are exercisable by the Company upon conversion of the Notes. The Note Hedges will expire upon the maturity of
the Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the Notes in the event that the fair value per share of the
Company's common stock at the time of exercise is greater than the conversion price of the Notes.
Warrants
Separately and concurrently with the entry by the Company into the Note Hedges, the Company entered into warrant transactions, whereby it sold warrants
to the same bank counterparties as the Note Hedges to acquire up to 4.7 million shares of the Company's common stock at a strike price of $80.06 per share
(“Warrants”), subject to anti-dilution adjustments. The Company received proceeds of $23.2 million from the sale of the Warrants. The Warrants expire at various
dates during 2018 and 2019. If the fair value per share of the Company's common stock exceeds the strike price of the Warrants, the Warrants will reduce diluted
earnings per share to the extent that the calculation does not have an anti-dilutive effect.
85
The amounts paid and received for the Note Hedges and the Warrants have been recorded in additional paid-in capital. The fair value of the Note Hedges and
the Warrants are not remeasured through earnings each reporting period.
Other Debt Arrangements
The Company has entered into other debt arrangements with finance companies to finance the purchase of property, equipment and software. As of
December 31, 2015 , there were no amounts outstanding under these arrangements. As of December 31, 2014, total amounts outstanding under these arrangements
were $0.4 million . Principal and interest was generally due monthly, through 2015. The weighted-average interest rate on borrowings for the year ended
December 31, 2014 was 6.9% .
The estimated fair value of the Company’s debt was $0.4 million at December 31, 2014 . The fair value was estimated based on discounted cash flow
analyses using appropriate current discount rates, taking into consideration the particular terms of the borrowing agreements, at the end of the respective periods.
These estimates involve considerable judgment and changes in those assumptions could significantly affect the estimates.
Although the Company has determined the estimated fair value amount using commonly accepted valuation methodologies, judgment is required in
interpreting market data to develop the estimate of fair value. Accordingly, the estimates are not necessarily indicative of the amount the Company, or holders of
the instruments, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a material effect on the
estimated fair value. The fair value estimate is based on information available as of December 31, 2014 . This amount has not been revalued since that date, and
current estimates of fair value could differ significantly from the amount presented.
10.
CAPITALIZATION
As of December 31, 2015 , the Company’s authorized stock consists of 1,000,000,000 shares of common stock, par value of $0.0001 per share, and
50,000,000 shares of preferred stock, par value of $0.0001 per share. No shares of preferred stock were issued or outstanding at December 31, 2015 and 2014.
11.
STOCK-BASED AWARDS
1999 and 2009 Plans
In November 1999, the Company adopted the 1999 Stock Plan (“1999 Plan”) as amended. In January 2009, the Company adopted the 2009 Plan (“2009
Plan”) as amended. Stock options granted under the 1999 and 2009 Plans may be incentive stock options or non-statutory stock options. Incentive stock options
may only be granted to employees. Stock purchase rights may also be granted under the 1999 and 2009 Plans. The Board of Directors determines the period over
which stock options become exercisable. However, except in specific cases of stock options granted to officers, directors and consultants, stock options become
exercisable at a rate of not less than 20% per year over five years from the date the stock options are granted. Options granted under the 1999 and 2009 Plans
expire ten years after the grant date and generally vest one-fourth on the first anniversary of the grant and ratably thereafter for the following thirty-six months .
The exercise price of incentive stock options and non-statutory stock options cannot be less than 100% and 85% , respectively, of the fair market value per share of
the Company’s common stock on the grant date as determined by the Company’s Board of Directors. If an individual owns stock representing more than 10% of
the outstanding shares, the price of each incentive stock option or non-statutory stock option share must be at least 110% of fair market value, as determined by the
Board of Directors. The term of the stock options is ten years except for incentive stock options granted to an individual who owns stock representing more than
10% of the outstanding shares, in which case the term of the stock options is 5 years . The Company may also grant options that are immediately exercisable upon
the Board of Directors’ approval.
At December 31, 2015 , no shares are issuable under the 1999 and 2009 Plans.
2010 Plan
In March 2011, upon the completion of the Company’s IPO, the Company adopted the 2010 Plan and determined that it will no longer grant any additional
awards under the 1999 Plan and the 2009 Plan. However, the 1999 Plan and the 2009 Plan continue to govern the terms and conditions of the outstanding awards
previously granted under each respective plan. Upon the adoption of the 2010 Plan, the maximum aggregate number of shares issuable thereunder was 3,680,480
shares, plus (i) any shares subject to stock options or similar awards granted under the 1999 Plan or 2009 Plan prior to March 16, 2011 that expire or otherwise
terminate without having been exercised in full and (ii) shares issued pursuant to awards granted under the 1999 Plan and 2009 Plan that are forfeited to or
repurchased by the Company after March 16, 2011, with the maximum number of shares to be added to the 2010 Plan from the 1999 Plan and 2009 Plan equal to
5,614,369 shares of common stock. In addition,
86
the number of shares available for issuance under the 2010 Plan will be annually increased on the first day of each fiscal year beginning with 2012, by an amount
equal to the lesser of 5,500,000 shares, 4.5% of the outstanding shares of the Company’s common stock as of the last day of the immediately preceding fiscal year,
or such other amount as the Company’s Board of Directors determines.
Shares issued pursuant to awards under the 2010 Plan that are repurchased by the Company or that expire or are forfeited, as well as shares used to pay the
exercise price of an award or to satisfy the minimum tax withholding obligations related to an award, will become available for future grant or sale under the 2010
Plan. In addition, to the extent that an award is paid out in cash rather than shares, such cash payment will not reduce the number of shares available for issuance
under the 2010 Plan.
The 2010 Plan permits the grant of incentive stock options to employees and the grant of non-statutory stock options, restricted stock, restricted stock units,
stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants.
Under the 2010 Plan, 1,534,144 shares remained available for issuance, at December 31, 2015 .
Stock Options
The exercise price of stock options granted under the 2010 Plan must equal at least the fair market value of the Company’s common stock on the date of
grant. The term of an incentive stock option may not exceed ten years ; provided, however, that an incentive stock option held by a participant who owns more than
10% of the total combined voting power of all classes of the Company’s stock, may not have a term in excess of five years and must have an exercise price of at
least 110% of the fair market value of the Company’s common stock on the grant date.
Restricted Stock Awards
The Company may grant restricted stock under the 2010 Plan. Restricted stock awards are grants of shares of the Company’s common stock that are subject
to various restrictions, including restrictions on transferability and forfeiture provisions. Recipients of restricted stock awards generally will have voting and
dividend rights with respect to such shares upon grant without regard to vesting, unless the Board of Directors provides otherwise. Shares of restricted stock that do
not vest for any reason will be forfeited by the recipient and will revert to the Company. The fair value of each share of restricted stock granted is equal to the grant
date fair market value of the Company’s common stock.
Restricted Stock Units
The Company may also grant restricted stock units under the 2010 Plan. The fair value of each restricted stock unit granted is equal to the grant date fair
market value of the Company’s common stock. The payment of restricted stock units may be in the form of cash, shares, or in a combination thereof, as determined
by the Board of Directors. During 2015 , the Company granted 2,167,544 restricted stock units under the 2010 Plan, containing service conditions.
Stock Appreciation Rights
The Company may also grant stock appreciation rights under the 2010 Plan. Stock appreciation rights allow the recipient to receive the appreciation in the
price of the Company’s common stock between the date of grant and the exercise date. The payment of stock appreciation rights may be in the form of cash,
shares, or in a combination thereof, as determined by the Board of Directors. As of December 31, 2015 , no stock appreciation rights had been granted under the
2010 Plan.
Performance Units/Performance Shares
The Company may also grant performance units and performance shares under the 2010 Plan. Performance units and performance shares are awards that will
result in a payment to a participant only if performance goals for a predetermined period, established by the Board of Directors, are achieved or the awards
otherwise vest. The fair value of each performance unit and performance share awarded is equal to the grant date fair market value of the Company’s common
stock when the performance goals are defined solely by reference to the Company’s own operations. The fair value of each performance unit and performance
award that contain performance goals tied to performance of the Company’s common stock is estimated using a Monte-Carlo simulation. The payment of
performance units and performance shares may be in the form of cash, shares, or a combination thereof, as determined by the Board of Directors.
87
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 market value of the stock at the time of grant or 85% of the fair market value at the time of exercise. The right to purchase shares is granted twice yearly for six
month offering periods in June and December and exercisable on or about the succeeding December and June, respectively, on each year. The Company
commenced its first offering period in December 2014 and the first purchase period occurred in June 2015. Under the ESPP, 2,250,832 shares remained available
for issuance, at December 31, 2015 . The Company recognized compensation expense related to the ESPP of $0.9 million for the year ended December 31, 2015 .
Stock Options
The Company has granted stock options which vest upon meeting service conditions. The following table summarizes the stock option activity which contain
only service conditions, under the Company’s 1999, 2009 and 2010 Plans (in thousands, except per share and term information):
Outstanding, December 31, 2014
Granted
Exercised
Forfeited
Outstanding, December 31, 2015
Exercisable at December 31, 2015
Vested and expected to vest at December 31, 2015
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
30.04
34.63
14.94
42.26
30.75
25.55
30.63
Aggregate
Intrinsic
Value
7.8 $
77,498
7.1
6.4
7.1 $
63,328
61,244
63,266
Shares
7,746 $
570
(565)
(487)
7,264
4,810
7,179 $
The following table summarizes information about stock options, which contain only service conditions, under the Company’s equity incentive plans at
December 31, 2015 (in thousands except term information):
Options Outstanding
at December 31, 2015
Options Exercisable
at December 31, 2015
Range of Exercise Prices
Number of Options
Weighted
Average
Remaining
Contractual
Term (in
years)
Number of Options
Weighted
Average
Remaining
Contractual
Term (in
years)
$0.34 to $1.65
$5.93 to $8.88
$12.54 to $15.41
$16.24 to $18.82
$20.85 to $23.94
$27.55 to $31.44
$32.92 to $36.15
$38.03 to $45.76
$46.20 to $56.05
300
888
398
487
749
356
1,098
1,350
1,638
7,264
3.4
4.9
5.7
6.0
6.4
7.4
8.5
8.0
8.1
7.1
300
888
398
482
671
242
340
713
776
4,810
3.4
4.9
5.7
6.0
6.4
7.0
7.3
7.9
8.0
6.4
The total intrinsic value of options exercised during the years ended December 31, 2015 , 2014 and 2013 was $11.4 million , $42.9 million , and $57.7
million , respectively. The total grant date fair value of stock options vested during the years ended December 31, 2015 , 2014 and 2013 was $32.3 million , $27.6
million , and $15.3 million , respectively. The Company recognized compensation expense related to stock options of $28.0 million , $28.8 million , and $17.2
million for the years ended December 31, 2015 , 2014 , and 2013 , respectively.
88
Unrecognized compensation expense relating to stock options was $43.7 million at December 31, 2015 which is expected to be recognized over a weighted-
average period of 2.2 years.
The aggregate grant date fair value of stock options granted for the years ended December 31, 2015 , 2014 and 2013 was $8.4 million , $48.0 million , and
$51.5 million , respectively.
Restricted Stock Units
Restricted stock unit activity for the year ended December 31, 2015 under the Company’s equity incentive plans is summarized as follows (shares in
thousands):
Nonvested shares subject to restricted stock units outstanding at December 31, 2014
Granted
Forfeited
Vested
Nonvested shares subject to restricted stock units outstanding at December 31, 2015
Number of Shares
Weighted
Average Grant Date
Fair Value
711
$
2,168
(219)
(200)
2,460
$
36.91
34.13
34.90
36.03
34.71
The Company recognized compensation expense related to restricted stock units of $15.0 million , $5.7 million and $3.4 million for the years ended
December 31, 2015 , 2014 and 2013 , respectively. Unrecognized compensation expense related to nonvested restricted stock units was $68.6 million at
December 31, 2015 , which is expected to be recognized as expense over the weighted-average period of 3.2 years.
Performance-Based Restricted Stock Units
In July 2014, the Company granted performance-based restricted stock units to an executive of the Company. The number of shares of the Company’s
common stock issuable upon the vesting of this performance-based restricted stock award is based upon (a) the performance of the Company’s stock price relative
to a certain independent market index, and (b) the recipient continuing to provide service through the end of the three year term of the award. Achievement of the
maximum performance level would result in the issuance of 60,900 shares. The Company has used a Monte Carlo simulation to estimate the fair value of this
award which factors in the probability of the award vesting. The grant date fair value of the award was $1.8 million , which will be recognized ratably over the
three year term of the award.
In December 2014, the Compensation Committee of the Company’s Board of Directors approved the issuance of performance-based restricted stock units to
certain executives of the Company. The number of shares of the Company’s common stock issuable upon the vesting of these performance-based restricted stock
unit awards is based upon (a) the performance of the Company’s stock price relative to a certain independent market index, (b) the achievement of the Company’s
revenue guidance for each of fiscal year 2015 and 2016 and (c) the recipient continuing to provide services to the Company through the end of the three year term
of the award. The Company finalizes its revenue guidance in February of each year, thus establishing a grant date for the portion of the award related to that year’s
revenue guidance. Each tranche is treated as a separate grant and recognized from the date the revenue guidance is determined over the remaining portion of the
original three year term of the award. Achievement of the maximum performance level would result in the issuance of an aggregate of 1,070,000 shares.
The Company used a Monte Carlo simulation to estimate the fair value of the portion of the awards for which a grant date has been established. The valuation
factors in the probability of achieving the performance of the Company’s stock price relative to the market index. The grant date fair value of the first half of the
award was $9.9 million . The expense recognized will depend on the Company’s performance in relation to the revenue guidance and the probable amount of
shares that will ultimately vest, which will be evaluated each reporting period. Based on the revenue for the year ended December 31, 2015 in comparison to the
original revenue guidance for 2015, the Company determined that the total expense to be recognized for the first half of the award was decreased from $9.9 million
to $5.0 million . The maximum level of shares was decreased from an aggregate of 1,070,000 shares to an aggregate of 802,500 shares, including the second half of
the award.
The Company recognized compensation expense related to these performance based awards of $1.9 million , $0.7 million and $0.3 million for the years
ended December 31, 2015 , 2014 and 2013 . Unrecognized compensation expense related to
89
nonvested performance-based restricted stock units was $4.3 million at December 31, 2015 , based on the probable performance target at that date, which is
expected to be recognized as expense over the weighted-average period of 2.0 years.
Stock-Based Compensation
Stock-based compensation expense related to stock options, restricted stock units, restricted stock awards and performance-based restricted stock units is
included in the following line items in the accompanying Consolidated Statement of Operations for the years ended December 31, 2015 , 2014 , and 2013 (in
thousands):
Cost of revenue
Sales and marketing
Research and development
General and administrative
Total
Years Ended December 31,
2015
2014
2013
3,887 $
2,669 $
23,604
6,010
9,580
18,364
3,551
9,096
43,081 $
33,680 $
2,207
9,866
2,052
6,715
20,840
$
$
In certain instances the Company is responsible for payroll taxes related to stock options exercised or the underlying shares sold by its employees. The
Company accrues its obligations at the time of the exercise of the stock options or the sale of the underlying shares.
12.
INCOME TAXES
The components of the Company’s loss before provision (benefit) for income taxes are as follows (in thousands):
United States
Foreign
Loss before provision for income taxes
Years Ended December 31,
2015
2014
2013
$
$
(59,797) $
(24,538)
(84,335) $
(59,249) $
(4,795)
(64,044) $
(36,821)
(3,733)
(40,554)
The components of the provision (benefit) for income taxes attributable to continuing operations are as follows (in thousands):
Current income tax provision:
Federal
State
Foreign
Total current income tax provision
Deferred income tax benefit:
Federal
State
Foreign
Total deferred income tax benefit
Total income tax provision (benefit)
Years Ended December 31,
2015
2014
2013
$
— $
147
1,139
1,286
—
—
(105)
(105)
— $
40
822
862
—
—
(7)
(7)
$
1,181 $
855 $
—
117
620
737
—
—
(865)
(865)
(128)
On a consolidated basis, the Company has incurred operating losses and has recorded a full valuation allowance against its United States, United Kingdom,
New Zealand, Hong Kong and Brazil deferred tax assets for all periods to date and, accordingly, has not recorded a provision (benefit) for income taxes for any of
the periods presented other than a provision (benefit) for certain foreign and state income taxes. Certain foreign subsidiaries and branches of the Company provide
intercompany services and are compensated on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.
90
The differences in the total provision for income taxes that would result from applying the 34% federal statutory rate to loss before provision for income
taxes and the reported provision for income taxes are as follows (in thousands):
U.S. Federal tax benefit at statutory rates
State income taxes, net of federal tax benefit
Foreign rate differential
Stock based compensation
Other permanent differences
Other
Valuation allowance
Total income tax (benefit) provision
Years Ended December 31,
2015
2014
2013
(28,681) $
(21,795) $
(1,632)
3,964
4,673
(99)
536
22,420
1,181 $
(2,013)
734
4,121
941
(82)
18,949
855 $
$
$
Major components of the Company’s deferred tax assets (liabilities) at December 31, 2015 and 2014 are as follows (in thousands):
Deferred tax assets:
Accrued expenses
Long-lived intangible assets and fixed assets — basis difference
Net operating loss carryforwards
Stock-based compensation
Deferred revenue
Convertible note hedge
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Prepaid expenses and deferred commissions
Convertible note discount
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
December 31,
2015
2014
$
1,508 $
12,766
68,395
15,049
2,828
10,299
1,418
112,263
(96,326)
15,937
(7,401)
(7,688)
(612)
(15,701)
$
236 $
(13,784)
(415)
1,354
2,039
410
76
10,192
(128)
1,795
585
63,438
8,630
1,532
13,913
715
90,608
(73,906)
16,702
(5,940)
(10,511)
(121)
(16,572)
130
At December 31, 2015 , the Company had federal, state and foreign net operating losses of approximately $254.1 million , $264.4 million and $39.9 million ,
respectively. The federal net operating loss carryforward will begin expiring in 2019, the state net operating loss carryforward began expiring in 2015, and the
foreign net operating loss has an unlimited carryforward period. The Internal Revenue Code of 1986, as amended, imposes substantial restrictions on the utilization
of net operating losses in the event of an “ownership change” of a corporation. Accordingly, a company’s ability to use net operating losses may be limited as
prescribed under Internal Revenue Code Section 382 (“IRC Section 382”). Events which may cause limitations in the amount of the net operating losses that the
Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three-year period. Due to the effects of
historical equity issuances, the Company has determined that the future utilization of a portion of its net operating losses is limited annually pursuant to IRC
Section 382. The Company has determined that none of its net operating losses will expire because of the annual limitation. The Company acquired federal and
state R&D credits as a result of the Evolv acquisition in the amounts of $0.4 million and $0.5 million , respectively. The federal R&D credit will begin the expire
in 2030; the state credit has indefinite carryforward.
91
The Company has recorded a full valuation allowance against its otherwise recognizable United States, United Kingdom, New Zealand, Hong Kong and
Brazil deferred income tax assets as of December 31, 2015 . Management has determined, after evaluating all positive and negative historical and prospective
evidence, that it is more likely than not that these assets will not be realized. The net increase to the valuation allowance of $22.4 million , $25.3 million and $14.5
million for the years ended December 31, 2015 , 2014 and 2013 , respectively, was primarily due to additional net operating losses generated by the Company.
The Company has excluded excess windfall tax benefits resulting from stock option exercises as components of the Company’s gross deferred tax assets and
corresponding valuation allowance disclosures, as tax attributes related to such windfall tax benefits should not be recognized until they result in a reduction of
taxes payable. The tax effected amount of gross unrealized net operating loss carryforwards, and their corresponding valuation allowances resulting from stock
option exercises was $35.8 million at December 31, 2015 ; the corresponding gross amount is $97.5 million . When realized, excess windfall tax benefits are
credited to additional paid-in capital. The Company follows the with-and-without allocation approach to determine when such net operating loss carryforwards
have been realized.
Deferred income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries because the Company’s practice and
intent is to permanently reinvest these earnings. The cumulative amount of such undistributed earnings was $2.2 million and $2.1 million at December 31, 2015
and December 31, 2014 , respectively. Any future distribution of these non-U.S. earnings may subject the Company to both U.S. federal and state income taxes, as
adjusted for tax credits, and foreign withholding taxes that the Company estimates would be $0.3 million and $0.2 million at December 31, 2015 and 2014 ,
respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2015 , 2014 , and 2013 is as follows (in
thousands):
Balance at January 1
Additions for tax positions related to the current year
Balance at December 31
Years Ended December 31,
2015
2014
2013
$
$
276 $
—
276 $
276 $
—
276 $
276
—
276
The provision for uncertain tax positions relate to business in territories outside of the United States.
The Company’s policy is to classify interest and penalties on uncertain tax positions as a component of tax expense. An insignificant amount of interest and
penalties on unrecognized tax benefits were accrued during the 2015 tax year. The amount of accrued interest and penalties on unrecognized tax benefits was
insignificant, as of December 31, 2015 and 2014 . The Company does not expect the change in uncertain tax positions to have a material impact on its financial
position, results of operations or liquidity. The recognition of previously unrecognized tax benefits on uncertain positions would result in a $0.4 million tax benefit.
The Company does not expect any significant increases or decreases to its unrecognized tax benefits within the next twelve months.
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 2012 through 2015 tax years. State income tax returns are subject to
examination for the 2011 through 2015 tax years. Foreign income tax returns are subject to examination for the 2007 through 2015 tax years.
92
13.
GEOGRAPHIC INFORMATION
Revenue by geographic region, as determined based on the location of the Company’s clients is set forth below (in thousands):
Revenue
United States
United Kingdom
All other countries
Total revenue
Property and equipment by region is set forth below (in thousands):
Property and equipment, net
United States
United Kingdom
All other countries
Total property and equipment, net
14.
401(K) SAVINGS PLAN
Years Ended December 31,
2015
2014
2013
$
$
228,724 $
180,834 $
30,104
80,823
28,938
53,796
339,651 $
263,568 $
128,983
19,448
36,698
185,129
December 31,
2015
2014
$
$
22,072 $
3,272
1,677
27,021 $
16,990
2,802
1,632
21,424
The Company has a defined contribution savings plan (the “Plan”) under Section 401(k) of the Internal Revenue Code. The Plan covers substantially all
employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the Board of Directors. Beginning in 2012, the Plan provided for a Company match of employees’
contributions in an amount equal to 50% of an employee’s contributions up to $2,400 per year which vests over four years.
The Company incurred approximately $1.6 million , $1.3 million and $0.8 million of matching contribution expenses related to the Plan during the years
ended December 31, 2015 , 2014 and 2013, respectively.
15.
COMMITMENTS AND CONTINGENCIES
Leases
The Company has various non-cancelable operating leases for its offices and its managed hosting facilities and services. These leases expire at various times
through 2019. Certain lease agreements contain renewal options, rent abatement, and escalation clauses. The Company recognizes rent expense on a straight-line
basis over the lease term, commencing when the Company takes possession of the property. Certain of the Company’s office leases entitle the Company to receive
a tenant allowance from the landlord. The Company records tenant allowances as a deferred rent credit, which the Company amortizes on a straight-line basis, as a
reduction of rent expense, over the term of the underlying lease. Total rent expense under operating leases was approximately $6.7 million , $5.7 million , $4.1
million for the years ended December 31, 2015 , 2014 and 2013 , respectively.
93
Future minimum lease payments under non-cancelable operating and capital leases at December 31, 2015 are as follows (in thousands):
2016
2017
2018
2019
Total minimum lease payments
Less: Amounts representing interest
Present value of capital lease obligations
Less: Current portion
Long-term portion of capital lease obligations
Letters of Credit
Operating Leases
Capital Leases
$
$
7,802 $
7,174
7,323
581
22,880
$
33
—
—
—
33
—
33
(33)
—
During 2015, the Company amended a standby letter of credit in association with its building lease. In addition, the Company maintains standby letters of
credit in association with other contractual arrangements. Total letters of credit outstanding at December 31, 2015 was $1.9 million .
Other Commitments
As of December 31, 2015 , the Company had various content reseller agreements with third-party content providers. The Company is obligated to pay
content fees under this agreement of $1.4 million in 2016 and $0.5 million in 2017.
As of December 31, 2015 , the Company had agreements with various third-party service providers whereby the Company has committed to assign certain
dollar amounts or hours of professional service projects related to implementation and other services for clients of the Company’s Enterprise and Mid-Market
solution. In aggregate, these estimated commitments total approximately $17.6 million in 2016, $17.6 million in 2017 and $5.6 million in each of 2018 and 2019.
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. In connection with certain facility leases, the Company has agreed to
indemnify its lessors for certain claims arising from the facility or the lease. 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 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 materially adversely affect its financial conditions or
operating results.
Taxes
From time to time, various federal, state and other jurisdictional tax authorities undertake review of the Company and its filings. In evaluating the exposure
associated with various tax filing positions, the Company accrues charges for possible exposures. The Company believes any adjustments that may ultimately be
required as a result of any of these reviews will not be material to its consolidated financial statements.
94
16.
RELATED PARTY TRANSACTIONS
In 2010, the Cornerstone OnDemand Foundation, or the Foundation, was formed to empower communities in the United States and internationally by
increasing the impact of the non-profit sector through the utilization of talent management technology including the Company’s Enterprise and Mid-Market
solution. The Company’s Chief Executive Officer 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 statement of activities with its financial results. During the years ended December 31, 2015 , 2014
and 2013 , the Company has provided at no charge certain resources to the Foundation, with approximate value of $2.9 million , $2.2 million and $1.3 million ,
respectively.
During June 2010, an executive officer of an accounting software company joined the Company’s Board of Directors. During May 2012, an executive officer
of a travel and expense management software company joined the Company’s Board of Directors and resigned in January 2015. For the years ended December 31,
2015 , 2014 and 2013 , the Company recorded $0.6 million , $0.8 million and $0.5 million , respectively, in expenses related to the use of the accounting and travel
and expense software from companies whose executive officers served on the Company’s Board of Directors during those years.
17.
SUBSEQUENT EVENTS
On January 1, 2016, shares issuable under the Company’s 2010 Employee Stock Purchase Plan increased by 547,037 shares and shares issuable under the
Company’s 2010 Plan increased by 2,461,669 shares in accordance with the automatic annual increase provisions of such plans.
During January and February 2016, the Compensation Committee of the Company’s Board of Directors granted restricted stock units covering an aggregate
of 222,805 shares of the Company’s common stock which generally vest annually over four years.
During February 2016, the Company amended an agreement with one of its third party service providers, whereby the Company has committed to provide
certain dollar amounts of professional service projects related to implementation and other services for clients of the Company. The amendment increased the
contractual commitment amount by $0.5 million in 2016 and $0.5 million in 2017.
95
18.
SELECTED QUARTERLY DATA (UNAUDITED)
The following unaudited quarterly consolidated statements of operations for each of the quarters in the years ended December 31, 2015 and 2014 have been
prepared on a basis consistent with the Company’s audited annual financial statements and include, in the opinion of management, all normal recurring adjustments
necessary for the fair statement of the financial information contained in these statements.
Quarter Ended
(in thousands, except per share data)
Mar. 31,
2014
57,409 $
June 30,
2014
61,468 $
Sept. 30,
2014
68,318 $
Dec. 31,
2014
76,373 $
Mar. 31,
2015
73,955 $
June 30,
2015
82,563 $
Sept. 30,
2015
87,271 $
Dec. 31,
2015
95,862
$
17,404
40,005
17,409
44,059
19,374
48,944
23,497
52,876
24,662
49,293
27,893
54,670
27,246
60,025
35,139
6,883
10,454
39,608
6,900
10,455
41,512
7,552
9,576
46,293
9,283
11,317
45,958
9,767
11,091
51,446
9,983
12,260
53,255
10,457
13,194
30,063
65,799
56,367
10,784
13,332
251
213
211
153
150
150
150
150
52,727
57,176
58,851
67,046
66,966
73,839
77,056
80,633
(12,722)
(13,117)
(9,907)
(14,170)
(17,673)
(19,169)
(17,031)
(14,834)
(2,915)
(3,315)
(4,226)
(3,672)
(5,311)
(3,713)
(2,986)
(3,618)
(15,637)
(16,432)
(14,133)
(17,842)
(22,984)
(22,882)
(20,017)
(18,452)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Amortization of certain
acquired intangible assets
Total operating
expenses
Loss from operations
Other income (expense):
Interest income (expense)
and other income (expense),
net
Loss before income tax
(provision) benefit
Income tax (provision) benefit
(153)
(200)
(178)
(324)
(278)
(380)
(132)
(391)
Net loss
Net loss per share, basic and
diluted
Weighted average common
shares outstanding, basic and
diluted
$
$
(15,790) $
(16,632) $
(14,311) $
(18,166) $
(23,262) $
(23,262) $
(20,149) $
(18,843)
(0.30) $
(0.31) $
(0.27) $
(0.34) $
(0.43) $
(0.43) $
(0.37) $
(0.35)
52,726
53,197
53,423
53,660
53,876
53,987
54,260
54,551
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
96
Item 9A.
Controls and Procedures
(a) 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 December 31, 2015 , the end of the period covered by this Annual Report on Form 10-K. 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.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management
and board of directors; and
provide reasonable assurance regarding prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a
material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect financial statement misstatements. Also, projections of
any evaluation of internal control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control
over financial reporting as of December 31, 2015 . In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013) . Based on this assessment, our management has
concluded that our internal control over financial reporting was effective as of December 31, 2015 .
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in its report, which appears in Item 8 of this Annual Report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information
None.
PART III
97
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item will be included in our Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2015 , and is incorporated herein by reference.
Item 11.
Executive Compensation
The information required by this item will be included in our Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2015 , and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in our Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2015 , and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in our Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2015 , and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services
The information required by this item will be included in our Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2015 , and is incorporated herein by reference.
With the exception of the information incorporated in Items 10, 11, 12, 13, and 14 of this Annual Report on Form 10-K, our Proxy Statement for the 2016
Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2015 is not deemed “filed” as part of this Annual
Report on Form 10-K.
Item 15.
Exhibits and Financial Statement Schedules
Documents filed as part of this report are as follows:
1. Consolidated Financial Statements:
PART IV
Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” under Item 8 of this Annual Report on
Form 10-K.
2. Financial Statement Schedules:
Financial Statement Schedules have been omitted as information required is inapplicable or the information is presented in the consolidated
financial statements and the related notes.
3. Exhibits:
The documents listed in the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K are incorporated by
reference or are filed with this Annual Report on Form 10-K, in each case as indicted therein (numbered in accordance with Item 601 of Regulation S-
K).
98
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, on February 26, 2016 .
SIGNATURES
CORNERSTONE ONDEMAND, INC.
By:
Name:
Title:
/s/ Adam L. Miller
Adam L. Miller
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Adam L. Miller and Perry A.
Wallack, jointly and severally, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report
on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated:
Signature
Title
President, Chief Executive Officer and Director (principal executive officer)
/s/ Adam L. Miller
Adam L. Miller
/s/ Perry A. Wallack
Perry A. Wallack
/s/ R. C. Mark Baker
R. C. Mark Baker
/s/ Harold W. Burlingame
Harold W. Burlingame
/s/ Robert Cavanaugh
Robert Cavanaugh
/s/ James McGeever
James McGeever
Chief Financial Officer (principal financial and accounting officer)
Director
Director
Director
Director
99
Date
February 26,
2016
February 26,
2016
February 26,
2016
February 26,
2016
February 26,
2016
February 26,
2016
Signature
Title
/s/ Joseph Payne
Joseph Payne
/s/ Kristina Salen
Kristina Salen
Director
Director
100
Date
February 26,
2016
February 26,
2016
Exhibits
Exhibits and Financial Statements
Exhibit
Number
2.1
2.2
3.1
3.2
4.1
10.1*
10.2*
10.3*
Exhibit Description
Amended and Restated Share Purchase Agreement, dated as of April 5, 2012,
by and among the Registrant, Dolphin Acquisition Limited, Sonar Limited,
the Company Stockholders (as defined therein), and, with respect to Article
III only, the Stockholder Representative (as defined therein). The schedules
and exhibits referenced in the agreement have been omitted pursuant to Item
601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will
be furnished supplementally to the SEC upon request.
Agreement and Plan of Merger, dated as of October 7, 2014, by and among
the Registrant, Evolv Inc., Data Acquisition Sub, Inc. and, with respect to
Article VII, Article VIII, Article IX and Article X thereof only, the Escrow
Representative (as defined therein) and U.S. National Bank Association as
Escrow Agent (as defined therein). The schedules and exhibits referenced in
the agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-
K. A copy of any omitted schedule or exhibit will be furnished
supplementally to the SEC upon request.
Amended and Restated Certificate of Incorporation of the Registrant.
Amended and Restated Bylaws of the Registrant.
Indenture between the Registrant and U.S. Bank National Association, dated
as of June 17, 2013.
Form of Indemnification Agreement between the Registrant and each of its
directors and executive officers.
The Registrant’s 1999 Stock Plan, including the form of stock option
agreement, as amended and currently in effect.
The Registrant’s 2009 Equity Incentive Plan, including forms of stock option
agreements, as currently in effect.
10.3A*
Form of Restricted Stock Unit Award Agreement under 2009 Equity
Incentive Plan.
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
The Registrant’s 2010 Equity Incentive Plan, including form of stock option
agreement.
The Registrant’s 2010 Employee Stock Purchase Plan.
Employment Agreement between the Registrant and Adam Miller, dated as
of November 8, 2010.
Employment Agreement between the Registrant and Perry Wallack, dated as
of November 8, 2010.
Employment Agreement between the Registrant and Mark Goldin, dated as
of May 24, 2010.
Amended and Restated Employment Agreement between the Registrant and
David J. Carter, dated as of November 8, 2010.
101
Incorporated by Reference
Form
10-Q
File No.
001-35098
Exhibit
2.1
Filing Date
May 15, 2012
10-K
001-35098
2.2
February 27, 2015
S-1/A
S-1/A
8-K
333-169621
333-169621
001-35098
3.2
3.4
4.1
November 9, 2010
November 9, 2010
June 17, 2013
S-1/A
333-169621
10.1
December 17, 2010
S-1
S-1
333-169621
10.2
September 29, 2010
333-169621
10.3
September 29, 2010
S-1/A
333-169621
10.3A
December 17, 2010
S-1/A
333-169621
10.4
December 17, 2010
S-1/A
S-1/A
333-169621 10.5
333-169621
10.6
December 17, 2010
November 9, 2010
S-1/A
333-169621
10.7
November 9, 2010
S-1
333-169621
10.11
September 29, 2010
S-1/A
333-169621
10.9
November 9, 2010
Exhibit
Number
10.10A*
2012 Sales Commission Plan between the Registrant and David J. Carter.
Exhibit Description
10.10B*
2013 Sales Commission Plan between the Registrant and David J. Carter.
10.10C*
2014 Sales Commission Plan between the Registrant and David J. Carter.
10.10D*
2015 Sales Commission Plan between the Registrant and David J. Carter.
10.11*
Amended and Restated Unlimited Term Employment Contract between the
Registrant and Vincent Belliveau.
10.11A*
2012 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.11B*
2013 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.11C*
2014 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.11D*
2015 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.12*
Form of Change of Control Severance Agreement between the Registrant and
certain of its executive officers
10.13*
Description of 2014 Executive Bonus Plan
10.14
10.15
10.16
10.17
10.18
Master Service Agreement (United States) between the Registrant and
Equinix Operating Co., Inc., dated as of November 6, 2009.
Master Service Agreement (United Kingdom) between the Registrant and
Equinix (United Kingdom) Limited, dated as of November 4, 2009.
Office Lease between Water Garden Realty Holding LLC and the Registrant,
dated as of November 30, 2011
First Amendment to the Office Lease between Water Gardens Realty Holding
LLC and the Registrant, dated as of April 24, 2012
Second Amendment to the Office Lease between Water Garden Realty
Holding LLC and the Registrant, dated as of February 28, 2013
21.1
List of subsidiaries of the Registrant
102
Incorporated by Reference
Form
10-Q
10-Q
10-Q
10-Q
File No.
001-35098 10.2
Exhibit
Filing Date
November 14, 2012
001-35098 10.2
001-35098 10.1
001-35098 10.1
August 7, 2013
August 7, 2014
May 8, 2015
S-1/A
333-169621
10.10
February 11, 2011
10-Q
10-Q
10-Q
10-Q
10-Q
8-K
S-1
001-35098 10.1
001-35098 10.3
001-35098 10.2
001-35098 10.2
001-35098
10.4
November 14, 2012
August 7, 2013
August 7, 2014
May 8, 2015
August 7, 2013
001-35098 n/a
April 8, 2014
333-169621
10.17
September 29, 2010
S-1
333-169621
10.18
September 29, 2010
10-K
001-35098
10.16
March 6, 2012
10-Q
001-35096
10.1
10-Q
001-35096
10.2
May 9, 2013
May 9, 2013
Exhibit
Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Incorporated by Reference
23.1
Consent of PricewaterhouseCoopers LLP
24.1
Power of Attorney (contained in the signature page to this Annual Report)
31.1
31.2
Certification of the Chief Executive Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
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
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
†
Indicates a management contract or compensatory plan or arrangement.
The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form 10-K, 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 Annual Report on Form 10-K, irrespective
of any general incorporation language contained in such filing.
103
SUBSIDIARIES OF THE COMPANY
Exhibit 21.1
SUBSIDIARIES:
Cornerstone OnDemand Global Operations, Inc. (Delaware)
Cornerstone OnDemand Holdings, Inc. (Delaware)
Cornerstone OnDemand Limited (United Kingdom)
Cornerstone OnDemand Services India Private Limited (India)
Cornerstone OnDemand Spain SL (Spain)
Evolv Inc. (Delaware)
Sonar Limited (New Zealand)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-202940, 333-194198, 333-189389, 333-180311, 333-
173754) of Cornerstone OnDemand, Inc. of our report dated February 25, 2016 relating to the financial statements and the effectiveness of internal control over
financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 25, 2016
Exhibit 31.1
I, Adam L. Miller, certify that:
CERTIFICATION PURSUANT TO SECTION 302(A)
OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
5.
I have reviewed this Annual Report on Form 10-K of Cornerstone OnDemand, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
(a)
(b)
(c)
(d)
(a)
(b)
Date: February 26, 2016
/s/ Adam L. Miller
Adam L. Miller
President and Chief Executive Officer
Exhibit 31.2
I, Perry A. Wallack, certify that:
CERTIFICATION PURSUANT TO SECTION 302(A)
OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
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I have reviewed this Annual Report on Form 10-K of Cornerstone OnDemand, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
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Date: February 26, 2016
/s/ Perry A. Wallack
Perry A. Wallack
Chief Financial Officer
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
Exhibit 32.1
I, Adam L. Miller, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Cornerstone OnDemand, Inc. on Form 10-K for the fiscal year ended December 31, 2015 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects,
the financial condition and results of operations of Cornerstone OnDemand, Inc.
Date: February 26, 2016
/s/ Adam L. Miller
Adam L. Miller
President and Chief Executive Officer
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
Exhibit 32.2
I, Perry A. Wallack, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Cornerstone OnDemand, Inc. on Form 10-K for the fiscal year ended December 31, 2015 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects,
the financial condition and results of operations of Cornerstone OnDemand, Inc.
Date: February 26, 2016
/s/ Perry A. Wallack
Perry A. Wallack
Chief Financial Officer