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DynatraceUNITED 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, 2017
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number: 001-35098
______________________________
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. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
¨
¨
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
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, 2017 , the last day of the
registrant’s most recently completed second fiscal quarter, was $1,125,050,319 (based on the closing price for shares of the registrant’s common stock as reported
by the Nasdaq Global Select Market on June 30, 2017).
On February 21, 2018 , 57,319,023 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, 2017 .
DOCUMENTS INCORPORATED BY REFERENCE
CORNERSTONE ONDEMAND, INC.
2017 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
PART I
PART II
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.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
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
Exhibits, Financial Statement Schedules
Summary 10-K
Signatures
PART IV
TRADEMARKS
Page No.
4
15
34
34
34
34
35
37
39
58
60
93
94
95
95
95
96
96
96
97
100
© Copyright 2018 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.
3
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
products; our ability to service those clients effectively and induce them to renew and upgrade their deployments of our products; 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 products; 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 human capital management products and other business
management products; 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 products and alternatives to our products, 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 learning and human capital management software, delivered as Software-as-a-Service (“SaaS”). We are one of
the world’s largest cloud computing companies with approximately 35.3 million users across 3,250 clients in 192 countries and 43 different languages. We help
organizations around the globe recruit, train and manage their employees.
Our human capital management platform combines the world’s leading unified talent management solutions with state-of-the-art analytics and HR
administration solutions to enable organizations to manage the entire employee lifecycle. Our focus on continuous learning and development helps organizations to
empower employees to realize their potential and drive success.
We work with clients across all geographies, verticals and market segments. Our clients include multi-national corporations, large domestic and foreign-
based enterprises, mid-market companies, public sector organizations, healthcare providers, higher education institutions, non-profit organizations and small
businesses. We sell our platform domestically and internationally through both direct and indirect channels, including direct sales teams throughout North and
South America, Europe and Asia-Pacific and distributor relationships with payroll companies, human resource consultancies and global system integrators.
Our enterprise human capital management platform is composed of four product suites:
•
•
•
•
Our Recruiting suite helps organizations to source and attract candidates, assess and select applicants, onboard new hires and manage the entire recruiting
process;
Our Learning suite enables clients to manage training and development programs, knowledge sharing and collaboration among employees, track
compliance requirements and support career development for employees. Our content offering delivers fresh, modern content, fueling employee curiosity
and inspiring growth;
Our Performance suite provides tools to manage goal setting, performance reviews, competency assessments, development plans, continuous feedback,
compensation management and succession planning; and
Our HR Administration suite supports employee records administration, organizational management, employee and manager self-service, workforce
planning and compliance reporting.
4
Our clients can supplement the product suites with our state-of-the-art analytics capabilities to make more-informed decisions using data from across the
platform for talent mobility, engagement and development so that HR and leadership can focus on strategic initiatives to help their organization succeed.
In addition to our enterprise human capital management platform, we offer PiiQ, formerly known as Cornerstone Growth Edition, which is a cloud-based
talent management solution with learning and performance product offerings targeted to organizations with 500 or fewer employees.
Our Client Success team supports our clients’ ongoing optimization of their talent processes and use of our platform. In addition, our Cornerstone Edge
solutions allow our clients and partners to more easily integrate with a growing marketplace of service providers. After the initial purchase of our platform, we
continue to market and sell to our existing clients, who may renew their subscriptions, add additional products, broaden the deployment of the platform across their
organizations and increase usage of the platform over time.
We have grown our business each of the last 16 years. Our revenue has grown to $482.0 million in 2017 from $423.1 million in 2016 and from $339.7
million in 2015 . We have averaged an annual dollar retention rate of approximately 95% since 2002 and our annual recurring revenue as of December 31, 2017
was $439.0 million , as described in Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations, ” under the heading “
Metrics ”, which includes a detailed description of these metrics.
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 2017, total
compensation paid to the United States civilian workforce of approximately 161.1 million people was expected to exceed $11.9 trillion in 2017.
Accordingly, organizations have long sought to optimize their investments in human capital. We believe that organizations face seven major challenges in
maximizing the productivity of their internal and external human capital:
•
•
•
•
•
•
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 developing employees throughout their careers to achieve their full potential, which has become
more difficult with the Millennial generation entering the workforce. Additionally, increasingly distributed workforces and heightened compliance
requirements have made training requirements even more important.
Engaging Employees. Connecting with employees at all levels and locations of the organization to keep them motivated, working together and
innovating, 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.
• Modernizing HR Data Management. Enterprise organizations are forced to either sustain many disparate, outdated HR systems across multiple sites and
countries, or choose to replace those systems with a global core HR solution, which can be very costly, risky and take years to implement. Also, many
mid-market organizations have outgrown their use of spreadsheets to manage people data, but do not need the complexities of a core HR solution.
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 human capital management solutions. We also believe many of the existing solutions suffer from one or more of the following
shortcomings:
•
Narrow Functionality. As they only address specific stages of the employee lifecycle, many solutions lack sufficient breadth of functionality to maximize
employee productivity effectively.
5
•
•
•
•
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 a comprehensive, unified solution that helps organizations manage all
aspects of their internal and external human capital and link human capital management to their business strategy.
The Cornerstone OnDemand Answer
Our human capital management platform is a comprehensive SaaS solution that consists of suites to help organizations manage their recruiting, learning,
performance and HR administration processes. These suites are supplemented by state-of-the-art analytics and reporting as well as a number of cross-product tools
for employee profile management and e-learning content aggregation and delivery. We also provide professional services for configuration, integration, training
and optimization of our platform. We believe that our human capital management platform delivers the following benefits:
•
Comprehensive Functionality. Our platform provides a comprehensive approach to human capital management by offering products to address all stages
of the employee lifecycle: recruiting, onboarding, learning, performance, succession, compensation, enterprise social collaboration and HR administration
processes. Employees use our platform throughout their careers to engage in performance processes such as goal management, performance reviews,
continuous feedback, 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 and collaborate with co-workers by leveraging enterprise social networking
tools. Employee managers and HR managers use our platform to perform their human capital administrative responsibilities effectively throughout the
employees’ careers.
Our clients can manage processes that span different human capital 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 platform allows our clients to align their human capital management processes and practices with their broader
strategic goals.
•
Flexible and Highly Configurable. Our platform 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 platform 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 human capital management needs and can incrementally deploy additional products in the future as their needs evolve.
•
•
Easy-to-Use, Personalized User Interface. Our platform 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 platform 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.
6
•
•
Scalable to Meet the Needs of Organizations. Our platform 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 platform is capable of
supporting deployments of various sizes. Today we service 36 multi-national corporations with over 150,000 active users each. Our largest deployment is
for over 600,000 users.
Continued Innovation through Collaborative Product Development. We work collaboratively with our clients on an ongoing basis to develop almost
every part of our platform. The vast majority of our thousands of software features were designed with existing and prospective clients based on their
specific functional requests.
Our
Human
Capital
Management
Platform
Our comprehensive human capital management platform combines the world's leading unified talent management solution with state-of-the-art analytics and
HR administration. We built this platform using a single code base and a multi-tenant, multi-user architecture that we host in our data centers. The platform
consists of a collection of suites to help organizations manage key phases of the employee life cycle. To complement our platform, we offer a number of cross-
product tools for analytics and reporting, employee profile management and e-learning content aggregation.
Cornerstone
Recruiting
Cornerstone Recruiting. Our applicant tracking product supports the modern ways that organizations source, attract and hire new employees. The recruiting
product streamlines the entire hiring process and improves stakeholder collaboration with powerful dashboards and workflows. With mobile-friendly, customizable
career sites, organizations can showcase their unique employer brand to attract top talent.
Cornerstone Onboarding. Our onboarding product delivers the resources, connections and tools at critical points across the employee lifecycle. The
onboarding product complements the recruiting product by providing a seamless and engaging experience for the employee, while reducing administrative burden
and promoting collaboration across departments.
Our Recruiting suite is utilized by approximately 22% of our total base of 3,250 clients.
Cornerstone
Learning
Cornerstone Learning. Our learning product helps clients deliver mobile-ready, enterprise-class training and development programs. It links employee
development to other parts of the talent management lifecycle, including onboarding, performance management and succession planning. The learning product
supports all forms of learning, including online, instructor-led and collaborative and on-the-job learning, as well as robust reporting and embedded predictive
analytics. With tens of thousands of online training titles from dozens of global content providers accessible through our new engaging Learning Experience
Platform, clients reduce overall training expenses, while quickly transforming their learning programs with modern, curated content. The access to personalized
content delivered at scale with Cornerstone’s machine learning technology builds a culture of continuous learning, boosting employee engagement and retention.
Cornerstone Extended Enterprise. Our extended enterprise product helps clients provide training and enablement to their customers, vendors and
distributors. The extended enterprise product enables clients to develop new profit centers, increase sales, cut support costs and boost channel productivity.
Cornerstone for Salesforce. Our Cornerstone for Salesforce product is an enablement solution for employees, partners and customers developed natively on
the Salesforce.com platform. Cornerstone for Salesforce leverages clients’ Salesforce investments across all products to build high-performance sales and service
teams with triggered, just-in-time training, as well as leverage learning to engage and enable customers and partners.
Cornerstone Content. Our Cornerstone Content solutions enable organizations to deliver fresh, modern content to their workforce. Content Anytime is our
foundational subscription package that includes a pre-curated library of more than 2,500 courses and a constantly evolving library. We also offer Custom Curated
Packages , giving organizations access to pre-curated or custom-curated course collections from our robust library of 30+ content providers and 34,000+ content
offerings. Both offerings are complementary to one another.
Our Learning suite is utilized by approximately 86% of our total base of 3,250 clients.
Cornerstone
Performance
Cornerstone Performance. Our performance management product allows clients to direct and measure performance at the individual, departmental and
organizational levels through ongoing competency management, organizational goal setting, performance appraisal, development planning and feedback.
Performance data can also be used by the learning product offering to set training priorities and to make informed workforce planning decisions.
7
Cornerstone Succession. Our succession product allows clients to proactively plan for organizational change and talent mobility. The succession product
serves both the employee looking for career advancement and management team members planning for the future. Employees can share career preferences and
discover development opportunities. Management team members can utilize tools provided to identify skill gaps, implement development plans and create talent
pools for future needs.
Cornerstone Compensation. Our compensation product allows clients to reward their employees for hard work in direct relation to performance. The
compensation product enables clients to make more informed decisions about the allocation of base pay, bonus and equity awards.
Our Performance suite is utilized by approximately 52% of our total base of 3,250 clients.
Cornerstone
HR
Cornerstone HR. Our HR product offers a modern interface for centralized HR administration across an organization’s disparate systems. Acting as a source
of truth for core employee and talent data, the system supports employee self-service, absence management, organization management and records administration.
Cornerstone View. Our view product allows clients to access HR data across our human capital management products. The view product enables
organizations to utilize interactive data visualization tools to discover their top performers and future leaders to proactively answer workforce questions and
achieve business results.
Cornerstone Benchmark. Our benchmark product enables organizations to compare internal employee data with peers in external companies or across
divisions, subdivisions, subsidiaries, or regions within their own organization. Both options allow the organization to visualize how they compare against custom
and internal business segments across a variety of metrics.
Our HR suite, our newest offering, is utilized by approximately 8% of our total base of 3,250 clients.
Our Strategy
Our goal is to empower people, organizations and communities to realize their potential with our comprehensive human capital management platform. 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, 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 platform, and as a result,
approximately 69% of our clients today utilize two or more products and approximately 40% utilize three or more products. With our expanding product
portfolio, such as our newest product Cornerstone HR, we believe significant upsell opportunity remains within our existing client base.
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 human capital management is large and remains significantly underpenetrated.
Expand and Strengthen Our Alliances. We intend to grow our distribution channels through key business alliances, including agreements with global
vendors.
Significantly Grow Our International Operation. We believe a substantial opportunity exists to continue to grow sales of our platform internationally. We
intend to grow our Europe, Middle-East and Africa ("EMEA") and Asia-Pacific and Japan ("APJ") 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 698 clients at December 31, 2017 and
our APJ client base from two clients at December 31, 2009 to 173 clients at December 31, 2017 .
8
Continue
to
Innovate
and
Extend
Our
Technological
Leadership.
We believe we have developed over the last decade a deep understanding of the human
capital 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 human capital management and client relationships to develop new products, features and functionality
which will enhance our platform 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 experiencing business contraction. We plan to continue with the
same systematic approach in the future.
Acquisitions.
In the future, we may seek to acquire or invest in additional businesses, products or technologies that we believe will complement or expand
our platform, enhance our technical capabilities or otherwise offer growth opportunities.
Execute
Our
Renewed
Strategic
Focus.
Following a strategic review process undertaken by our board of directors during 2017, the board determined that
the optimal way to maximize shareholder value is to execute a plan to transform our operations and support that plan with a capital infusion and new strategic
partnerships. As a result, we entered into an agreement with Silver Lake, one of the world's leading technology private equity investors, and LinkedIn, under which
Silver Lake and LinkedIn invested $300.0 million in Cornerstone in the form of convertible senior notes. In November 2017, we announced our strategic plan with
the objective of better positioning us for long-term growth and increasing shareholder value. In connection with the plan, we will (i) sharpen our focus on recurring
revenue growth; (ii) drive operating margin and free cash flow improvement; (iii) develop new recurring revenue streams, including e-learning content
subscriptions; (iv) bolster our leadership team; and (v) strengthen our governance to help us best execute on this strategic transformation.
Strategic Relationships and Professional Services
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 to assist in the successful implementation of our platform and to optimize our
clients’ use of our platform during the terms of their engagements. Our clients 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. As part of our renewed strategic
focus, we are taking steps to migrate much of our implementation services to our global partners. To effect the migration, we are augmenting our partner operations
and delivery assurance functions while reducing overall headcount in our service delivery division, as partners take on the majority of our professional services
work. This aligns with our focus on growing recurring revenue.
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 human capital management
platform in significantly less time than required for similar deployments of hosted or on-premise software. Our professional services include implementation
services, integration services, content services, business consulting services, training services as well as ongoing support and advice.
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. 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 Learning Experience
Platform. 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 human capital management platform.
9
Global Client Success
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
Client Management teams 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:
•
•
•
Client Executives 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 human capital management platform; and
Product Specialists who interact with client administrators and are focused on features and functions of our human capital management platform.
We believe this life cycle 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 our client-facing teams.
Our Customers
As of December 31, 2017 , 3,250 clients used our human capital management platform with approximately 35.3 million registered users across 192 countries
and 43 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 2017 , 2016 or 2015 .
Technology, Operations and Research and Development
Technology
Our human capital management platform is designed with an on-demand architecture which our clients access via a standard web browser. It uses a single
code base, with all of our clients running on the current version of our software and 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;
•
• modularity and flexibility, by allowing our clients to activate and implement virtually any combination of the features we offer;
•
high levels of configurability to enable our clients to mimic their existing business processes, workflows and organizational hierarchies within our
platform;
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.
•
•
•
Our human capital management platform offers a localized user interface and currency conversion capabilities. It is currently available in the following 43
languages: Arabic, Armenian, 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.
10
Our human capital management platform is deployed using a multi-tenant and multi-user architecture. 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. Global uptime in 2017 was 99.995%.
Security is of paramount importance to us due to the sensitive nature of employee data. We have designed our human capital management platform 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
logically 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.
We utilize a variety of industry standard technologies including Microsoft .NET and Hadoop and write the majority of our software in programming
languages, such as C# and Java. We use Web 2.0 technologies, such as Javascript and React, extensively to enhance the usability, performance and overall user
experience of our human capital management platform. Microsoft SQL Server is our primary relational database management system, but other database
technologies are in use as well, including NoSQL databases. Apart from these and other third-party components, our entire human capital management platform
has been specifically built and upgraded by our in-house development team.
Operations
We physically host our human capital management platform 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.
Additionally, we are in the process of building data centers in Paris, France and Frankfurt, Germany.
We lease space for disaster recovery purposes from Equinix in Virginia, United States and in Manchester, United Kingdom. In addition, we have started
building out services and functionality on Amazon Web Services (“AWS”) with a view to migrating more software to AWS over time. We maintain the same or
higher standards of security and compliance at AWS as we do in our leased facilities.
Our infrastructure includes firewalls, switches, routers, load balancers and IDS/IPS from Palo Alto Networks, Cisco Systems, A10 Networks 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 human capital management platform and Akamai Technologies’ Global Network of Edge Servers for content caching. We use
solid state storage and other storage technologies from leading vendors such as SanDisk, Pure Storage and NetApp.
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 global, with major centers in our Santa Monica, California headquarters as well as in Sunnyvale, California; Tel Aviv, Israel;
Auckland, New Zealand; and Bangalore, India. Our Agile 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 or as needed. 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 $62.0 million in 2017 , $47.0 million in 2016 and $41.0 million in 2015 . Our research and development
expenses plus capitalized software were $82.5 million in 2017 , $63.4 million in 2016 and $54.3 million in 2015 .
11
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, pharmaceuticals, 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:
•
•
•
•
•
•
•
•
•
Strategic Accounts. We have a strategic accounts sales team focused on sales to some of the top 150 largest multi-national corporations.
U.S. 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 approximately 20 years in sales.
U.S. Mid-Market. Our mid-market sales team sells to organizations with between 501 and 4,999 employees. This team is composed primarily of
experienced sales individuals, with an average tenure of approximately 16 years in sales.
Small and Medium-Sized Business. Our small and medium-sized business sales team is targeted to clients with 500 or fewer employees.
U.S. Public Sector. Our public sector sales team targets federal, state and local government, as well as K-12 and higher education institutions.
U.S. 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 EMEA markets. This team is composed primarily of experienced sales
individuals, with an average tenure of over 16 years in sales.
APJ. We have enterprise sales professionals based in core APJ markets including Australia, Hong Kong, India, Japan, New Zealand and Singapore.
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 client executives 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:
•
•
Demand Generation. Our demand generation activities include lead generation through email and direct mail campaigns, participation in industry events,
securing event speaking opportunities and online marketing, including both SEM and organic SEO online 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, client advocacy and social
media outreach.
Competition
The market for human capital management software 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
unified platform for human capital management as opposed to specific service offerings.
12
In the applicant tracking systems segment, which the recruiting and onboarding product offerings each serve, our principal competitors include companies
such as Oracle Corporation, International Business Machines Corporation and Lumesse. 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 the performance management systems segment, which the performance, succession and compensation product offerings each serve, our
principal competitors include companies such as Saba Software, Inc., Talentsoft, Oracle Corporation, Peoplefluent, Inc. and SAP America, Inc. These vendors are,
like us, largely SaaS providers. We compete in these segments primarily on the basis of:
•
•
•
•
•
•
the level of integration of our product offerings within our human capital management platform;
the breath and depth of our product functionality;
the flexibility and configurability of our product offerings to meet the changing content and workflow requirements of our clients’ business units;
the quality of our service and focus on client success;
our ability to provide scalability and flexibility for large and complex global deployments; and
the ease of use of our product offerings and overall user experience.
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 human capital 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.”
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.”
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 human capital management platform 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 suites, features and functionality, collaboration with our clients and frequent enhancements to our platform 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.
13
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 our clients’ procurement departments 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. 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, 2017 , we had 1,891 employees, which is a 4% increase from 1,823 employees at December 31, 2016 . 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 human capital management platform to on-board, develop, connect, align, assess, retain, promote and
manage the HR administration of our own employees.
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 human capital management platform and capacity building programs.
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.
Additional Information
Our Internet address is www.cornerstoneondemand.com and our investor relations website is located at http://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.
14
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
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 human capital management platform in
particular. We sell our human capital management platform primarily to large, mid-sized and small business organizations whose businesses fluctuate based on
general economic and business conditions. In addition, a portion of our revenue is attributable to the number of users of our products at each of our 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 products may be negatively affected. Historically, economic
downturns have resulted in overall reductions in spending on information technology and human capital management platforms as well as pressure from clients and
potential clients for extended billing terms. If economic conditions deteriorate, our clients and potential clients may elect to decrease their information technology
and human capital management budgets by deferring or reconsidering product purchases, which would limit our ability to grow our business and negatively affect
our operating results.
Our
financial
results
may
fluctuate
due
to
our
long,
variable
and,
therefore,
unpredictable
sales
cycle
and
our
focus
on
large
and
mid-market
organizations.
We plan our expenses based on certain assumptions about the length and variability of our sales cycle. If our sales cycle becomes longer or more variable,
our results may be adversely affected. Our sales cycle generally varies in duration from two to nine months and, in some cases, much longer depending on the size
of the potential client. Factors that may influence the length and variability of our sales cycle include among others:
•
•
•
•
•
•
•
•
the need to educate potential clients about the uses and benefits of our products;
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 human capital 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 billings, 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
various
business
factors,
some
of
which
may
be
beyond
our
control.
•
•
•
•
There are a number of other factors that may cause our financial results to fluctuate from period to period, including among others:
changes in billing 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 products to satisfy their human capital management needs;
the timing and rate at which we sign agreements with new clients;
our access to service providers and partners 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;
•
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to provide, or partner with effective partners 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 products and the timing of those renewals;
the extent to which existing clients purchase or discontinue the use of additional products and add or decrease the number of users;
the extent to which our clients request enhancements to underlying features and functionality of our products 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 products 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, expansion and restructuring of our business, operations and
infrastructure;
changes in the operational efficiency of our business;
the timing and success of our new product and service introductions;
the timing of expenses of the development of new products and technologies, including enhancements to our products;
our ability to exploit Big Data to drive increased demand for our products;
continued strong demand for human capital management in the U.S. and globally;
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 due 2021 and 2018;
business disruptions, costs and future events related to shareholder activism;
legal or political changes in local or foreign jurisdictions that decrease demand for, or restrict our ability to sell or provide, our products;
fluctuations in foreign currency exchange rates, including any fluctuation caused by uncertainties relating to Brexit;
general economic, industry and market conditions; and
various factors related to disruptions in our SaaS hosting network infrastructure, defects in our products, 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.
16
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 human capital 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 products 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, Oracle Corporation, Peoplefluent, Inc., Saba Software, Inc., SAP America, Inc.,
Skillsoft Corp., Talentsoft and Workday, Inc. In addition, some of the parties with which we maintain business alliances offer or may offer products or services that
compete with our products or services.
Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our
competitors have established marketing relationships, access to larger client bases and major distribution agreements with consultants, system integrators and
distributors. Moreover, many software vendors can bundle human resource products or offer such products at a lower price as part of a larger product sale. In
addition, some competitors may offer software that addresses one or a limited number of human capital management functions at a lower price point or with
greater depth than our products. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities,
technologies, standards or client requirements. Further, some potential clients, particularly large enterprises, may elect to develop their own internal products. For
all of these reasons, we may not be able to compete successfully against our current and future competitors.
Existing
or
future
laws
and
regulations
relating
to
privacy
or
data
security
could
increase
the
cost
of
our
products
and
subject
us
or
our
clients
to
litigation,
regulatory
investigations
and
other
potential
liabilities.
Our human capital management platform enables 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 (“EU”), and the United Kingdom, 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, at times due to differing economic conditions and changes in political climate, with
new laws and regulations proposed frequently and existing laws and regulations subject to different and conflicting interpretations. Such changes have the potential
to increase costs of compliance, risks of noncompliance and penalties for noncompliance. For example, we maintain a major support center in Tel Aviv, Israel.
Israel presently is recognized by the EU as providing an “adequate” level of protection for personal data, causing transfers of personal data to be permitted under
EU data protection law, but if EU authorities were to determine that Israel no longer provided an “adequate” level of data protection, our business could be harmed.
As an additional example, the EU adopted a general data protection regulation, effective in May 2018, that will supersede current EU data protection legislation,
impose more stringent EU data protection requirements and provide for greater penalties for noncompliance. Further, following a referendum on June 23, 2016 on
the United Kingdom’s membership in the EU, the outcome of which was a vote in favor of leaving the EU, it is expected that the United Kingdom government will
shortly commence negotiations in connection with any exit from the EU (often referred to as “Brexit”). The outcome of the referendum has created uncertainty
with regard to the regulation of data protection in the United Kingdom. In particular, it is unclear whether the United Kingdom will enact the general data
protection regulation and how data transfers to and from the United Kingdom will be regulated. We maintain a data center in the United Kingdom where EU
residents’ personal data is stored and processed, causing uncertainty with respect to the regulation of data protection in the United Kingdom to create uncertainty
among some of our customers in Europe. We are in the process of building data centers in other EU locations that we anticipate will be functional in 2018, but until
such data centers are operational and available to be used by our European customers, we may experience reluctance or refusal by our customers in Europe to use
our products. Additionally, any delays in completing the data centers or impediments to beginning operations may harm our customer retention and billings in
Europe.
17
We sell our products and operate in many countries. Some of these countries are considering or have passed legislation implementing data protection or
privacy requirements that could increase the cost and complexity of selling or delivering our solutions. In addition, changes in the political climate in the United
States or other countries may decrease demand for our solutions or make them less competitive to preferred local offerings.
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, demand for our products 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 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, or 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 subsequently
have self-certified under the EU-U.S. Privacy Shield, a replacement for the U.S.-EU Safe Harbor Framework. The EU-U.S. Privacy Shield has been challenged by
private parties and may face additional challenges by national regulators or additional private parties. We may be unsuccessful in maintaining 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 products. Our response to the ECJ Ruling and any other events with respect to the legal landscape surrounding cross-border transfer
of EU residents’ personal data may cause us to assume additional liabilities or incur additional expenses for implementing compliance requirements, and any such
other events, as well as our response, could adversely affect our billings and lead to regulatory investigations or enforcement actions. The foregoing could have a
materially adverse impact upon our business, financial condition and operational results.
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.; in October 2014, Skillsoft Corp. acquired
SumTotal Systems, Inc.; and in May 2017, Saba Software, Inc. acquired Halogen Software, 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 products and limiting the number of consultants available to implement our
products. Disruptions in our business caused by these events could reduce our revenue.
Our
business
and
operations
are
experiencing
growth
and
organizational
change.
If
we
fail
to
effectively
manage
such
growth
and
change
in
a
manner
that
preserves
the
key
aspects
of
our
corporate
culture,
our
business
and
operating
results
could
be
harmed.
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 1,823 employees on December 31, 2016 to 1,891
employees on December 31, 2017 . In addition, we have several international offices, including 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 products may suffer,
which could negatively affect our brand and reputation and harm our ability to retain and attract clients.
18
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 risk factors titled “ —
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 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.”
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, British Pounds, Hong Kong
Dollars, Indian Rupees, Japanese Yen, Mexican Pesos, New Zealand Dollars, Singapore Dollars, South African Rand, Swedish Krona and Swiss Franc 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 British Pounds and Euros
and, to a much lesser extent, in Australian Dollars, Brazilian Reals, Canadian Dollars, Chinese Yuan, Hong Kong Dollars, Indian Rupees, Israeli New Shekels,
Japanese Yen, Mexican Pesos, New Zealand Dollars, Singapore Dollars and Swedish Krona. 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,
including any fluctuations caused by uncertainties relating to Brexit, may negatively impact our business, financial condition and operating results. Due to our legal
structure, any fluctuations in the exchange rates of the British Pound may be particularly impactful. 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.
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 platform, 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:
•
•
•
•
•
•
•
•
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.
19
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 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 human capital management platform involves the storage and transmission of clients’ sensitive, proprietary and confidential information over the
Internet (including public networks), and security breaches, unauthorized access, unauthorized usage, viruses or similar breaches or disruptions 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 or are otherwise
compromised 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 human capital management platform through a
standard web browser and depend on us for fast and reliable access to our products. Our software is proprietary, and we currently rely on two third-party data
center hosting facilities, which we lease, and the expertise of members of our engineering and software development teams for the continued performance of our
platform. Recently, we began the process of migrating our platform from our leased data center hosting facilities to third-party data center hosting facilities
operated by Amazon Web Services (“AWS”). After we complete this migration, we will rely extensively on AWS to provide our clients and their users with fast
and reliable access to our products. Any disruption of or interference with our SaaS hosting network infrastructure, including the services and operations of AWS,
could harm our reputation, business and results of operations. We have experienced, and may in the future experience, disruptions in our computing and
communications infrastructure. Factors that may cause such disruptions that may harm our reputation include:
•
•
•
•
•
human error;
security breaches;
telecommunications outages from third-party providers;
computer viruses;
acts of terrorism, sabotage or other intentional acts of vandalism, including cyber attacks;
20
•
•
•
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 and there is a remote chance that client data from recent transactions may be permanently lost or otherwise compromised. In addition, we
may not have adequate insurance coverage to compensate for losses from a major interruption. Moreover, some of our agreements include performance guarantees
and service level standards that obligate us to provide credits, refunds or termination rights in the event of a significant disruption in our SaaS hosting network
infrastructure or other technical problems that relate to the functionality or design of our platform.
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 products. 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, which may cause fluctuations in certain of our operating results and financial metrics, and
thus difficulties in predictability.
We
rely
on
third-party
computer
hardware
and
software
that
may
be
difficult
to
replace
or
could
cause
errors
or
failures
of
our
service.
In addition to the software we develop, we rely on computer hardware, purchased or leased, and software licensed from third parties in order to deliver our
platform. 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 platform 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 platform could result in errors or a failure of our products, which could
harm our business.
Defects
in
our
platform
could
affect
our
reputation,
result
in
significant
costs
to
us
and
impair
our
ability
to
sell
our
products
and
related
services.
Defects in our platform could adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. The
costs incurred in correcting any product defects may be substantial and could adversely affect our operating results. Although we continually test our products for
defects and work with clients through our client support organization to identify and correct errors, defects in our products are likely to occur in the future. Any
defects that cause interruptions to the availability of our products could result in:
lost or delayed market acceptance and sales of our products;
early termination of 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.
•
•
•
•
•
•
•
While our client agreements typically contain limitations and disclaimers that purport to limit our liability for damages related to defects in our products,
such limitations and disclaimers may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.
21
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
human
capital
management
platform.
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.
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 and do not prohibit them
from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties to favor their
products or services or to prevent or reduce subscriptions to our products. In addition, these distributors and providers may not perform as expected under our
agreements, and we have had and may in the future have, disagreements or disputes with such distributors and providers, which could negatively affect our brand
and reputation. A global economic slowdown could also adversely affect the businesses of our distributors and it is possible that they may not be able to devote the
resources we expect to our relationships with such distributors.
If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our
revenue could be impaired and our operating results could suffer. Even if we are successful, we cannot assure you that these relationships will result in improved
operating results.
Failure
to
effectively
retain
and
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 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, and we may be required to sacrifice near-term growth and divert management
attention in order to restructure our direct sales teams. In particular, if our recent transition to a sales commission model based solely on subscription or recurring
revenue and other recent organizational changes hinder our ability 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.
Restructuring
activities
could
adversely
affect
our
ability
to
execute
our
business
strategy.
In December 2017, we announced that we were implementing a restructuring plan to reduce the headcount of our global service delivery team, as well as the
headcount of some of our sales teams, representing a workforce reduction of approximately six percent. In connection with this action, we incurred approximately
$1.5 million of expenditures in the quarter ended December 31, 2017 and we estimate we will incur approximately $3.0 million of expenditures, substantially all of
which will be severance costs, in the quarter ended March 31, 2018. This restructuring and any future restructurings, should it become necessary for us to continue
to restructure our business due to worldwide market conditions or other factors that reduce the demand for our products and services, could adversely affect our
ability to execute our business strategy.
22
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.
Changes to U.S. immigration and work authorization laws and regulations can be significantly affected by political forces and levels of economic activity.
Our international expansion and our business may be materially adversely affected if legislative or administrative changes to immigration or visa laws and
regulations impair our hiring processes or projects involving personnel who are not citizens of the country where the work is to be performed.
Failure
to
effectively
manage
client
deployments
by
our
third-party
service
providers
could
adversely
impact
our
business.
In cases where our third-party service providers are engaged either by us or by a client directly to deploy a product for a client, our third-party service
providers need to have a substantial understanding of such client’s business so that they can configure the product in a manner that complements its existing
business processes and integrates the product into its existing systems. It may be difficult for us to manage the timeliness of these deployments and the allocation
of personnel and resources by our clients. 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 products.
Forecasts
of
our
business
growth
and
profitability
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 and related costs to support the growth of our business. Our assumptions and estimates related to our
business growth and profitability, including the performance of our core business and emerging businesses and the demand for our products in the United States,
Europe, Japan 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
human
capital
management
products
and
services
increases
generally,
there
is
no
guarantee
that
demand
for
SaaS
products
like
ours
will
increase
to
a
corresponding
degree.
The widespread adoption of our products depends not only on strong demand for human capital 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 human capital
management functions at all, and it is unclear whether such organizations will ever adopt such functions and, if they do, whether they will desire a SaaS human
capital management platform like ours. As a result, we cannot assure you that our SaaS human capital management platform will achieve and sustain the high level
of market acceptance that is critical for the success of our business.
23
Our
business
depends
substantially
on
clients
renewing
their
agreements
with
us,
purchasing
additional
products
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 a 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 products, 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.
Integrated,
comprehensive
SaaS
products
such
as
ours
represent
a
relatively
recent
approach
to
addressing
organizations’
human
capital
management
challenges,
and
we
may
be
forced
to
change
the
prices
we
charge
for
our
products,
or
the
pricing
model
upon
which
they
are
based,
as
the
market
for
these
types
of
products
evolves.
Providing organizations with applications to address their human capital management challenges through integrated, comprehensive SaaS products is a
developing market. The market for these products 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 products and different approaches to enable
organizations to address their human capital management needs. As a result, we may be forced to reduce the prices we charge for our products or the pricing model
on which they are based, and may be unable to renew existing 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.
Evolving
regulation
of
the
Internet,
changes
in
the
infrastructure
underlying
the
Internet,
or
interruptions
in
Internet
access
may
adversely
affect
our
financial
condition
by
increasing
our
expenditures
and
causing
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. Changes in laws or regulations that adversely affect the growth, popularity or use of the Internet,
or impact the way that Internet service providers treat Internet traffic, including laws impacting net neutrality, 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 products over the Internet, our clients may discontinue the use of our human capital management
platform and choose not to renew their contracts with us. Further, the performance of the Internet has also been adversely affected by viruses, worms, hacking,
phishing attacks, denial of service attacks and other similar malicious programs, as well as other forms of damage to portions of its infrastructure, which have
resulted in a variety of Internet outages, interruptions and other delays. These service interruptions could diminish the overall attractiveness of our products to
existing and potential users and could cause demand for our products to suffer.
We
currently
have
a
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 several countries, including 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 that may decrease demand for, or restrict our ability to sell or provide, our products, including:
•
•
•
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;
24
•
•
•
•
•
•
•
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 social, political, legal 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;
currency exchange rate fluctuations, including any fluctuations caused by uncertainties relating to Brexit;
limited or unfavorable intellectual property protection; and
restrictions on repatriation of earnings.
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. In addition, it
may take us longer to build our presence in international markets. 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.
Our operations could be materially affected by changes in domestic and foreign economic, political or legal conditions. For example, we are monitoring
developments related to Brexit, which could have significant implications for our business. The political and economic instability created by the United Kingdom’s
vote to leave the EU has caused and may continue to cause significant volatility in global financial markets and the value of the British Pound currency or other
currencies, including the Euro. Depending on the terms reached regarding any exit from the EU, it is possible that there may be adverse practical and/or operational
implications on our business.
Failure
to
comply
with
anti-bribery,
anti-corruption
and
anti-money
laundering
laws
could
subject
us
to
penalties
and
other
adverse
consequences.
We are subject to the Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act and other anti-corruption, anti-bribery and anti-money laundering laws
in various jurisdictions both domestic and abroad. We leverage third parties, including channel partners, to sell subscriptions to our platform and conduct our
business abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-
owned or affiliated entities and may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees,
representatives, contractors, channel partners and agents, even if we do not explicitly authorize such activities. While we have policies and procedure to address
compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for
which we may be ultimately held responsible. Any violation of the FCPA or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws
could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions, or suspension or
debarment from U.S. government contracts, all of which may have an adverse effect on our reputation, business, operating results and prospects.
If
we
fail
to
develop
our
brand
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 products 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.
25
Our
sales
to
government
entities
are
subject
to
a
number
of
additional
challenges
and
risks.
We sell to U.S. federal and state and foreign governmental agency customers, and we may increase sales to government entities in the future. For example, in
June 2017, we entered into an agreement with the U.S. Postal Service that authorizes, but does not guarantee, the purchase by the U.S. Postal Service of our
software and services to support their more than 600,000 employees. The additional risks and challenges associated with doing business with governmental entities
include, but are not limited to, the following:
•
•
•
•
•
Selling to governmental entities can be more competitive, expensive and time-consuming than selling to private entities, often requiring significant
upfront time and expense without any assurance that these efforts will generate a sale;
Government certification requirements may change, or we may lose one or more government certifications, such as FedRAMP, and in doing so restrict
our ability to sell into the government sector until we have attained revised certificates;
Governmental entities may have significant leverage in negotiations, thereby enabling such entities to demand contract terms that differ from what we
generally agree to in our standard agreements, including, for example, most favored nation clauses and terms allowing contract termination for
convenience;
Government demand and payment for our products may be influenced by public sector budgetary cycles and funding authorizations, with funding
reductions or delays having an adverse impact on public sector demand for our products; and
Government contracts are generally subject to audits and investigations, which we have limited experience with, potentially resulting in termination of
contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government
business.
To the extent that we become more reliant on contracts with government entities in the future, our exposure to such risks and challenges could increase,
which, in turn, could adversely impact our business.
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 products and introduce new features. The success of any enhancement or new feature depends on several factors, including
timely completion, introduction and market acceptance. If we are unable to enhance our existing products to meet client needs or successfully develop or acquire
new features or products, or if such new features or products fail to be successful, our business and operating results will be adversely affected.
In addition, because our products are designed to operate on a variety of network, hardware and software platforms using Internet tools and protocols, we
will need to continuously modify and enhance our products to keep pace with changes in internet-related hardware, software, communication, browser and
database technologies. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments, our products may become less
marketable and less competitive or obsolete, and our operating results may be negatively impacted.
Finally, our ability to grow is subject to the risk of future disruptive technologies. If new technologies emerge that are able to deliver a human capital
management platform at lower prices, more efficiently or more conveniently, such technologies could adversely impact our ability to compete.
We
may
require
additional
capital
to
support
business
growth,
and
this
capital
may
not
be
available
on
acceptable
terms,
if
at
all.
We intend to continue to make investments to support our business growth and may seek additional funds to respond to business challenges, including the
need to develop new features or enhance our existing products, improve our operating infrastructure or acquire complementary businesses and technologies.
Accordingly, we may need to engage in additional equity or debt financings to secure additional funds. 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.
26
Further, the indenture governing the convertible notes due 2021 includes a restrictive covenant that, subject to specified exceptions and parameters, limits
our ability to incur additional debt. We may be unable to take advantage of strategic or business development opportunities as they arise, or we may not be able to
react to market conditions, if we are restricted in our ability to raise debt financing, or we may be required to seek alternative means to generate cash, including by
selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive, if available at all.
In addition, in connection with the sale of our convertible notes due 2012, we entered into an investment agreement with Silver Lake providing Silver Lake
with the option to purchase all or a portion of any equity securities, or instruments convertible into or exchangeable for any equity securities, in any proposed
offerings by us until the earlier of June 2019 or such time as Silver Lake no longer has a representative and no longer has rights to have a representative on our
Board. Although Silver Lake’s option will not apply to equity securities issued in connection with acquisitions, underwritten public offerings, strategic partnerships
or commercial arrangements, or equity compensation plans, Silver Lake’s participation rights could impact our ability to raise additional capital.
Servicing
our
debt
will
require
a
significant
amount
of
cash,
which
could
adversely
affect
our
business,
financial
condition
and
results
of
operations.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our convertible notes due 2021 and
2018, which represent an aggregate principal amount of $553.0 million, 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.
Further, with certain exceptions, upon a change of control, the holders of our convertible notes due 2021 may require that we repurchase all or part of such
notes at a purchase price equal to the principal amount plus the total sum of all remaining scheduled interest payments through the remainder of the term of the
notes. In addition, with certain exceptions, upon a change of control, the holders of our convertible notes due 2018 may require us to purchase all or a portion of
such notes for cash at a price equal to the principal amount of such notes plus any accrued and unpaid interest to, but excluding, the effective date of the change of
control. In such event, we may not have enough cash available or be able to obtain financing to repurchase the notes, and our ability to repurchase notes may be
limited by law, regulatory authority or agreements governing our other indebtedness.
Because
of
how
we
recognize
revenue,
a
significant
downturn
in
our
business
may
not
be
immediately
reflected
in
our
operating
results.
Generally, we recognize revenue from subscription agreements monthly over the terms of these agreements, which is typically three years for our human
capital management platform. 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 subscriptions in any one quarter may not significantly impact our revenue and financial performance in that
quarter, but will negatively affect our revenue, or rate of revenue growth and financial performance in future quarters.
In addition, if subscription agreements expire and are not renewed in the same quarter, our revenue and financial performance in that quarter and subsequent
quarters will be negatively affected. However, the revenue impact may not be immediately reflected in our operating results to the extent there is an offsetting
increase in revenue from services contracts performed in that same quarter.
Finally, we may be unable to adjust our fixed costs in response to reduced revenue. Accordingly, the effect of significant declines in sales and market
acceptance of our products may not be reflected in our short-term operating results.
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.
27
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 $61.3 million , $66.8 million and $85.5 million in 2017 , 2016 and 2015 ,
respectively. At December 31, 2017 , our accumulated deficit was $515.1 million and total stockholders’ equity was $22.1 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 products
that may not generate revenue until later periods, if at all. Any failure to increase revenue or manage our cost structure as we implement initiatives to grow our
business could prevent us from 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.
The
conversion
feature
of
the
convertible
notes
due
2018
could
adversely
affect
our
financial
condition
and
operating
results.
In the event the conditional conversion feature of the convertible notes due 2018 is triggered, holders of such notes will be entitled to convert the notes at any
time during specified periods at their option. In addition, holders of these notes may convert all or a portion of their notes at any time on and after April 1, 2018. 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
methods
for
our
convertible
debt
securities
may
have
a
material
effect
on
our
reported
financial
results.
In May 2008, the Financial Accounting Standards Board, or 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 convertible notes due 2018) 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 convertible notes due 2018 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 convertible notes
due 2018 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 convertible notes due 2018) 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. In
contrast, our convertible notes due 2021 may be settled upon conversion only in shares of our common stock. As a result, the shares issuable upon conversion of
these notes will be included in the calculation of diluted earnings per share assuming the conversion of the notes at the beginning of the reporting period if the
impact is dilutive. To the extent that we are required to include shares issuable upon conversion of our convertible debt securities in the calculation of diluted
earnings per share, our diluted earnings per share will be adversely affected.
28
The
nature
of
our
business
requires
the
application
of
complex
revenue
and
expense
recognition
rules
and
the
current
legislative
and
regulatory
environment
affecting
GAAP
is
uncertain.
Changes
in
financial
accounting
standards
or
practices
may
cause
adverse,
unexpected
financial
reporting
fluctuations
and
affect
our
reported
operating
results.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the FASB, the SEC and various bodies formed
to promulgate and interpret appropriate accounting principles. In addition, many companies’ accounting disclosures are being subjected to heightened scrutiny by
regulators and the public. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of
transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred
and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we
conduct our business.
For example, in May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
supersedes nearly all existing revenue recognition guidance under GAAP. We will adopt Topic 606 on the effective date of January 1, 2018, using the modified
retrospective transition method, and plan to implement changes to our accounting, internal controls and disclosures to support the new standard. Under this
guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be
received for those goods and services. The guidance is expected to impact the timing and recognition of costs to obtain contracts with customers, such as
commissions, and may result in variability in our revenue recognition from period to period that may cause unexpected variability in our operating results. Any
difficulties in implementing this new standard could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline, harm
investors’ confidence in us, and adversely affect our stock price.
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.
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 products. Litigation brought to protect and enforce our intellectual
property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. If
we fail to secure, protect and enforce our intellectual property rights, we may lose valuable assets, generate reduced revenue and incur costly litigation to protect
our rights, which could seriously harm our brand and adversely impact our business.
29
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 platform 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.
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 products are subject to export controls, including the Commerce Department’s Export Administration Regulations and various economic and trade
sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls, and exports of our products must be made in compliance with
these laws. If we fail to comply with these 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 products from being shipped or provided to U.S. sanctions targets,
our products 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 products or could
limit our clients’ ability to implement our products in those countries.
30
Changes to our products or changes in export and import regulations may create delays in the introduction and sale of our products in international markets,
prevent our clients with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries,
governments or persons altogether. Any change in export or import regulations, economic sanctions or related laws, shift in the enforcement or scope of existing
regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our products, or in our
decreased ability to export or sell our products to existing or potential clients with international operations. Any decreased use of our products or limitation on our
ability to export or sell our products would likely adversely affect our business, financial condition and operating results.
We
rely
on
implementation
partners
to
deliver
professional
services
to
our
clients,
and
if
these
implementation
partners
fail
to
deliver
these
professional
services
effectively,
or
if
we
are
unable
to
incentivize
new
partners
to
service
our
customers,
our
operating
results
will
be
harmed.
We rely on various partners to assist us in the successful implementation of our products and to optimize our clients’ use of our products during the terms of
their engagements. We provide our implementation partners with specific training and programs to assist them in servicing our clients, but there can be no
assurance that these steps will be utilized or effective. If these partners fail to deliver these services to our customers in an effective and timely manner, we may
suffer reputational harm and our results of operations may be adversely impacted. We also may not be able to incentivize new partners to service our customers. If
we are unable to maintain our existing relationships or enter into new ones, we would have to devote substantially more resources to delivering our professional
services. If we fail to effectively manage our implementation partners, our ability to sell our products and subscriptions and our operating results will be harmed.
Our
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, 2017 , we had $393.6 million in cash and cash equivalents and $263.5 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. We have made, and from time to time may continue to make, strategic investments in
privately-held companies. The privately-held companies in which we may invest are 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.
31
Risks Related to Tax Issues
We
are
a
multinational
organization
faced
with
increasingly
complex
tax
issues
in
many
jurisdictions,
and
we
could
be
obligated
to
pay
additional
taxes
in
various
jurisdictions.
As a multinational organization, we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of
which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles,
including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our
liquidity and operating results. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and
the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our
subsidiaries, any of which could have a material impact on us and our operating results. If we are selected for future examinations that uncover incorrect tax
positions, we could be subject to additional taxes, interest and penalties.
Taxing
authorities
could
reallocate
our
taxable
income
among
our
subsidiaries,
which
could
increase
our
consolidated
tax
liability.
We conduct operations worldwide through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between our subsidiaries. If two
or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as
those between unrelated companies dealing at arms’ length and that contemporaneous documentation is maintained to support the transfer prices. While we believe
that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable
tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s length transactions, they could
require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. In
addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double
taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would
increase our consolidated tax liability, which could adversely affect our financial condition, operating results and cash flows.
The
recently
passed
comprehensive
tax
reform
bill
could
adversely
affect
our
business
and
financial
condition.
On December 22, 2017, new legislation was enacted that significantly revises the Internal Revenue Code of 1986, as amended. The newly enacted federal
income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of
35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitations on the
deductibility of executive compensation, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating
loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings
(subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and
modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal
tax law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will
conform to the newly enacted federal tax law. The Act's new international rules, including the Global Intangible Low-Taxed Income, the Foreign Derived
Intangible Income and the Base Erosion Anti-Avoidance Tax, are highly complex and may affect our financial condition as additional interpretive guidance is
issued. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal
and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.
Our
ability
to
use
net
operating
loss
carryforwards
to
reduce
future
tax
payments
may
be
subject
to
limitations.
We have federal and state net operating loss carryforwards that will begin to expire, if not utilized. These net operating loss carryforwards could expire
unused and be unavailable to offset future income tax liabilities. Under the newly enacted federal income tax law, federal net operating losses incurred in 2018 and
in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses may be limited. It is uncertain if and to what extent
various states will conform to the newly enacted federal tax law. In addition, 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
32
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:
•
•
•
•
•
•
•
•
•
•
our operating performance and the performance of other similar companies;
the financial or non-financial metric projections we provide to the public, including the failure of the projections to meet the expectations of securities
analysts or investors, and any changes in these projections or our failure to meet or exceed these projections;
the overall performance of the equity markets;
developments with respect to intellectual property rights;
publication of unfavorable research reports about us or our industry or withdrawal of research coverage by securities analysts;
speculation in the press or investment community;
the size of our public float;
natural disasters 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.
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 cover us downgrade our common stock or publish incorrect or unfavorable research about our business, the market price
of our common stock would likely decline. In addition, if one or more of these analysts cease coverage of our company or fail to publish reports on us regularly,
demand for our common stock could decrease, which could cause the market price of our stock or trading volume to decline.
The
issuance
of
additional
stock
in
connection
with
acquisitions,
our
stock
incentive
plans
or
otherwise
will
dilute
all
other
stockholdings.
Our certificate of incorporation authorizes us to issue up to 1,000,000,000 shares of common stock and up to 50,000,000 shares of preferred stock with such
rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue all of these
shares that are not already outstanding without any action or approval by our stockholders. We intend to continue to evaluate strategic acquisitions in the future.
We may pay for such acquisitions, partly or in full, through the issuance of additional equity. 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.
33
We
cannot
guarantee
that
our
recently
announced
share
repurchase
program
will
be
fully
consummated
or
that
it
will
enhance
shareholder
value,
and
share
repurchases
could
affect
the
trading
price
of
our
common
stock.
In November 2017, our board of directors authorized a $100.0 million share repurchase program. Although our board of directors has authorized a share
repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The
share repurchase program could affect the price of our common stock, increase volatility and diminish our cash reserves. In addition, it may be suspended or
terminated at any time, which may result in a decrease in the price of our common stock.
Conversion
of
our
convertible
notes
may
dilute
the
ownership
interest
of
existing
stockholders,
including
holders
who
had
previously
converted
their
notes,
or
may
otherwise
depress
the
price
of
our
common
stock.
The conversion of some or all of our convertible notes due 2021 and the conversion of all or some of our convertible notes due 2018, to the extent we deliver
shares upon conversion of the 2018 notes. will dilute the ownership interests of existing stockholders. Any sales in the public market of our 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, our bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us
or changes in our management. Our certificate of incorporation and our bylaws include provisions that:
•
•
•
•
•
•
•
•
authorize “blank check” preferred stock, which could be issued by the board 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.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which
limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us.
Any provision of our certificate of incorporation, our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay
for our common stock.
Item 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, Netherlands; Auckland, New Zealand; Bangalore, India; Düsseldorf, Germany;
Hong Kong; London, United Kingdom; Madrid, Spain; Mumbai, India; Munich, Germany; New Delhi, India; Paris, France; São Paulo, Brazil; Stockholm,
Sweden; Sunnyvale, United States; Sydney, Australia; Tel Aviv, Israel; and Tokyo, Japan 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.
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 and tort claims, labor and employment claims, tax and other matters. Although claims, suits,
investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of our current pending
matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash 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
34
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 2017
Fiscal 2016
High
Low
High
Low
$
43.75 $
38.36 $
34.15 $
39.51
41.14
40.90
35.31
33.82
34.17
43.08
47.17
45.88
24.38
32.92
37.88
31.55
As of January 31, 2018 there were 19 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.
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 December 31, 2012 through December 31, 2017 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 December 31, 2012 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.
35
COMPARISON OF CUMULATIVE TOTAL RETURN OF CORNERSTONE ONDEMAND
Cornerstone OnDemand
Nasdaq Global Market Index
Nasdaq Computer & Data Processing Index
December
31, 2012
December
31, 2013
December
31, 2014
December
31, 2015
December
31, 2016
December
31, 2017
$
$
$
100.00 $
100.00 $
100.00 $
180.53 $
166.85 $
131.95 $
119.20 $
176.88 $
158.17 $
116.93 $
176.86 $
168.05 $
143.28 $
170.04 $
188.67 $
119.64
212.17
261.81
The comparisons shown in the graph and table above 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. See the disclosure in Part I, Item 1A. “Risk
Factors.”
Equity Compensation Plan Information
The information required by this item will be included in our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2017 , and is incorporated herein by reference.
Recent Sales of Unregistered Securities
None.
36
Issuer Purchases of Equity Securities
The following table summarizes stock repurchases during the year ended December 31, 2017 (in thousands, expect per share amounts):
November 2017
December 2017
Total Number of
Shares Purchased
Average Price Paid
per Share
100 $
536 $
636 $
36.46
35.38
35.55
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plan or Programs (1)
96,370
100 $
536 $
636
77,400
(1)
In November 2017, our board of directors authorized a $100.0 million share repurchase program of our common stock. We may repurchase our
common stock for cash in the open market in accordance with applicable securities laws. The timing and amount of any stock repurchase will depend
on share price, corporate and regulatory requirements, economic and market conditions, and other factors. The stock repurchase authorization will
expire in November 2019 and shares repurchased will be immediately retired.
Item 6.
Selected
Financial
Data
The statements of operations data for the three years ended December 31, 2017 , 2016 and 2015 and the balance sheet data at December 31, 2017 and 2016 ,
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, 2014 and 2013 and the balance sheet data at December 31, 2015, 2014 and 2013, 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.
37
2017
2016
Years Ended December 31,
2015
(in thousands)
2014
2013
Consolidated statements of operations data:
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Restructuring
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 provision for income taxes
Income tax (provision) benefit
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic
and diluted
$
481,985 $
423,124 $
339,651 $
263,568 $
142,867
339,118
240,271
61,975
84,589
1,539
—
388,374
(49,256)
(10,333)
(59,589)
(1,746)
135,752
287,372
225,631
46,977
70,956
—
150
343,714
(56,342)
(9,288)
(65,630)
(1,207)
109,864
229,787
207,026
40,991
49,877
—
600
298,494
(68,707)
(15,628)
(84,335)
(1,181)
77,684
185,884
162,552
30,618
41,802
—
828
235,800
(49,916)
(14,128)
(64,044)
(855)
$
$
(61,335) $
(66,837) $
(85,516) $
(64,899) $
(1.07) $
(1.20) $
(1.58) $
(1.22) $
185,129
53,548
131,581
109,737
21,260
33,572
—
1,004
165,573
(33,992)
(6,562)
(40,554)
128
(40,426)
(0.79)
57,262
55,595
54,171
53,267
51,427
2017
2016
At December 31,
2015
(in thousands)
2014
2013
Consolidated balance sheet data:
Cash and cash equivalents
Short-term and long-term investments
Property and equipment, net
Working capital, excluding deferred revenue, current
portion 1
Total assets
Deferred revenue, current and non-current portion
Debt, current portion and non-current portion
Capital lease obligations, current portion and non-current
portion
Total stockholders’ equity
$
393,576 $
83,300 $
107,691 $
166,557 $
266,500
20,817
449,874
967,190
326,163
533,193
—
22,120
259,837
23,962
419,408
623,629
282,332
238,432
—
26,963
201,088
27,021
334,664
561,545
252,139
232,583
33
7,822
170,044
21,424
356,553
505,655
191,336
225,445
236
35,502
109,583
199,925
14,436
369,499
451,355
138,822
218,876
1,123
52,895
1 Working capital is defined as total current assets minus total current liabilities.
38
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
Cornerstone is a leading global provider of learning and human capital management software, delivered as Software-as-a-Service (“SaaS”). We are one of
the world’s largest cloud computing companies with approximately 35.3 million users across 3,250 clients in 192 countries and 43 different languages. We help
organizations around the globe recruit, train and manage their employees.
Following a strategic review process undertaken by our board of directors during 2017, the board determined that the optimal way to maximize shareholder
value is to execute a plan to transform our operations and support that plan with a capital infusion and new strategic partnerships. As a result, we entered into an
agreement with Silver Lake, one of the world's leading technology private equity investors, and LinkedIn, under which Silver Lake and LinkedIn invested $300.0
million in Cornerstone in the form of convertible senior notes. In November 2017, we announced our strategic plan with the objective of better positioning us for
long-term growth and increasing shareholder value. In connection with the plan, we will (i) sharpen our focus on recurring revenue growth; (ii) drive operating
margin and free cash flow improvement; (iii) develop new recurring revenue streams, including e-learning content subscriptions; (iv) bolster our leadership team;
and (v) strengthen our governance to help us best execute on this strategic transformation.
Our human capital management platform combines the world’s leading unified talent management solutions with state-of-the-art analytics and HR
administration solutions to enable organizations to manage the entire employee lifecycle. Our focus on continuous learning and development helps organizations to
empower employees to realize their potential and drive success.
We work with clients across all geographies, verticals and market segments. Our clients include multi-national corporations, large domestic and foreign-
based enterprises, mid-market companies, public sector organizations, healthcare providers, higher education institutions, non-profit organizations and small
businesses. We sell our platform domestically and internationally through both direct and indirect channels, including direct sales teams throughout North and
South America, Europe and Asia-Pacific and distributor relationships with payroll companies, human resource consultancies and global system integrators.
Our enterprise human capital management platform is composed of four product suites:
•
•
•
•
Our Recruiting suite helps organizations to source and attract candidates, assess and select applicants, onboard new hires and manage the entire recruiting
process;
Our Learning suite enables clients to manage training and development programs, knowledge sharing and collaboration among employees, track
compliance requirements and support career development for employees. Our content offering delivers fresh, modern content, fueling employee curiosity
and inspiring growth;
Our Performance suite provides tools to manage goal setting, performance reviews, competency assessments, development plans, continuous feedback,
compensation management and succession planning; and
Our HR Administration suite supports employee records administration, organizational management, employee and manager self-service, workforce
planning and compliance reporting.
Our clients can supplement the product suites with our state-of-the-art analytics capabilities to make more-informed decisions using data from across the
platform for talent mobility, engagement and development so that HR and leadership can focus on strategic initiatives to help their organization succeed.
In addition to our enterprise human capital management platform, we offer Cornerstone PiiQ, formerly known as Cornerstone Growth Edition, which is a
cloud-based talent management solution with performance and learning products targeted to organizations with 500 or fewer employees. We currently do not
include the number of clients and users of our Cornerstone for Salesforce and Cornerstone PiiQ products in our client and user count metrics as they are not
significant and we believe the client and user count metrics for our human capital management platform give a better indication of our overall performance.
39
Our Client Success team supports our clients’ ongoing optimization of their talent processes and use of our platform. In addition, our Cornerstone Edge
solutions allow our clients and partners to more easily integrate with a growing marketplace of service providers. After the initial purchase of our platform, we
continue to market and sell to our existing clients, who may renew their subscriptions, add additional products, broaden the deployment of the platform across their
organizations and increase usage of the platform over time.
We generate most of our revenue from the sale of our products pursuant to multi-year client agreements. Client agreements for our human capital
management platform 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 human capital management platform based on the number of products purchased
and the permitted number of users with access to each product.
We sell our products 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 professional services as the services are
performed. In certain instances, our clients request enhancements to the underlying features and functionality of our human capital management platform, 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 upfront for annual subscription fees for multi-year subscriptions and upfront for professional services. We record amounts invoiced
for annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our balance sheet. With the growth in the
number of clients, our revenue grew to $482.0 million for the year ended December 31, 2017 from $423.1 million for the same period in 2016 .
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. As the terms of most of our client agreements are full year increments, agreements initially entered
into the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected to a much
lesser extent, and sometimes is not immediately apparent, in our revenue, due to the fact that we 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, invoice new clients, invoice existing clients for annual subscription periods and recognize revenue. We
expect this seasonality to continue, which may cause fluctuations in certain of our operating results and financial metrics, and thus limit our ability to predict future
results.
We believe the market for human capital management remains large and underpenetrated, providing us with significant growth opportunities. We expect
businesses and other organizations to continue to increase their spending on human capital management platforms 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 human capital management platform 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. Over time, we expect our sales and marketing expenses to
increase, as we continue to expand our direct sales teams, increase our marketing activities and grow our international operations; however, we are focused on
optimizing our investment in sales and marketing and expect to obtain operating leverage into future years similar to what we have achieved over the last couple of
years. Research and development expenses are expected to increase as we continue to improve the existing functionality for our products. 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 service capabilities in order to support
continued future growth. While we expect to increase our level of investment in the business, we also expect that these increased levels of spending will drive
improved profitability over time, such that we should obtain incremental leverage in categories like general and administrative expenses.
40
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, including those described in the “ Risk Factors ” section of this Annual Report on Form 10-K. 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.
Subscription revenue. Revenue as defined above on a recurring basis.
Annual recurring revenue. In order to assess our business performance with a metric that reflects a subscription-based business model, we track annual
recurring revenue, which is a non-GAAP financial measure we define as the annualized recurring value of all active contracts at the end of a reporting
period.
Billings . 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 billings, 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 billings so it better reflects new business activity in the period as evidenced by
payments under our billing policies arising from the acquisition of new clients, sales of additional products to existing clients, the addition of incremental
users by existing clients and client renewals. Beginning in the first quarter of 2018, due to the implementation of our renewed strategic plan and
specifically the migration of professional services to our partners, we will no longer consider billings a key metric and will stop reporting on it. Factors
that may cause our billings results to vary from period to period include the following:
◦
◦
◦
Billings terms. Any changes in those billing terms may shift billings between periods.
Seasonality . Due to the seasonality of our sales, billings growth is inconsistent from quarter to quarter throughout a calendar year.
Foreign currency exchange rates. While most of our billings have historically been in U.S. Dollars, an increasing percentage of our billings in
recent periods has been in foreign currencies, particularly the British Pound.
For a reconciliation of billings to revenue, please see “ Results of Operations – Revenue and Metrics .”
Unlevered Free cash flow. We define unlevered free cash flow, a non-GAAP financial measure, as cash provided by operating activities minus capital
expenditures and capitalized software costs plus cash paid for interest. We present this metric because it is a liquidity measure that provides useful
information to management and investors about the amount of cash generated by our business that can be used for strategic opportunities, including
investing in our business and strengthening our balance sheet.
Annual dollar retention rate . We define annual dollar retention rate 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 beginning of the fiscal year and includes incremental sales
up to but not exceeding the original renewal amount to the existing client base. 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. 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 human capital management platform. This ratio excludes the implied
monthly recurring revenue from clients of our Cornerstone for Salesforce and Cornerstone PiiQ products. 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.
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•
•
•
Constant currency results . We present constant currency information, a non-GAAP financial measure, to provide a framework for assessing how our
underlying business performed excluding the effect of foreign currency fluctuations. Due to our legal and operating structure, our international revenues
are favorably impacted as the U.S. Dollar weakens relative to the British pound, and unfavorably impacted as the U.S. Dollar strengthens relative to the
British pound. We believe the presentation of results on a constant currency basis in addition to reported results helps improve the ability to understand
our performance because they exclude the effects of foreign currency volatility that are not indicative of our core operating results. To present this
information, current period results for entities reporting in British pounds are translated into U.S. Dollars at the prior period exchange rates as opposed to
the actual exchange rates in effect for the current period. These results should be considered in addition to, not as a substitute for, results reported in
accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other
companies and are not a measure of performance presented in accordance with GAAP.
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 human capital management
platform as of the end of the period and excludes clients of our Cornerstone for Salesforce and Cornerstone PiiQ products.
Number of users. Since our clients generally pay fees based on the number of users of our products 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 human capital management platform and
excludes users of our Cornerstone for Salesforce and Cornerstone PiiQ products.
Key Components of Our Results of Operations
Sources
of
Revenue
and
Revenue
Recognition
Our platform is designed to enable organizations to meet the challenges they face in maximizing the productivity of their human capital. We generate
revenue from the following sources:
•
•
Subscriptions to Our Products and Other Offerings on a Recurring Basis. Clients pay subscription fees for access to our enterprise human capital
management platform, other products and support on a recurring basis. Fees are based on a number of factors, including the number of products
purchased, which may include e-learning content, and the number of users having access to a product. We generally recognize revenue from subscriptions
ratably over the term of the agreements.
Professional Services and Other. We offer our clients assistance in implementing our products and optimizing their use. Professional services include
application configuration, system integration, business process re-engineering, change management and training services. Services are generally billed on
a fixed-fee basis and to a lesser degree on a time-and-material 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 professional services at any other time. We generally
recognize revenue from fixed fee professional services using the proportional performance method over the period the services are performed and as time
is incurred for time-and-material arrangements.
Our client agreements generally include both subscription to access our products and related professional services. Our agreements generally do not contain
any cancellation or refund provisions other than in the event of our default.
Cost
of
Revenue
Cost of revenue consists primarily of costs related to hosting our products; personnel and related expenses, including stock-based compensation, for network
infrastructure, IT support, delivery of contracted professional 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 professional services are significantly higher, as a percentage of revenue,
than the costs associated with providing access to our products due to the labor costs to provide the consulting services. We expect gross margin to increase over
time as we optimize the efficiency of our operations and continue to scale our business.
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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 strategically to expand our business both domestically and internationally. We expect over time
sales and marketing expenses, as a percentage of revenue, to decrease.
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 products. We believe that our research and development activities
are efficient because we benefit from maintaining a single software code base for each of our products. We expect research and development expenses to
increase proportionately with our business.
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 but decrease as a percentage of
revenue.
Restructuring. Restructuring consists of payroll-related costs, such as severance, outplacement costs and continuing healthcare coverage, associated with
employee terminations.
Amortization of Certain Acquired Intangible Assets. Amortization of certain acquired intangible assets consists of amortization of acquisition-related
intangibles for customer relationships.
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, U.S.
treasury securities and commercial paper.
Interest Expense. Interest expense consists primarily of interest expense from our convertible notes, accretion of debt discount and amortization of debt
issuance costs.
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 income, state income and withholding taxes. Given our historical losses, we have not recorded a provision,
except for state minimum taxes and withholding taxes, for United States, United Kingdom, New Zealand, Hong Kong and Brazil income taxes as we have recorded
a full valuation allowance against the net deferred tax assets for each of these countries. Other foreign subsidiaries and branches provide intercompany services and
are compensated on a cost-plus basis, and therefore, have incurred liabilities for foreign income taxes in their respective jurisdictions.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the related notes included elsewhere in this 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
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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 products or professional services exists, (ii) our products 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 products. 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 products accompanied by professional 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 products, 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 products 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 professional services
have standalone value because third-party service providers, distributors or our clients themselves can perform these services without our involvement. The
professional services we provide are to assist clients with the configuration and integration of our products. 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 professional 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 products. Accordingly, we determine the selling
prices of subscriptions to our products, professional services and e-learning content based on BESP. In determining BESP for subscriptions to our products, 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 products 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 professional services, we analyze both bundled
arrangements that include subscriptions to our products and professional services, as well as standalone purchases of different types of professional services made
subsequent to the original subscription. For these professional 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. The amount we allocate to professional services generally does not exceed its
contractual value, as the revenue for subscription to our products is delivered over a longer period of time and represents contingent consideration. This can result
in higher allocations of the contractual value to subscriptions to our products over and above the relative fair value allocation based on this limitation. For e-
learning content, we estimate BESP by reviewing fees for content in order to establish an average
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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 professional 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 professional services, we consider the type of professional 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 products,
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 professional services and e-learning content considers our internal costs to provide the professional 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 professional
services and content included with the subscriptions in the arrangement.
•
We update our estimates of BESP on an ongoing basis through internal periodic reviews and 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 products, we recognize the revenue on a straight-line basis over the term of the client agreement, which is
typically three years. For professional 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 product 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 product 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 product. The enhancement revenue is recognized based on the allocated value on a straight-line basis once the enhancement has been made to
the product.
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 products, 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.
Commission
Expense
We defer commissions paid to our sales force because these amounts are recoverable from future revenue due to 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.
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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.
Beginning in 2017, we began estimating expected volatility based solely on our historical volatility as a public company. In previous years, we estimated this
using the average volatility of similar publicly traded companies as sufficient trading history of our stock was not available. 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 in the past and do not currently intend to declare dividends in the foreseeable future.
The following information represents the weighted average of the assumptions used in the Black-Scholes option-pricing model for stock options granted
within each of the last three years:
Risk-free interest rate
Expected term (in years)
Estimated dividend yield
Estimated volatility
For the Years Ended December 31,
2017
2016
2015
n/a
n/a
n/a
n/a
1.4%
5.8
—%
48.8%
1.8%
6.0
—%
41.8%
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, we 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 vest based upon continued service through the vesting term and achievement of
certain market conditions and performance goals, and others that vest based upon continued service through the vesting term and achievement of certain market
conditions or performance goals, established by the board of directors, for a predetermined period. The fair value of the performance-based awards containing a
market condition are determined using a Monte-Carlo simulation model that factors in the probability of the award vesting. The fair value of the performance-
based awards containing only a service and performance condition are determined based upon the closing price of our common stock on the date of the grant. For
performance-based awards, the fair value is not determined until all of the terms and conditions of the award are established.
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As of December 31, 2017 , we had approximately $5.4 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 1.0 year . Unrecognized compensation expense related to
nonvested restricted stock units was $105.7 million at December 31, 2017 , which is expected to be recognized as expense over the weighted-average period of 2.7
years. Additionally, during 2017, 2016 and 2014, we granted certain performance-based restricted stock units. There was no unrecognized compensation expense
related to performance-based restricted stock units at December 31, 2017 . 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 2018 compared to 2017 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,
2017 and 2016 , our allowance for doubtful accounts was $7.5 million and $3.5 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
products, when the preliminary project stage is completed, management has decided to make the project a part of a future offering and the software will be used to
perform the function intended. These capitalized costs include external direct costs of materials and services consumed in developing or obtaining internal-use
software, personnel and related expenses for employees who are directly associated with, 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 products are also capitalized. Post-configuration training and maintenance costs are
expensed as incurred. Capitalized software costs are amortized to cost of revenue using the straight-line method over the estimated useful life of the software of
typically three years, commencing when the software is ready for its intended use.
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.
47
Consistent with our impairment analysis at December 31, 2016 , we had one reporting unit for purposes of the impairment analysis as of December 31, 2017
. 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, 2017 .
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, 2017 and 2016 .
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, 2017 , we had $263.5 million of investments in marketable securities.
Convertible
Notes
In June 2013, we issued 1.5% convertible notes due July 1, 2018 with a principal amount of $253.0 million (the “2018 Notes”). In December 2017, we issued
5.75% senior convertible notes due July 1, 2021 with a principal amount of $300.0 million (the “2021 Notes”). In accounting for the 2018 Notes at issuance, we
separated the 2018 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 2018 Notes, excluding the
conversion feature. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have an associated
convertible feature. The excess of the principal amount of the 2018 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 2018 Notes using the interest method.
The equity component of the 2018 Notes was recorded to additional paid-in capital
48
is not to be remeasured as long as it continues to meet the conditions for equity classification. The 2021 Notes were recorded based on the fair value of the
proceeds, net of discounts and issuance costs, that will be accreted to face value over the term of the 2021 Notes.
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. 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.
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
In May 2014, the FASB issued a new ASU that provides guidance for recognizing revenue from contracts with customers. Under the new standard, we are
required to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration that we expect to be entitled
to in exchange for those goods or services. The standard permits the use of the full retrospective method, in which case the standard would be applied to each prior
reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective
method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. We have evaluated the transition
methods and elected to use the modified retrospective method and will adopt this standard beginning January 1, 2018.
During fiscal year 2017, we evaluated the accounting and disclosure requirements of the standard and implemented the appropriate changes to its business
processes, systems and internal controls to enable the preparation of its financial information on adoption. We are in the process of finalizing our assessment of the
standard as our analysis of costs that represent incremental costs to obtain a contract is ongoing. We believe that we will finalize this analysis in connection with
the preparation of our financial statements as of and for the quarter ended March 31, 2018. Costs that represent incremental costs to obtain a contract will be
amortized over the expected product life. We have finalized our assessment of how we recognize revenue for subscriptions to our products and other offerings on a
recurring basis and revenue for professional services. Upon adoption, revenue for professional services will be based on the relative standalone selling price
without limitation to its contractual value. Prior to adoption, such allocation was limited by its contractual value. This change is expected to result in a material
increase in the aggregate amount allocated to professional services when allocating total contract values on a relative standalone selling price basis under the new
standard. We expect to adjust the following balance sheet line items in fiscal year 2018 to reflect the adoption of the new ASU: deferred commissions; other assets,
net; accrued expenses; deferred revenue, current portion; other non-current liabilities; deferred revenue, net of current portion; and accumulated deficit.
For additional information regarding recent accounting pronouncements, refer to Note 2 of the Notes to Consolidated Financial Statements included in this
Annual Report on Form 10-K.
49
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
Restructuring
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
Income tax provision
Net loss
2017
$
Year Ended
December 31,
2016
2015
481,985 $
142,867
339,118
423,124 $
135,752
287,372
240,271
61,975
84,589
1,539
—
388,374
(49,256)
2,951
(14,762)
1,478
(10,333)
(59,589)
(1,746)
225,631
46,977
70,956
—
150
343,714
(56,342)
1,702
(12,924)
1,934
(9,288)
(65,630)
(1,207)
$
(61,335) $
(66,837) $
The following table sets forth our results of operations as a percentage of total revenue for each of the periods indicated.
2017
Year Ended
December 31,
2016
2015
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Restructuring
Amortization of certain acquired intangibles
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other, net
Loss before income tax provision
Income tax provision
Net loss
100.0 %
29.6 %
70.4 %
49.9 %
12.9 %
17.6 %
0.3 %
— %
80.6 %
(10.2)%
0.6 %
(3.1)%
0.3 %
(12.4)%
(0.4)%
(12.7)%
100.0 %
32.1 %
67.9 %
53.3 %
11.1 %
16.8 %
— %
— %
81.2 %
(13.3)%
0.4 %
(3.1)%
0.5 %
(15.5)%
(0.3)%
(15.8)%
50
339,651
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)
(85,516)
100.0 %
32.3 %
67.7 %
61.0 %
12.1 %
14.7 %
— %
0.2 %
87.9 %
(20.2)%
0.3 %
(3.7)%
(1.2)%
(24.8)%
(0.3)%
(25.2)%
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)
Subscription revenue (in thousands)
Annual recurring revenue (in thousands)
Billings (in thousands)
Unlevered free cash flow (in thousands)
Annual dollar retention rate
Number of clients
Number of users (in millions)
$
$
$
$
$
At or For Year Ended December 31,
2017
2016
2015
481,985
396,764
439,000
525,816
43,680
$
$
$
$
93.5%
3,250
35.3
423,124
339,756
n/a
453,317
16,411
$
$
$
$
95.1%
2,918
29.9
339,651
270,093
n/a
400,454
16,795
95.4%
2,595
23.8
Revenue increased $58.9 million , or 14% , in 2017 when compared to 2016 . Revenue growth on a constant currency basis increased 15% in 2017 when
compared to 2016 . Revenue increased $83.5 million, or 25%, in 2016 when compared to 2015 . Revenue growth on a constant currency basis increased 29% in
2016 when compared to 2015 . The rate of our revenue increase can be impacted by the mix and timing of new client agreements signed, the mix of subscription
and professional services revenue, the timing of delivery of our professional services revenue, fluctuations in foreign exchange rates, as well as the growth rate of
our emerging markets.
The rate at which revenue increased year over year declined in 2017 , from 25% in 2016 to 14% in 2017 . Our growth rate can depend on a variety of factors,
such as new clients, the size, volume and complexity of our agreements with our customers, foreign currency movements, our ability to work with our customers to
implement and deliver our products, 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 sources of revenue for each of the periods indicated (dollars in thousands):
Subscription revenue
Percentage of subscription revenue to total revenue
Professional services revenue
Percentage of professional services to total revenue
At or For Year Ended December 31,
2017
2016
2015
396,764
$
82.3%
85,221
$
17.7%
481,985
$
339,756
$
80.3%
83,368
$
19.7%
423,124
$
270,093
79.5%
69,558
20.5%
339,651
$
$
$
Subscription revenue increased by $57.0 million in 2017 . The increase was attributable to new business, which includes new clients, upsells and renewals
from existing clients. Professional services revenue increased by $1.9 million in 2017 . The timing of the recognition of professional services revenue can depend
on a variety of factors, such as the size, volume and complexity of our agreements with our customers and our ability to work with our customers to implement and
deliver our solutions.
Revenue by geography is generally based on the address of the customer as defined in our master subscription agreement with each customer. The following
table sets forth our revenue by geographic area for each of the periods indicated (dollars 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,
2017
2016
2015
313,729
$
65.1%
168,256
$
34.9%
481,985
$
284,657
$
67.3%
138,467
$
32.7%
423,124
$
228,724
67.3%
110,927
32.7%
339,651
$
$
$
51
Annual recurring revenue for the year ended December 31, 2017 was $439.0 million . In order to assess our business performance with a metric that reflects
our transition to an even more subscription-based (or recurring revenue) business model, we track annual recurring revenue, which is a non-GAAP financial
measure we define as the annualized recurring value of all active contracts at the end of a reporting period. Management believes this metric is useful to investors,
in evaluating our ongoing operational performance and trends, and in comparing our financial measures with other companies in the same industry. However, it is
important to note that other companies, including companies in our industry, may calculate annual recurring revenue differently or not at all, which may reduce its
usefulness as a comparative measure.
Billings increased $72.5 million , or 16% in 2017 , reflecting the increase in revenue for the period, plus an increase in deferred revenue compared to the
same period in 2016 . Billings growth on a constant currency basis increased 12% in 2017 . Billings increased $52.9 million, or 13% in 2016 , reflecting the
increase in revenue for the period, plus an increase in deferred revenue compared to the same period in 2015 . Billings growth on a constant currency basis
increased 20% in 2016 . The growth rates for revenue and billings are not correlated with each other in a given period due to the seasonality of when we enter into
client agreements, fluctuations in foreign exchange rates, 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 professional services revenue generally on a proportional performance basis over the period the
services are performed.
As discussed above under the section titled “ Metrics ,” billings is a non-GAAP financial measure, which we define as the sum of revenue and the change in
the deferred revenue balance for the period. Management has historically used billings 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 billings differently
or not at all, which may reduce its usefulness as a comparative measure. Due to the implementation of our renewed strategic plan and specifically the migration of
professional services to our partners, we will no longer consider billings a key metric and will stop reporting on it beginning in the first quarter of 2018.
52
The following table presents a reconciliation of revenue to billings for each of the periods presented (in thousands):
Revenue
Deferred revenue at December 31, 2016
Deferred revenue at December 31, 2017
Change in deferred revenue
Billings
Revenue
Deferred revenue at December 31, 2015
Deferred revenue at December 31, 2016
Change in deferred revenue
Billings
Revenue
Deferred revenue at December 31, 2014
Deferred revenue at December 31, 2015
Change in deferred revenue
Billings
$
$
$
Deferred
Revenue
Balance
Year Ended
December 31, 2017
$
481,985
282,332
326,163
$
43,831
525,816
Deferred
Revenue
Balance
Year Ended
December 31, 2016
$
423,124
252,139
282,332
$
30,193
453,317
Deferred
Revenue
Balance
Year Ended
December 31, 2015
$
339,651
191,336
252,139
$
60,803
400,454
Unlevered free cash flow for the year ended December 31, 2017 was $43.7 million . We define unlevered free cash flow, a non-GAAP financial measure, as
net cash provided by operating activities minus capital expenditures and capitalized software costs plus cash paid for interest. We present this metric because it is a
liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that can be used for strategic
opportunities, including investing in our business and strengthening our balance sheet.
In 2017 , our number of clients grew 11% and our number of users increased 18% .
Cost
of
Revenue,
Gross
Profit
and
Gross
Margin
Cost of revenue
Gross profit
Gross margin
Year Ended December 31,
2017
2016
2015
$
$
142,867
339,118
$
$
70.4%
(dollars in thousands)
135,752
287,372
$
$
67.9%
109,864
229,787
67.7%
Cost of revenue increased $7.1 million , or 5% , in 2017 as compared to 2016 . The increase in cost of revenue was primarily due to $4.4 million in increased
amortization of capitalized software, $1.9 million in increased employee-related costs due to higher headcount and $1.9 million in increased third-party content
costs. These increased costs were offset by $2.2 million in decreased costs related to outsourced consulting services. These costs were incurred to service our
existing clients and support our continued growth. The improvement in gross margin was primarily due to a higher mix of subscription revenue, which carry a
higher gross margin. Aside from the improvement in gross margin from the higher mix of subscription revenue, we expect gross margin to increase over time as we
optimize the efficiency of our operations and continue to scale our business.
53
Cost of revenue increased $25.9 million, or 24%, in 2016 . as compared to 2015 . The increase in cost of revenue was consistent with the increase in revenue.
The increase in cost of revenue was primarily due to $12.1 million in increased costs related to outsourced consulting services, $4.1 million in increased
amortization of capitalized software, $3.8 million in increased employee-related costs due to higher headcount, $1.5 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
Sales
and
Marketing
Sales and marketing
Percent of revenue
Year Ended December 31,
2017
2016
2015
$
240,271
$
(dollars in thousands)
225,631
$
49.9%
53.3%
207,026
61.0%
Sales and marketing expenses increased $14.6 million , or 6% , in 2017 as compared to 2016 . As a percentage of revenue, sales and marketing expense
decreased by approximately three percentage points, primarily resulting from a combination of increased cost efficiency and leverage realized from changes to our
sales commission plans, as we continued our efforts to strategically scale our sales teams and improve their productivity.
Sales and marketing expenses increased $18.6 million, or 9%, in 2016 as compared to 2015 . As a percentage of revenue, sales and marketing expense
decreased by approximately eight percentage points, primarily resulting from a combination of increased cost efficiency and leverage realized from changes to our
sales commission plans, as we continued our efforts to strategically scale our sales teams and improve their productivity.
We assess our investments in new and existing markets strategically and we believe we have gained leverage through our operational excellence initiatives.
We expect over time sales and marketing expense, as a percentage of revenue, to continue to decrease as we gain efficiency throughout the various sales teams.
Research
and
Development
Research and development
Percent of revenue
Year Ended December 31,
2017
2016
2015
$
61,975
$
12.9%
(dollars in thousands)
46,977
$
11.1%
40,991
12.1%
Research and development expenses increased $15.0 million , or 32% , in 2017 as compared to 2016 . The increase was principally due to an increase in
research and development headcount to maintain and improve the functionality of our products. As a result, we incurred increased employee-related costs of $10.4
million. In addition, we determined that previously capitalized software costs were impaired resulting in the write-off of $1.3 million .
Research and development expenses increased $6.0 million, or 15%, in 2016 as compared to 2015 . The increase was principally due to an increase in
research and development headcount to maintain and improve the functionality of our products. As a result, we incurred increased employee-related costs of $4.3
million.
We continue to develop and release new products and new features within existing products and as a result, we expect research and development expense to
increase proportionately with revenue.
54
We capitalize a portion of our software development costs related to the development and enhancements of our products, which are then amortized to cost of
revenue. The timing of our capitalizable development and enhancement projects may affect the amount of development costs expensed in any given period. We
capitalized $24.3 million , $20.9 million and $16.5 million of software development costs and amortized $17.6 million , $13.2 million and $9.1 million in 2017 ,
2016 and 2015 , respectively.
General
and
Administrative
General and administrative
Percent of revenue
Year Ended December 31,
2017
2016
2015
$
84,589
$
17.6%
(dollars in thousands)
70,956
$
16.8%
49,877
14.7%
General and administrative expenses increased $13.6 million , or 19% , in 2017 as compared to 2016 . The increase was largely driven by higher costs to
support our growing business and incremental spend to support our operational excellence initiatives, which we expect to result in future margin improvements.
We incurred increased employee-related costs of $9.8 million as a result of increased headcount and stock-based compensation awards.
General and administrative expenses increased $21.1 million, or 42%, in 2016 as compared to 2015 . The increase was largely driven by higher costs to
support our growing business, reallocation of resources to this cost category and incremental spend to support our operational excellence initiatives, which we
expect to result in future margin improvements. We incurred increased employee-related costs of $16.8 million as a result of increased headcount and stock-based
compensation awards.
We expect over time our general and administrative expense to increase in absolute dollars but decrease as a percentage of revenue.
Restructuring
Restructuring
Percent of revenue
Year Ended December 31,
2017
2016
2015
(dollars in thousands)
$
1,539
$
0.3%
— $
—%
—
—%
Restructuring expenses of $1.5 million were recorded in 2017, which consisted primarily of payroll-related costs, such as severance, outplacement costs and
continuing healthcare coverage, associated with employee terminations.
Amortization
of
certain
acquired
intangible
assets
Amortization of certain acquired intangible assets
$
— $
150 $
600
Amortization of certain acquired intangible assets decreased $0.2 million in 2017 due to the acquired intangible assets being fully amortized.
55
Year Ended December 31,
2017
2016
2015
(dollars in thousands)
Other
Income
(Expense)
Interest income
Interest expense
Other, net
Other income (expense), net
Year Ended December 31,
2017
2016
(in thousands)
2015
$
$
2,951 $
(14,762)
1,478
(10,333) $
1,702 $
(12,924)
1,934
(9,288) $
894
(12,506)
(4,016)
(15,628)
Interest income in 2017 increased by $1.2 million due to the increase in interest income earned on the purchase of investment securities, net of purchased
premium amortization.
Interest expense in 2017 increased $1.8 million 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 foreign exchange gains
and losses related to our intercompany loans and certain cash accounts. Foreign exchange gains and losses for the years ended December 31, 2017 , 2016 and 2015
, respectively, were primarily driven by fluctuations in the Euro and U.S. Dollar in relation to the British Pound.
Income
Tax
Provision
Year Ended December 31,
2017
2016
(in thousands)
2015
Income tax provision
$
(1,746) $
(1,207) $
(1,181)
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 or benefit for income taxes for any of the years presented, other than provisions for certain foreign and state current income taxes.
Liquidity and Capital Resources
At December 31, 2017 , our principal sources of liquidity were $393.6 million of cash and cash equivalents, investments in marketable securities of $263.5
million and $154.4 million of accounts receivable. In June 2013, we issued $253 million of 1.5% convertible notes due July 1, 2018 (the “2018 Notes”) and
concurrently entered into convertible note hedges and separate warrant transactions. The 2018 Notes mature on July 1, 2018, unless earlier converted.
In November 2017, we entered into certain agreements to issue $300.0 million principal amount of 5.75% senior convertible notes due July 1, 2021 (the
“2021 Notes”) for a purchase price equal to 98% of the principal amount, to certain entities affiliated with Silver Lake and LinkedIn. Holders of the 2021 Notes
may convert their 2021 Notes at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date.
We intend to use our cash for general corporate purposes, including the payment of 2018 Notes when due, 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 growth, 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 products. 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. In addition, we may enter into agreements or letters of intent with respect to potential investments
in, or acquisitions of, complementary businesses, services or technologies in the future, which could also require us to seek additional financing or utilize our cash
resources.
56
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 investing activities
Net cash provided by financing activities
2017
Year Ended
December 31,
2016
$
67,510 $
35,252 $
(36,666)
276,852
(81,638)
23,515
2015
43,796
(110,939)
11,005
Our cash flows from operating activities are significantly influenced by our growth, ability to maintain our contractual billing and collection terms and our
investments in headcount and infrastructure to support anticipated growth. Given the seasonality and continued growth of our business, our cash flows from
operations will vary from period to period.
Cash provided by operating activities was $67.5 million in 2017, compared to $35.3 million in 2016. The increase in operating cash flow was primarily due
to working capital changes in 2017 when compared to 2016 and improved profitability.
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.
Cash used in investing activities was $36.7 million in 2017, compared to $81.6 million in 2016. The decrease in cash used for investing activities was
primarily due to the timing of maturities and purchases of our investments. As we generate cash flow from operations, we look to invest any excess cash that will
not be required to fund our operations in the near future.
Cash provided by financing activities was $276.9 million in 2017, compared to $23.5 million in 2016. The increase in financing cash flows was primarily
due to proceeds from the issuance of the 2021 Notes.
Share
Repurchase
Program
In November 2017, our board of directors authorized a $100.0 million share repurchase program of our common stock. We may repurchase our common
stock for cash in the open market in accordance with applicable securities laws. The timing and amount of any stock repurchase will depend on share price,
corporate and regulatory requirements, economic and market conditions, and other factors. The repurchase authorization will expire in November 2019.
During the year ended December 31, 2017 , we repurchased 0.6 million shares of our common stock at an average cost of $35.55 per share for a total
expenditure of $22.6 million . At December 31, 2017 , $77.4 million remained available under the share repurchase program. Subsequent to December 31, 2017
and as of February 9, 2018, we repurchased 0.3 million shares of our common stock at an average cost of $37.03 per share for a total expenditure of $9.9 million .
Contractual
Obligations
Our principal commitments consist of obligations for outstanding debt, leases for our office space, a sponsorship agreement with a professional sports
franchise, contractual commitments for professional service projects and third-party consulting firms. The following table summarizes our contractual obligations
at December 31, 2017 (in thousands):
Less than 1 Year
Total
618,272 $
Payments Due by Period
1-3 Years
3-5 Years
More than 5
Years
Long-term debt obligations including interest
$
266,522 $
34,500 $
317,250 $
Operating lease obligations
Software subscription obligations
Sponsorship agreements
Other contractual obligations (1)
9,229
14,254
1,425
19,136
8,247
8,448
700
12,011
909
5,806
725
7,125
73
—
—
—
$
662,316 $
295,928 $
49,065 $
317,323 $
57
—
—
—
—
—
—
(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, 2017 , liabilities for unrecognized tax benefits of $1.3 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 timing 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 under these standby letters of credit is $1.4 million at December 31, 2017 .
Item 7A.
Quantitative
and
Qualitative
Disclosures
About
Market
Risk
We have operations in the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily
include interest rate, foreign exchange, inflation and counterparty risks, as well as risks relating to changes in the general economic conditions in the countries
where we conduct business. 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 securities, agency securities, commercial paper 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, 2017 , we had cash and cash equivalents of $393.6 million and investments of $263.5 million , which primarily consisted of corporate
bonds, U.S. treasury securities, agency securities, commercial paper, 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 the fair market value of our investments. An increase of 50-basis points in interest rates would have resulted in a $0.7 million reduction on the
fair market value of our portfolio as of December 31, 2017 . We therefore do not expect our operating results or cash flows to be materially affected by a sudden
change in market interest rates.
We do not believe our cash equivalents, corporate bonds, U.S. treasury securities, agency securities and commercial paper 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, primarily Euros and
British Pounds. To a lesser extent, we also have revenue denominated in Australian Dollars, Brazilian Reals, Canadian Dollars, Chinese Yuan, Hong Kong Dollars,
Indian Rupees, Japanese Yen, Mexican Pesos, New Zealand Dollars, Singapore Dollars, South African Rand, Swedish Krona, Swiss Franc and other foreign
currencies, and operating expenses denominated in Australian Dollars, Brazilian Reals, Canadian Dollars Chinese Yuan, Hong Kong Dollars, Indian Rupees,
Israeli Shekels, Japanese Yen, Mexican Pesos, New Zealand Dollars, Singapore Dollars, and Swedish Krona. Increases and decreases in our foreign-denominated
revenue from movements in foreign exchange rates are often partially offset by the corresponding decreases or increases in our foreign-denominated operating
expenses. Due to our legal structure,
58
revenue and operating expenses denominated in currencies other than the U.S. Dollar primarily flow through subsidiaries with functional currencies of the British
Pound and Euro. Our other income (expense) is also impacted by the remeasurement of 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, 2017 , including our intercompany loans with our subsidiaries, would result in a foreign currency
loss of approximately $6.9 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.
59
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, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
60
PAGE
61
62
63
64
65
66
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Cornerstone OnDemand, Inc.
Opinions
on
the
Financial
Statements
and
Internal
Control
over
Financial
Reporting
We have audited the accompanying consolidated balance sheets of Cornerstone OnDemand, Inc. and its subsidiaries as of December 31, 2017 and 2016 and the related
consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the
related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December
31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and
2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis
for
Opinions
The Company's management is responsible for these consolidated 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 the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We
are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. 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.
Definition
and
Limitations
of
Internal
Control
over
Financial
Reporting
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 27, 2018
We have served as the Company’s auditor since 2001.
61
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
December 31, 2017
December 31, 2016
Assets
$
393,576 $
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
Convertible notes, net
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, 57,512 and 56,516 shares issued and
outstanding at December 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
169,551
154,428
42,806
21,754
782,115
37,431
20,817
96,949
—
25,894
3,984
967,190 $
17,637 $
57,528
311,997
248,025
9,051
644,238
285,168
1,498
14,166
945,070
6
536,951
(515,054)
217
22,120
83,300
218,791
136,657
36,298
18,467
493,513
30,683
23,962
41,046
7,421
25,894
1,110
623,629
24,392
47,619
272,206
—
2,094
346,311
238,435
1,794
10,126
596,666
6
476,230
(453,719)
4,446
26,963
623,629
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
62
$
967,190 $
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
Restructuring
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
Income tax provision
Net loss
Net loss per share, basic and diluted
Weighted average common shares outstanding, basic and diluted
2017
Years Ended
December 31,
2016
2015
$
481,985 $
423,124 $
142,867
339,118
240,271
61,975
84,589
1,539
—
388,374
(49,256)
2,951
(14,762)
1,478
(10,333)
(59,589)
(1,746)
135,752
287,372
225,631
46,977
70,956
—
150
343,714
(56,342)
1,702
(12,924)
1,934
(9,288)
(65,630)
(1,207)
$
$
(61,335) $
(1.07) $
57,262
(66,837) $
(1.20) $
55,595
339,651
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)
(85,516)
(1.58)
54,171
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
63
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 (loss) income, net of tax
Total comprehensive loss
2017
Years Ended
December 31,
2016
2015
(61,335) $
(66,837) $
(85,516)
(3,795)
(434)
(4,229)
3,748
88
3,836
686
(247)
439
(65,564) $
(63,001) $
(85,077)
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
64
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
Balance as of December 31, 2014
53,826 $
5 $
336,692 $
(301,366) $
171
$
35,502
Common
Stock
Shares
Par
Value
Additional
Paid-In
Capital
(Deficit)
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
—
—
—
—
—
439
610
$
—
—
—
—
—
3,836
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
565
200
113
—
—
—
—
—
—
—
—
—
8,448
—
3,035
45,914
—
—
—
—
—
—
(85,516)
—
Balance as of December 31, 2015
54,704 $
5 $
394,089 $
(386,882) $
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, 2016
Issuance of common stock upon the exercise
of options
Vesting of restricted stock units
Shares issued under employee stock
purchase plan
Repurchase of common stock
Stock-based compensation
Net loss
Other comprehensive loss, net of tax
Balance as of December 31, 2017
978
699
135
—
—
—
1
—
—
—
—
—
18,904
—
4,286
58,951
—
—
—
—
—
—
(66,837)
—
56,516 $
6 $
476,230 $
(453,719) $
4,446
$
414
1,035
182
(635)
—
—
—
—
—
—
—
—
—
—
6,777
—
5,621
(22,599)
70,922
—
—
—
—
—
—
—
(61,335)
—
—
—
—
—
—
—
(4,229)
57,512 $
6 $
536,951 $
(515,054) $
217
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
65
8,448
—
3,035
45,914
(85,516)
439
7,822
18,905
—
4,286
58,951
(66,837)
3,836
26,963
6,777
—
5,621
(22,599)
70,922
(61,335)
(4,229)
22,120
CORNERSTONE ONDEMAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
2017
2016
2015
$
(61,335)
$
(66,837) $
(85,516)
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 (gain) loss
Stock-based compensation expense
Write-off of capitalized software
Deferred income taxes
Changes in operating assets and liabilities:
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
Capital expenditures
Capitalized software costs
Net cash used in provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net
Repayment of debt
Principal payments under capital lease obligations
Proceeds from employee stock plans
Repurchases of common stock
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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
Deferred debt issuance costs included in accrued expenses
Unsettled share repurchase in other liabilities
$
$
$
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
35,377
9,833
1,135
(2,461)
65,924
1,339
52
(14,317)
(5,249)
(2,704)
(6,820)
8,530
35,829
2,377
67,510
(323,413)
314,418
(7,100)
(20,571)
(36,666)
285,077
—
—
12,509
(20,734)
276,852
2,580
310,276
83,300
393,576
$
$
$
3,841
2,243
575
3,467
1,829
4,998
152
1,866
32,392
9,130
240
(7)
54,699
—
(736)
(38,092)
(2,543)
(3,623)
5,939
3,727
43,379
(2,416)
35,252
(210,534)
151,533
(6,228)
(16,409)
(81,638)
—
—
(33)
23,548
—
23,515
(1,520)
(24,391)
107,691
83,300 $
3,796 $
2,334
489
— $
2,080
4,252
—
—
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
1,915
1,520
193
—
705
2,833
—
—
66
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 human capital management software, delivered as Software-as-a-Service (“SaaS”). The Company
helps organizations around the globe recruit, train and manage their employees. It is one of the world’s largest cloud computing companies. The Company's human
capital management platform combines the world’s leading unified talent management solutions with state-of-the-art analytics and HR administration solutions to
enable organizations to manage the entire employee lifecycle. Its focus on continuous learning and development helps organizations to empower employees to
realize their potential and drive success.
The Company works with clients across all geographies, verticals and market segments. Its Recruiting, Learning, Performance and HR Administration suites
help with sourcing, recruiting and onboarding new hires; managing training and development requirements; nurturing knowledge sharing and collaboration among
employees; goal setting reviews, competency management and continuous feedback; linking compensation to performance; identifying development plans based
on performance gaps; streamlining employee data management, self-service and compliance reporting; and then utilizing state-of-the-art analytics capabilities to
make smarter, more-informed decisions using data from across the platform for talent mobility, engagement and development so that HR and leadership can focus
on strategic initiatives to help their organization succeed.
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, Netherlands; Auckland, New Zealand; Bangalore, India;
Düsseldorf, Germany; Hong Kong; London, United Kingdom; Madrid, Spain; Mumbai, India; Munich, Germany; New Delhi, India; Paris, France; São Paulo,
Brazil; Stockholm, Sweden; Sunnyvale, United States; Sydney, Australia; Tel Aviv, Israel; and Tokyo, Japan.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of
Presentation
and
Principles
of
Consolidation
The accompanying consolidated financial statements are presented in accordance with accounting standards generally accepted in the United States of
America (“GAAP”), and 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 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
67
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.
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. There were no transaction costs for the years ended December 31, 2017 , 2016 and 2015.
Revenue
Recognition
The Company derives its revenue from the following sources:
•
•
Subscriptions
to
the
Company’s
products
and
other
offerings
on
a
recurring
basis
—Clients pay subscription fees for access to the Company’s enterprise
human capital management platform, other products and support on a recurring basis. Fees are based on a number of factors, including the number of
products purchased, which may include e-learning content, and the number of users having access to a product. The Company generally recognizes revenue
from subscriptions ratably over the term of the agreements.
Professional
services
and
other
—The Company offers its clients assistance in implementing its products and optimizing their use. Professional services
include application configuration, system integration, business process re-engineering, change management and training services. Services are generally
billed on a fixed fee basis and to a lessor degree on a time-and-material 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 professional services at any other time. The
Company generally recognizes revenue from fixed fee professional services using the proportional performance method over the period the services are
performed and as time is incurred for time-and-material arrangements.
The Company recognizes revenue when: (i) persuasive evidence of an arrangement for the sale of the Company’s products or professional services exists,
(ii) the products 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 product has commenced once it provides the client
with log-in information to access and use the product. 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 products 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 products and professional 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 products, 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.
68
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 products have standalone value, because, once access is given to a client, the products are fully functional and do not require any
additional development, modification or customization. Professional services have standalone value because third-party service providers, distributors or clients
themselves can perform these services without the Company’s involvement. The professional services assist clients with the configuration and integration of the
Company’s products. The performance of these services generally does not require highly specialized or skilled individuals and are not essential to the
functionality of the products.
Based on the standalone value of the deliverables, and since clients do not have a general right of return relative to the included professional 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
products. Accordingly, total contract values are allocated to subscriptions to the products and professional services based on BESP. However, the amounts
allocated to professional services generally do not exceed the contractually stated values of the professional services, as the revenue for subscriptions to the
Company’s products is delivered over a longer period of time and is contingent upon delivery. This can result in higher allocations of the total contract value to
subscriptions to the Company’s products over and above the relative selling price allocation based on this contingent revenue limitation. 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 Company updates
its estimates of BESP on an ongoing basis through internal periodic reviews and as events or 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 products, revenue is recognized on a straight-line basis
over the subscription term, which is typically three years. For professional 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 product 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 product, 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 product. The enhancement revenue is recognized based on the allocated value on a straight-line basis once the enhancement has been made to
the product, through the remaining term of the agreement.
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 product, 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.
69
Cost
of
Revenue
Cost of revenue consists primarily of costs related to hosting the Company’s products; personnel and related expenses, including stock-based compensation,
and related expenses for network infrastructure, IT support, delivery of contracted professional services and on-going client support staff; payments to external
service providers contracted to perform implementation services; depreciation of data centers; amortization of capitalized software costs; amortization of
developed technology software license rights; content 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 professional 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 due to 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, 2017 , 2016 and 2015 , the Company deferred $48.2 million , $33.3 million and $42.0 million , respectively, of
commissions on the balance sheet. During the years ended December 31, 2017 , 2016 and 2015 , the Company recognized $41.7 million , $33.0 million and $32.3
million in commissions expense to sales and marketing expense, respectively. As of December 31, 2017 and 2016 , deferred commissions on the Company’s
consolidated balance sheets totaled $42.8 million and $36.3 million , respectively.
Research
and
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
$62.0 million in 2017 , $47.0 million in 2016 and $41.0 million in 2015 .
Advertising
Advertising expenses for 2017 , 2016 and 2015 were $9.0 million , $6.6 million and $5.4 million , respectively, and are expensed as incurred.
Stock-Based
Compensation
The Company accounts for stock-based awards granted to employees and directors by recording compensation expense based on the awards’ estimated fair
values. The Company grants 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.
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. 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 the Company’s 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.
70
Beginning in 2017, the Company began estimating expected volatility based solely on its historical volatility as a public company. In previous years, the
Company estimated this using the average volatility of similar publicly traded companies as sufficient trading history of the Company’s stock was not available.
For purposes of determining the expected term of the awards in the absence of sufficient historical data relating to stock option exercises for the Company, it
applies 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. The estimated dividend yield is zero, as the Company has not declared dividends in the past and does not currently intend to
declare dividends in the foreseeable future.
The following information represents the weighted average of the assumptions used in the Black-Scholes option-pricing model for stock options granted
during each of the last three years:
Risk-free interest rate
Expected term (in years)
Estimated dividend yield
Estimated volatility
For the Years Ended December 31,
2017
2016
2015
n/a
n/a
n/a
n/a
1.4%
5.8
—%
48.8%
1.8%
6.0
—%
41.8%
Once the Company has determined the estimated fair value of its stock-based awards, it recognizes 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. The Company estimates forfeitures based upon its historical experience and
for each period, the Company reviews the estimated forfeiture rate and makes changes as factors affecting the forfeiture rate calculations and assumptions change.
In addition, the Company has issued performance-based restricted stock units that vest based upon continued service over the vesting term and achievement
of certain market conditions and performance goals, and others that vest based upon continued service over the vesting term and achievement of certain market
conditions or performance goals, established by the Board of Directors, for a predetermined period. The fair value of the performance-based awards containing a
market condition are determined 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 market based condition
is met. The fair value of the performance-based awards containing only a service and performance condition are determined based upon the closing price of the
Company’s common stock on the date of the grant and the Company recognizes the fair value of awards containing a performance condition only if it is probable
the performance condition will be met. For all performance-based awards, the fair value is not determined until all of the terms and conditions of the award are
established.
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, 2017 and 2016 .
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 products, 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 products are also capitalized. Post-configuration training and
maintenance costs are expensed as incurred. Capitalized software costs are amortized to cost of revenue using the straight-line method over an estimated useful life
of the software, which is typically 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.
71
During the years ended December 31, 2017 , 2016 and 2015 , the Company capitalized $24.3 million , $20.9 million and $16.5 million , respectively, of
software development costs to the balance sheet. During the years ended December 31, 2017 , 2016 and 2015 , the Company amortized $17.6 million , $13.2
million and $9.1 million to cost of revenue, respectively. Based on the Company’s capitalized software costs at December 31, 2017 , estimated amortization
expense of $19.1 million , $12.5 million , $5.7 million and $0.1 million is expected to be recognized in 2018 , 2019 , 2020 and 2021 , respectively.
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, 2017 , 2016 and 2015 , 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, 2017 and 2016 , cash and cash equivalents consisted of cash balances of $24.7 million and $35.2 million , respectively,
money market funds backed by U.S. treasury securities of $358.9 million and $48.1 million , respectively, and certificates of deposit of $10.0 million and no ne,
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, 2017 and 2016
, the Company had $263.5 million and $257.8 million , respectively, of investments in marketable securities.
72
Strategic
Investments
Since 2014, the Company has invested in equity securities of multiple privately-held companies. 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.
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, 2017 , 2016 and 2015 , is as
follows (in thousands):
Beginning balance, January 1
Additions and adjustments
Write-offs
Ending balance, December 31
2017
2016
2015
$
$
3,532 $
2,578 $
7,680
(3,734)
3,165
(2,211)
7,478 $
3,532 $
2,177
1,368
(967)
2,578
The Company recognized bad debt expense of $1.4 million , $0.8 million and $0.7 million for the years ended December 31, 2017 , 2016 and 2015 ,
respectively.
Property
and
Equipment,
Net
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 6 ).
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, 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. During the year ended December 31, 2017 , the Company determined that previously capitalized software
costs were impaired resulting in the write-off of $1.3 million , which was recorded in research and development expense in the accompanying Consolidated
Statement of Operations. There were no impairment charges related to identifiable long lived assets in the year ended December 31, 2016 .
73
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. 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, 2017 or 2016.
Convertible
Notes
In June 2013, the Company issued 1.50% convertible notes due July 1, 2018 with a principal amount of $253.0 million (the “2018 Notes”). In December
2017, the Company issued 5.75% senior convertible notes due July 1, 2021 with a principal amount of $300.0 million (the “2021 Notes”). In accounting for the
2018 Notes at issuance, the Company separated the 2018 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 2018 Notes, excluding the conversion feature. The carrying amount of the liability component was calculated by measuring the fair value of similar
liabilities that do not have an associated convertible feature. The excess of the principal amount of the 2018 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 2018
Notes using the interest method. The equity component of the 2018 Notes recorded to additional paid-in capital is not to be remeasured as long as it continues to
meet the conditions for equity classification. The 2021 Notes were recorded based on the fair value of the proceeds, net of discounts and issuance costs, and will be
accreted to face value over the term of the 2021 Notes.
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.
74
•
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, 2017 , 2016 and 2015 , 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, 2017 or 2016 .
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 $(3.1) million , $20 thousand and $(0.9) million for the years ended December 31, 2017 , 2016 and 2015 , 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
of our subsidiaries 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.
Recently
Adopted
Accounting
Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued a new accounting standards update (“ASU”) which amends the reporting
requirement in regard to new accounting pronouncements or existing pronouncements that have not yet been adopted. The guidance requires registrants to disclose
the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. The Company implemented this
requirement as of the beginning of the first quarter of 2017.
In March 2016, the FASB issued a new ASU to simplify several areas of accounting for share-based compensation arrangements, including the income tax
impact, classification on the statement of cash flows and forfeitures. The Company adopted this ASU as of the beginning of the first quarter of 2017 and has
elected to continue to estimate expected forfeitures over the course of a vesting period. Further, the ASU eliminates the requirement to delay the recognition of
excess tax benefits until they reduce current taxes payable. Upon adoption on January 1, 2017, the Company recorded a $39.4 million U.S. deferred tax asset for
the previously unrecognized excess tax benefits, however, this had no impact on our accumulated deficit balance as the deferred tax assets were fully offset by a
valuation allowance. The adoption did not have any other material impacts on the Company’s financial statements.
Recent
Accounting
Pronouncements
In May 2017, the FASB issued a new ASU, which amends the scope of modification accounting for share-based payment arrangements. It provides guidance
on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under
ASC 718. This guidance is effective for the Company’s interim and annual reporting periods beginning January 1, 2018. The Company does not expect the
adoption of this ASU to have a material impact on its financial statements.
In August 2016, the FASB issued a new ASU to clarify how companies present and classify certain cash receipts and cash payments in the statement of cash
flows. This guidance is effective for our interim and annual reporting periods beginning January 1, 2018. The Company does not expect the adoption of this ASU
to have a material impact on its financial statements.
75
In February 2016, the FASB issued a new ASU, which amends a number of aspects of lease accounting, including requiring lessees to recognize operating
leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease
payments. This guidance is effective for the Company’s interim and annual reporting periods beginning January 1, 2019. Upon adoption, the Company expects
additional lease liability to be recognized on the consolidated balance sheets.
In January 2016, the FASB issued a new ASU that provides guidance for the recognition, measurement, presentation and disclosure of financial assets and
liabilities. This guidance is effective for the Company’s interim and annual reporting periods beginning January 1, 2018. The Company does not expect the
adoption of this ASU to have a material impact on its financial statements.
In May 2014, the FASB issued a new ASU that provides guidance for recognizing revenue from contracts with customers. Under the new standard, the
Company is required to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration that the
Company expects to be entitled to in exchange for those goods or services. The standard permits the use of the full retrospective method, in which case the
standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period
shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application.
The Company has evaluated the transition methods and elected to use the modified retrospective method and will adopt this standard beginning January 1, 2018.
During fiscal year 2017, the Company evaluated the accounting and disclosure requirements of the standard and implemented the appropriate changes to its
business processes, systems and internal controls to enable the preparation of its financial information on adoption. The Company is in the process of finalizing its
assessment of the standard as the Company’s analysis of costs that represent incremental costs to obtain a contract is ongoing. The Company believes it will
finalize this analysis in connection with the preparation of its financial statements as of and for the quarter ended March 31, 2018. Costs that represent incremental
costs to obtain a contract will be amortized over the expected product life. The Company has finalized its assessment of how it recognizes revenue for subscriptions
to the Company’s products and other offerings on a recurring basis and revenue for professional services. Upon adoption, revenue for professional services will be
based on the relative standalone selling price without limitation to its contractual value. Prior to adoption, such allocation was limited by its contractual value. This
change is expected to result in a material increase in the aggregate amount allocated to professional services when allocating total contract values on a relative
standalone selling price basis under the new standard. The Company expects to adjust the following balance sheet line items in fiscal year 2018 to reflect the
adoption of the new ASU: deferred commissions; other assets, net; accrued expenses; deferred revenue, current portion; other non-current liabilities; deferred
revenue, net of current portion; and accumulated deficit.
3.
NET LOSS PER SHARE
The following table presents the Company's basic and diluted net 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,
2017
2016
2015
$
$
(61,335) $
57,262
(1.07) $
(66,837) $
55,595
(1.20) $
(85,516)
54,171
(1.58)
At December 31, 2017 , 2016 and 2015 , the following potential shares were excluded from the computation of diluted net loss per share because their effect
would have been anti-dilutive (in thousands):
Options to purchase common stock, restricted stock units and performance-based
restricted stock units
Shares issuable pursuant to employee stock purchase plan
Convertible notes
Common stock warrants
Total shares excluded from net loss per share
2017
December 31,
2016
2015
10,143
114
11,825
4,682
26,764
10,635
89
4,682
4,682
20,088
10,860
77
4,682
4,682
20,301
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, 2017 . Since the beneficial impact of the Note Hedges is anti-dilutive, they are
excluded from the calculation of diluted net income (loss) per share. See Note 8 of the Notes to Consolidated Financial Statements.
76
4. INVESTMENTS
Investments
in
Marketable
Securities
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 principal objective of capital preservation and maintaining liquidity that is
sufficient to meet cash flow requirements.
The following is a summary of investments in marketable securities, including those that meet the definition of a cash equivalent, as of December 31, 2017
(in thousands):
Money market funds
Certificate of deposit
Corporate bonds
U.S. treasury securities
December 31, 2017
Amortized Cost
Basis
$
$
358,859 $
10,000
74,868
189,310
633,037 $
Unrealized Gains
Unrealized Losses
Fair Value
Cash Equivalent
Investments
— $
—
—
—
— $
358,859 $
358,859 $
—
(220)
(430)
10,000
74,648
188,880
10,000
—
—
— $
(650) $
632,387 $
368,859 $
—
—
74,648
188,880
263,528
The following is a summary of investments in marketable securities, including those that meet the definition of a cash equivalent, as of December 31, 2016
(in thousands):
Money market funds
Corporate bonds
Agency bonds
U.S. treasury securities
Commercial paper
December 31, 2016
Amortized Cost
Basis
Unrealized Gains
Unrealized Losses
Fair Value
Cash Equivalent
Investments
$
48,136 $
— $
— $
48,136 $
48,136 $
60,725
28,954
157,829
10,473
1
2
17
—
(50)
(26)
(160)
—
60,676
28,930
157,686
10,473
—
—
—
—
$
306,117 $
20 $
(236) $
305,901 $
48,136 $
—
60,676
28,930
157,686
10,473
257,765
As of December 31, 2017 , the Company’s investment in corporate bonds, agency bonds and U.S. treasury securities had a weighted-average maturity date of
approximately nine 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, 2017 . No marketable securities held have been in a continuous unrealized loss position for more than 12
months as of December 31, 2017 .
Strategic
Investments
During the year ended December 31, 2017 , the Company made $1.5 million in strategic investments. As of December 31, 2017 , the Company had
aggregate strategic investments of $3.0 million . During the year ended December 31, 2016 , the Company made $0.6 million in strategic investments. As of
December 31, 2016 , the Company had aggregate strategic investments of $2.1 million . 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. During the year ended December 31, 2017 , the Company recognized $0.6 million of impairment losses recorded in Other, net in the accompanying
Consolidated Statement of Operations. During the year ended December 31, 2016 , the Company did no t recognize any impairment losses.
77
5. 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, 2017 and 2016 (in thousands):
Developed technology
Software license rights
Total
December 31, 2017
December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
29,984 $
(29,984) $
1,654
(1,654)
31,638 $
(31,638) $
— $
—
— $
29,984 $
(22,711) $
1,654
(1,506)
31,638 $
(24,217) $
7,273
148
7,421
Total amortization expense from finite-lived intangible assets was $7.4 million , $9.3 million and $10.6 million for the years ended December 31, 2017 ,
2016 and 2015 , respectively. The amortization expense recognized was related to developed technology and software license rights and was recorded in cost of
revenue except for $0.2 million and $0.6 million for the years ended December 31, 2016 and 2015 , respectively, which was recorded in “Amortization of certain
acquired intangible assets” in the accompanying Consolidated Statements of Operations.
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. There were no impairment charges related to identifiable intangible assets in
the years ended December 31, 2017 , 2016 and 2015 .
Goodwill
There was no change in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 .
6.
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
2017
2016
December 31,
3 – 5 years $
7 years
2 – 6 years
n/a
38,838 $
3,855
10,046
58
52,797
(31,980)
$
20,817 $
Depreciation expense for the years ended December 31, 2017 , 2016 and 2015 was $10.3 million , $9.9 million , $7.6 million , respectively.
The balance of accrued expenses is as follows (in thousands):
Accrued bonuses
Accrued commissions
Other accrued expenses
Total accrued expenses
December 31,
2017
2016
$
$
13,557 $
12,401
31,570
57,528 $
78
32,926
3,837
9,878
58
46,699
(22,737)
23,962
13,371
10,616
23,632
47,619
7.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets and liabilities measured at fair value on a recurring basis included the following as of December 31, 2017 and 2016 (in thousands):
Cash equivalents
Corporate bonds
Agency bonds
U.S. treasury securities
Commercial paper
December 31, 2017
December 31, 2016
Fair Value
$
368,859 $
Level 1
358,859 $
74,648
—
188,880
—
—
—
—
—
Level 2
Level 3
Fair Value
Level 1
Level 2
Level 3
10,000 $
74,648
—
188,880
—
— $
48,136 $
48,136 $
— $
—
—
—
—
60,676
28,930
157,686
10,473
—
—
—
—
60,676
28,930
157,686
10,473
$
632,387 $
358,859 $
273,528 $
— $
305,901 $
48,136 $
257,765 $
—
—
—
—
—
—
At December 31, 2017 and 2016 , cash equivalents of $358.9 million and $48.1 million , respectively, consisted of money market funds with original
maturity dates of three months or less backed by U.S. Treasury bills. At December 31, 2017 , cash equivalents of $10.0 million consisted of certificate of deposits
with original maturity dates of three months or less.
As of December 31, 2017 , corporate bonds, agency bonds, U.S. treasury securities and commercial paper 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, 2017 , no adjustments were made to such pricing information.
Convertible
Notes
The Company’s convertible notes, including the 2018 Notes and the 2021 Notes described below, are shown in the accompanying Consolidated Balance
Sheets at their original issuance value, net of unamortized discount and debt issuance costs, and are not remeasured to fair value each period. The approximate fair
value of the Company’s convertible notes as of December 31, 2017 was $552.0 million . The fair value of the 2018 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. The fair value of the 2021 Notes were estimated as the
principal amount of the 2021 Notes, due to the lack of trading activity as of December 31, 2017.
8.
DEBT AND OTHER FINANCING ARRANGEMENTS
2018
Convertible
Notes
In 2013, the Company issued convertible notes (the “2018 Notes”) raising gross proceeds of $253.0 million .
The 2018 Notes are governed by an Indenture, dated June 17, 2013, between the Company and U.S. Bank National Association, as trustee (the “2013
Indenture”). The 2018 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 2018 Notes are convertible at an initial conversion rate of 18.5046 shares of the Company’s common stock per $1,000 principal amount of the 2018
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 2018 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;
79
•
•
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 2018 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 2013 Indenture.
Holders of the 2018 Notes may convert their 2018 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 2018 Notes may require the Company to repurchase all or a portion of their 2018 Notes at a cash repurchase price equal to 100% of the
principal amount of the 2018 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 2013 Indenture.
In accounting for the 2018 Notes at issuance, the Company separated the 2018 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 2018 Notes, excluding the conversion feature. The excess of the principal amount of the 2018 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 2018 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 2018 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 2018 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 2018 Notes to such components.
Transaction costs allocated to the debt component of $6.2 million are deferred and amortized to interest expense over the term of the 2018 Notes. The transaction
costs allocated to the equity component of $1.1 million were recorded to additional paid-in capital.
2021
Senior
Convertible
Notes
In December 2017, the Company issued $300.0 million principal amount of 5.75% senior convertible notes (the “2021 Notes”) for a purchase price equal to
98% of the principal amount, raising net proceeds of $294.0 million .
The 2021 Notes are governed by an Indenture, dated December 8, 2017 between the Company and U.S. Bank National Association, as trustee (the “2017
Indenture”). The 2021 Notes mature on July 1, 2021, unless earlier repurchased or converted, and bear interest at a rate of 5.75% per year payable semi-annually
in arrears on January 1 and July 1 of each year, commencing January 1, 2018.
The 2021 Notes are convertible at an initial conversion rate of 23.8095 shares of the Company’s common stock per $1,000 principal amount of the 2021
Notes, which represents an initial conversion price of $42.00 per share, subject to adjustment for anti-dilutive issuances, voluntary increases in the conversion rate
and make-whole adjustments upon a fundamental change. A fundamental change includes a change in control, delisting of the Company’s common stock and a
liquidation of the Company. Upon conversion, the Company will deliver the applicable number of the Company’s common stock and cash in lieu of any fractional
shares. Holders of the 2021 Notes may convert their 2021 Notes at any time prior to the close of business on the scheduled trading day immediately preceding the
maturity date, subject to a restricted period through December 2018.
The holders of the 2021 Notes may require the Company to repurchase all or a portion of their 2021 Notes at a cash repurchase price equal to 100% of the
principal amount of the Notes being repurchased, plus the remaining scheduled interest through and including the maturity date, upon a fundamental change and
events of default, including non-payment of interest or principal and other obligations under the 2017 Indenture.
The 2021 Notes were issued at a two percent discount and was accounted for as debt upon issuance. The Company recorded $300.0 million of debt and $6.0
million for the debt discount. The debt discount is accreted to interest expense over the term of the 2021 Notes using the interest method.
The Company incurred debt issuance costs of $9.1 million that were deferred and will be amortized to interest expense over the term of the 2021 Notes.
80
2018
Notes
and
2021
Notes
The net carrying amounts of the liability components of the 2018 and 2021 Notes as of December 31, 2017 and 2016 consists of the following (in thousands):
Principal amount
Unamortized debt discount
Net carrying amount before unamortized debt issuance costs
Unamortized debt issuance costs
Net carrying value
December 31, 2017
December 31, 2016
$
$
553,000 $
(10,190)
542,810
(9,617)
533,193 $
253,000
(12,550)
240,450
(2,015)
238,435
The effective interest rate of the liability component is 5.4% and 6.4% for the 2018 Notes and the 2021 Notes, respectively. The interest rate for the 2018
Notes was based on the interest rates of similar liabilities at the time of issuance that did not have associated convertible features.
The following table presents the interest expense recognized related to the 2018 Notes and the 2021 Notes for years ended December 31, 2017 , 2016 and
2015 (in thousands):
Contractual interest expense at 1.50% and 5.75% per annum
Amortization of debt issuance costs
Accretion of debt discount
Total
Years Ended December 31,
2017
2016
2015
$
$
4,897 $
1,472
8,360
14,729 $
3,795 $
1,263
7,867
12,925 $
3,795
1,202
7,489
12,486
Net proceeds of approximately $246.0 million and $285.1 million from the 2018 Notes and the 2021 Notes, respectively, were received after payment of the
initial purchasers’ offering expenses. The Company used approximately $49.5 million of the net proceeds of the 2018 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 2018 Notes that were issued in 2013, 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 2018 Notes. The Note Hedges will expire upon the
maturity of the 2018 Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the 2018 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 2018 Notes.
Warrants
Separately and concurrently with the entry by the Company into the Note Hedges in 2013, 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 (the “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.
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.
81
9.
STOCKHOLDERS ’ EQUITY
Capitalization
As of December 31, 2017 , 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, 2017 and 2016.
Share
Repurchase
Program
In November 2017, the Company’s board of directors authorized a $100.0 million share repurchase program of its common stock. The Company may
repurchase its common stock for cash in the open market in accordance with applicable securities laws. The timing and amount of any stock repurchase will
depend on share price, corporate and regulatory requirements, economic and market conditions, and other factors. The stock repurchase authorization will expire in
November 2019 and shares repurchased will be immediately retired.
During the year ended December 31, 2017 , the Company repurchased 0.6 million shares of its common stock at an average cost of $35.55 per share for a
total expenditure of $22.6 million . At December 31, 2017 , $77.4 million remained available under the share repurchase program.
10.
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. At December 31, 2017 , 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, 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, 4,128,903 shares remained available for issuance, at December 31, 2017 .
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.
82
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 2017 , the Company granted 1,937,900 restricted stock units under the 2010 Plan, containing service conditions.
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 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.
Employee Stock Purchase Plan
Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP”) eligible employees are granted the right to purchase shares at the lower of 85% of the
fair value of the stock at the time of grant or 85% of the fair value at the time of exercise. The right to purchase shares is granted 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. Under the ESPP, 3,045,181
shares remained available for issuance, at December 31, 2017 . The Company recognized compensation expense related to the ESPP of $1.6 million , $1.4 million
and $0.9 million for the years ended December 31, 2017 , 2016 and 2015, respectively.
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, 2016
Granted
Exercised
Forfeited
Outstanding, December 31, 2017
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
32.01
—
16.38
35.71
32.99
Aggregate
Intrinsic
Value (1)
6.2 $
74,989
5.3
40,122
Shares
6,041 $
—
(413)
(334)
5,294
83
Exercisable at December 31, 2017
Vested and expected to vest at December 31, 2017
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value (1)
Shares
4,934 $
5,280
32.60
32.98
5.2 $
5.3
39,951
40,113
(1) Based on the Company’s closing stock price of $35.33 on December 31, 2017 and $42.31 on December 31, 2016.
The following table summarizes information about stock options, which contain only service conditions, under the Company’s equity incentive plans at
December 31, 2017 (in thousands except term information):
Options Outstanding
at December 31, 2017
Options Exercisable
at December 31, 2017
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
$31.64 to $36.15
$38.03 to $45.76
$46.20 to $56.05
92
677
132
305
552
207
835
1,093
1,401
5,294
1.9
2.9
3.7
4.0
4.4
5.6
6.8
6.1
6.1
5.3
92
677
132
305
552
193
633
1,036
1,314
4,934
1.9
2.9
3.7
4.0
4.4
5.5
6.6
6.0
6.1
5.2
The total intrinsic value of options exercised during the years ended December 31, 2017 , 2016 and 2015 was $9.2 million , $18.2 million and $11.4 million ,
respectively. The total grant date fair value of stock options vested during the years ended December 31, 2017 , 2016 and 2015 was $15.4 million , $24.3 million
and $32.3 million , respectively. The Company recognized compensation expense related to stock options of $14.0 million , $23.0 million and $28.0 million for the
years ended December 31, 2017 , 2016 and 2015 , respectively.
Unrecognized compensation expense relating to stock options was $5.4 million at December 31, 2017 which is expected to be recognized over a weighted-
average period of 1.0 years.
The aggregate grant date fair value of stock options granted for the years ended December 31, 2016 and 2015 was $1.8 million and $8.4 million ,
respectively.
Restricted
Stock
Units
Restricted stock unit activity for the year ended December 31, 2017 under the Company’s equity incentive plans is summarized as follows (shares in
thousands):
Outstanding at December 31, 2016
Granted
Forfeited
Vested
Outstanding at December 31, 2017
Number of Shares
Weighted
Average Grant Date
Fair Value
$
3,254
1,938
(367)
(1,035)
3,790
$
36.35
37.99
36.04
36.34
37.22
84
The Company recognized compensation expense related to restricted stock units of $44.1 million , $31.9 million and $15.0 million for the years ended
December 31, 2017 , 2016 and 2015 , respectively. Unrecognized compensation expense related to unissued shares of the Company’s common stock subject to
unvested restricted stock units was $105.7 million at December 31, 2017 , which is expected to be recognized as expense over the weighted-average period of 2.7
years.
Performance-Based
Restricted
Stock
Units
In July 2014, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved the issuance of performance-
based restricted stock units to an executive officer 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 target performance level would result in the
issuance of 40,600 shares and achievement at the maximum performance level would result in the issuance of 60,900 shares. The Company 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 was recognized ratably over the three -year term of the award. In July 2017, based on the performance of the Company’s stock price relative to a certain
independent market index, the Company determined it had not achieved the required performance level, which resulted in none of the shares being issued.
In December 2014, the Compensation Committee approved the issuance of a special award 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 a grant date was established in February 2015 and February 2016 for each of the two
tranches 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 target performance level would result in the issuance of
535,000 shares and achievement at 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 each tranche 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. In the first quarter of 2015, the
aggregate grant date fair value of the first half of the above awards was $9.9 million . As of December 31, 2017 , the aggregate fair value of the first half of the
awards was $4.8 million based on the Company’s performance in relation to the revenue guidance for fiscal year 2015. In the first quarter of 2016, the aggregate
grant date fair value of the second half of the awards was $3.6 million . In the first quarter of 2017, the Compensation Committee provided clarification on the use
of constant currency adjustments to the Company’s performance in relation to the revenue guidance for fiscal year 2016. As a result, during the year ended
December 31, 2017 , the Company determined that the aggregate fair value of the awards was $9.8 million , which was recognized over the remaining vesting
period of the awards. In December 2017, based on the performance of the Company’s stock price relative to a certain independent market index, the Company
determined it had not achieved the required performance level, which resulted in none of the shares being issued.
Beginning in 2016, the Compensation Committee designed an annual equity compensation structure to further align the compensation levels of certain
executives to the performance of the Company through the issuance of performance-based restricted stock units. 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 the Company meeting composite revenue and cash flow
growth targets determined at the time of the grant. The total amount of compensation expense recognized is based on the number of shares that the Company
determines are probable of vesting. The estimate will be made each reporting period and determined by the Company’s actual and projected revenue and cash flow
performance and the compensation expense will be recognized over the vesting term of the awards.
85
The following table summarizes the Company’s issuances of awards under the new compensation award structure:
Grant Date
July 2016
March 2017
Performance Measures
(a) the Company meeting certain revenue and cash
flow targets through December 31, 2018 and (b) the
recipient continuing to provide services to the
Company through the end of June 2019
(a) the Company meeting certain revenue and cash
flow targets through December 31, 2019 and (b) the
recipient continuing to provide services to the
Company through the end of March 2020
Vesting Term
Three years
Three years
Fiscal years
2016, 2017 and
2018
Fiscal years
2017, 2018 and
2019
Performance
Period
# of Shares at
Target
# of Shares at
Maximum
499,800
Grant Date Fair
Value per share
$
38.67
166,600
185,270
555,810
$
41.73
The Company recognized compensation expense related to all performance-based awards in the aggregate amount of $11.2 million , $2.6 million and $1.9
million for the years ended December 31, 2017 , 2016 and 2015 , respectively. There was no unrecognized compensation expense related to unvested performance-
based restricted stock units at December 31, 2017 .
Stock-Based
Compensation
Stock-based compensation expense related to stock options, restricted stock units, the ESPP and performance-based restricted stock units is included in the
following line items in the accompanying Consolidated Statements of Operations for the years ended December 31, 2017 , 2016 and 2015 (in thousands):
Cost of revenue
Sales and marketing
Research and development
General and administrative
Total
Years Ended December 31,
2017
2016
2015
4,904 $
4,732 $
28,427
9,630
22,869
25,642
7,586
16,739
65,830 $
54,699 $
3,887
23,604
6,010
9,580
43,081
$
$
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.
11.
INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code of
1986, as amended. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31,
2017, further limitation on deductibility of interest expense, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a
one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Consistent with the guidance under ASC
740, we will record any impacts from enactment of the Tax Act in the fourth quarter of 2017 subject to Staff Accounting Bulletin (“SAB”) 118 which provides for
a measurement period to complete the accounting for certain elements of the tax reform.
We have calculated our best estimate of the impact of the Tax Act in our year end income tax provision in accordance with our understanding of the Tax Act
and guidance available as of the date of this filing. The Tax Act did not result in any material tax expense during fourth quarter of 2017, the period in which the
legislation was enacted. The Company remeasured the net deferred tax assets and corresponding valuation allowance at the 21% rate. Further, the impact of the
one-time transition tax on the mandatory deemed repatriation of foreign earnings was immaterial due to an aggregate foreign earnings deficit.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimate, possibly
materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any
changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has
utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.
The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to
finalize the recording of the related tax impacts.
86
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,
2017
2016
2015
$
$
(32,853) $
(26,736)
(59,589) $
(39,107) $
(26,523)
(65,630) $
(59,797)
(24,538)
(84,335)
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,
2017
2016
2015
$
— $
— $
114
1,580
1,694
—
—
52
52
105
1,838
1,943
—
—
(736)
(736)
$
1,746 $
1,207 $
—
147
1,139
1,286
—
—
(105)
(105)
1,181
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.
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
Deferred adjustments / U.S. rate change
Other
Valuation allowance
Total income tax (benefit) provision
Years Ended December 31,
2017
2016
2015
$
(20,260) $
(22,310) $
(806)
5,220
3,182
(494)
7,811
262
6,831
$
1,746 $
87
(855)
3,711
4,467
(750)
—
1,494
15,450
1,207 $
(28,681)
(1,632)
3,964
4,673
(99)
—
536
22,420
1,181
Major components of the Company’s deferred tax assets (liabilities) at December 31, 2017 and 2016 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,
2017
2016
$
2,371 $
19,884
80,615
16,886
2,739
1,467
2,721
126,683
(118,606)
8,077
(5,672)
(1,074)
(410)
(7,156)
$
921 $
3,037
22,146
68,356
19,515
4,060
6,387
2,276
125,777
(111,775)
14,002
(7,718)
(4,721)
(591)
(13,030)
972
At December 31, 2017 , the Company had federal, state and foreign net operating losses of approximately $250.7 million , $257.9 million and $86.0 million ,
respectively. The federal net operating loss carryforward will begin expiring in 2022, the state net operating loss carryforward began expiring in 2017, 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 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, 2017 . 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 $6.8 million , $15.5 million and $22.4
million for the years ended December 31, 2017 , 2016 and 2015 , respectively, was primarily due to additional net operating losses generated by the Company.
We adopted ASU No. 2016-09 effective January 1, 2017. The ASU eliminates the requirement to delay the recognition of excess tax benefits until they
reduce current taxes payable. However, as of January 1, 2017, the previously unrecognized excess tax benefits of $39.4 million had no impact on our accumulated
deficit balance as the related U.S. deferred tax assets were fully offset by a valuation allowance. The adoption did not have any other material impacts on the
Company’s provision for income taxes.
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 $3.3 million and $4.0 million at December 31, 2017
and December 31, 2016 , respectively. Any future distribution of these non-U.S. earnings may subject the Company to state income taxes, as adjusted for tax
credits, and foreign withholding taxes that the Company estimates would be $0.1 million and $0.8 million at December 31, 2017 and 2016 , respectively. We are
also estimating that the transition tax on any undistributed earnings that existed as of December 31, 2017 will be zero .
88
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 , 2016 and 2015 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,
2017
2016
2015
$
$
276 $
995
1,271 $
276 $
—
276 $
276
—
276
The provision for uncertain tax positions relates 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 2017 tax year. The amount of accrued interest and penalties on unrecognized tax benefits was
insignificant, as of December 31, 2017 and 2016 . 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 tax positions would result in a $1.3 million tax
benefit. The Company believes it is reasonably possible that within the next twelve months we may resolve certain matters related to the years under examination,
which may result in reductions of our unrecognized tax benefits and income tax expense of up to $1.1 million .
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 2014 through 2017 tax years. State income tax returns are subject to
examination for the 2013 through 2017 tax years. Foreign income tax returns are subject to examination for the 2007 through 2017 tax years.
12.
RESTRUCTURING COSTS
In December 2017, as part of the Company’s new strategic plan to accelerate revenue growth and increase operating margins, the Company approved a
restructuring plan to reduce the headcount of the Company’s global service delivery team, as well as the headcount of some of its sales teams, representing a total
workforce reduction of approximately six percent. In December 2017, the Company completed the sales team headcount reductions. The Company expects the
service delivery headcount reductions to be primarily completed by March 2018. The restructuring is part of the Company’s renewed focus on recurring, or
subscription-based, revenue growth and driving cost reductions to accelerate the growth of its operating margins and free cash flow.
89
During the year ended December 31, 2017 , the Company recognized $1.5 million of restructuring costs, which was recorded in “Restructuring” in the
accompanying Consolidated Statements of Operations. The restructuring costs consisted primarily of payroll-related costs, such as severance, outplacement costs
and continuing healthcare coverage, associated with employee terminations. The Company expects to incur an additional cost of approximately $3.0 million in
connection with the restructuring plan in the first quarter of 2018.
13.
SEGMENT AND GEOGRAPHIC INFORMATION
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 its chief executive officer, who is the chief operating decision maker. The Company presents its entity-wide information in the tables below.
The following table sets forth the Company’s sources of revenue (dollars in thousands):
Subscription revenue
Percentage of subscription revenue to total revenue
Professional services revenue
Percentage of professional services revenue to total revenue
At or For Year Ended December 31,
2017
2016
2015
396,764
$
339,756
$
270,093
82.3%
85,221
$
17.7%
80.3%
83,368
$
19.7%
79.5%
69,558
20.5%
481,985
$
423,124
$
339,651
$
$
$
Revenue by geographic region, which is generally based on the address of the Company’s clients as defined in their master subscription agreements, 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,
2017
2016
2015
$
$
313,729 $
284,657 $
25,701
142,555
27,571
110,896
481,985 $
423,124 $
228,724
30,104
80,823
339,651
December 31,
2017
2016
$
$
16,468 $
3,378
971
20,817 $
19,843
2,985
1,134
23,962
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. The Plan provides for a Company matching contribution in an amount equal to
50% of an employee’s contributions up to $2,400 per year, which vests fully after the four th year of employment.
The Company incurred approximately $2.0 million , $1.9 million and $1.6 million of matching contribution expenses related to the Plan during the years
ended December 31, 2017 , 2016 and 2015, respectively.
90
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 2021. 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 $8.0 million , $7.8 million and $6.7
million for the years ended December 31, 2017 , 2016 and 2015 , respectively.
Future minimum lease payments under non-cancelable operating leases at December 31, 2017 are as follows (in thousands):
2018
2019
2020
2021
2022
Total minimum lease payments
Letters
of
Credit
Operating Leases
8,246
826
84
73
—
9,229
$
$
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, 2017 was $1.4 million .
Other
Commitments
As of December 31, 2017 , 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 human capital management
platform. In aggregate, these estimated commitments total approximately $12.0 million in 2018, $6.5 million in 2019 and $0.7 million in 2020.
As of December 31, 2017 , the Company had software subscription agreements with various service providers with obligations of approximately $8.4 million
in 2018, $5.3 million in 2019 and $0.5 million in 2020.
As of December 31, 2017 , the Company had a sponsorship agreement with a professional sports franchise with obligations of approximately $0.7 million in
2018 and $0.7 million in 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. 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.
91
Litigation
During 2017, a patent infringement claim was filed against the Company. This claim has subsequently been dismissed and did not have a material adverse
effect on the Company’s business, operating results, cash flows or financial condition.
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 condition 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.
16.
RELATED PARTY TRANSACTIONS
The Cornerstone OnDemand Foundation (the “Foundation”) empowers communities in the United States and internationally by increasing the impact of the
non-profit sector through the utilization of human capital management technology including the Company’s products. 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, 2017 , 2016 and 2015 , the Company provided at no charge
certain resources to the Foundation, with approximate values of $3.4 million , $3.3 million and $2.9 million , respectively.
An executive of the Company has an ownership interest in The Corner restaurant (the “Corner”). The Company does not direct the Corner’s activities, and
accordingly, the Company does not consolidate the Corner’s statement of activities with its financial results. During the year ended December 31, 2017 , the
Company recorded $0.3 million in expenses related to the use of the restaurant.
During June 2010, an executive officer of an accounting software company joined the Company’s board of directors and resigned in September 2016. For the
years ended December 31, 2016 and 2015 , the Company recorded $0.7 million and $0.6 million , respectively, in expenses related to the use of the accounting
software from the company whose executive officer served on the Company’s Board of Directors during those years.
During May 2017, an executive officer of a cyber security company joined the Company’s board of directors. For the year ended December 31, 2017 , the
Company recorded $0.7 million , in expenses related to the products and services provided by the cyber security company. Additionally, for the year ended
December 31, 2017 , the Company recognized revenue of $0.3 million related to the cyber security company’s subscription to our products.
17.
SUBSEQUENT EVENTS
During January 2018, shares issuable under the Company’s 2010 Employee Stock Purchase Plan increased by 575,119 shares and shares issuable under the
Company’s 2010 Plan increased by 2,588,036 shares in accordance with the automatic annual increase provisions of such plans.
During January and February 2018, the Company entered into software subscription agreements with various service providers with obligations of
approximately $3.1 million in 2018, $3.1 million in 2019 and $3.1 million in 2020.
During January and February 2018, the Compensation Committee granted restricted stock units covering an aggregate of 64,635 shares of the Company’s
common stock which generally vest annually over four years.
Subsequent to December 31, 2017 and as of February 9, 2018, the Company repurchased 0.3 million shares of its common stock at an average cost of $37.03
per share for a total expenditure of $9.9 million .
92
18.
SELECTED QUARTERLY DATA (UNAUDITED)
The following unaudited quarterly consolidated statements of operations for each of the quarters in the years ended December 31, 2017 and 2016 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.
Mar. 31,
2016
99,324 $
June 30,
2016
107,013 $
Sept. 30,
2016
107,758 $
Dec. 31,
2016
109,029 $
Mar. 31,
2017
111,582 $
June 30,
2017
116,651 $
Sept. 30,
2017
121,796 $
Dec. 31,
2017
131,956
$
Quarter Ended
(in thousands, except per share data)
31,650
67,674
35,955
71,058
33,369
74,389
34,778
74,251
33,949
77,633
35,321
81,330
35,708
86,088
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Restructuring
Amortization of certain
acquired intangible assets
56,701
11,015
16,465
—
150
57,835
11,782
16,538
—
—
53,690
12,130
18,608
—
—
57,405
12,050
19,345
—
—
56,894
13,411
20,476
—
—
62,073
14,684
23,141
—
—
60,554
16,389
21,249
—
—
Total operating
expenses
Loss from operations
Other income (expense):
Interest income (expense)
and other income (expense),
net
84,331
86,155
84,428
88,800
90,781
99,898
98,192
(16,657)
(15,097)
(10,039)
(14,549)
(13,148)
(18,568)
(12,104)
(1,051)
(2,350)
(2,131)
(3,756)
(2,492)
(2,333)
(2,248)
Loss before income tax provision
(17,708)
(17,447)
(12,170)
(18,305)
(15,640)
(20,901)
(14,352)
Income tax provision
(535)
(141)
(218)
(313)
(571)
(364)
(503)
(18,243) $
(17,588) $
(12,388) $
(18,618) $
(16,211) $
(21,265) $
(14,855) $
Net loss
Net loss per share, basic and
diluted
Weighted average common
shares outstanding, basic and
diluted
$
$
(0.33) $
(0.32) $
(0.22) $
(0.33) $
(0.29) $
(0.37) $
(0.26) $
(0.16)
54,827
55,278
55,964
56,300
56,642
56,935
57,627
57,826
37,889
94,067
60,750
17,491
19,723
1,539
—
99,503
(5,436)
(3,260)
(8,696)
(308)
(9,004)
Item 9.
Changes
in
and
Disagreements
with
Accountants
on
Accounting
and
Financial
Disclosure
None.
93
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, 2017 , 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, 2017 . 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, 2017 .
The effectiveness of our internal control over financial reporting as of December 31, 2017 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, 2017 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
94
Item 9B.
Other
Information
Carter Transition Agreement
In connection with Dave Carter’s resignation as the Company’s Chief Sales Officer, effective as of March 31, 2018, Mr. Carter entered into a transition
agreement (the “Carter Transition Agreement”) with the Company, dated February 27, 2018, pursuant to which Mr. Carter released all claims he may have against
the Company and affirmed his obligations regarding confidential information as stated in his confidentiality agreement with the Company.
The Carter Transition Agreement provides that through Mr. Carter’s actual termination of employment with the Company, which is expected to occur on or
around March 31, 2018, he will continue to be employed pursuant to the current terms of his employment, as amended by the Carter Transition Agreement. If Mr.
Carter remains employed with the Company through March 31, 2018, or, if prior to that date his employment with the Company is terminated for reasons other
than for “cause”, then, subject to Mr. Carter executing and not revoking a supplemental separation agreement, he will receive the following benefits, which include
those set forth in his preexisting Change of Control Severance Agreement: (i) a lump-sum payment equal to $335,000, less applicable withholding taxes, (ii)
reimbursement for up to twelve months of COBRA premiums, (iii) twelve-months of accelerated vesting of all outstanding time-based equity awards, and (iv) the
ability to exercise any vested stock options through the earlier of the maximum expiration date and March 31, 2020.
The foregoing description of the Carter Transition Agreement is qualified in its entirety by reference to the full text of the Carter Transition Agreement,
which is filed as an exhibit to this Annual Report on Form 10-K.
Helvey Transition Agreement
In connection with Kirsten Helvey’s resignation as the Company’s Chief Operating Officer, effective as of March 31, 2018, Ms. Helvey entered into a
transition agreement (the “Helvey Transition Agreement”) with the Company, dated February 27, 2018, pursuant to which Ms. Helvey released all claims she may
have against the Company and affirmed her obligations regarding confidential information as stated in her confidentiality agreement with the Company.
The Helvey Transition Agreement provides that through Ms. Helvey’s actual termination of employment with the Company, which is expected to occur on
or around March 31, 2018, she will continue to be employed pursuant to the current terms of her employment, as amended by the Helvey Transition Agreement. If
Ms. Helvey remains employed with the Company through March 31, 2018, or, if prior to that date her employment with the Company is terminated for reasons
other than for “cause”, then, subject to Ms. Helvey executing and not revoking a supplemental separation agreement, she will receive the following benefits, which
include those set forth in her preexisting Change of Control Severance Agreement: (i) a lump-sum payment equal to $350,000, less applicable withholding taxes,
(ii) reimbursement for up to twelve months of COBRA premiums, (iii) twelve-months of accelerated vesting of all outstanding time-based equity awards, (iv) the
ability to exercise any vested stock options through the earlier of the maximum expiration date and March 31, 2020, and (v) reimbursement of up to $10,000 for
expenses relating to executive coaching. In order to ensure a smooth transition, Ms. Helvey may render transitional services as a consultant to the Company after
her resignation.
The foregoing description of the Helvey Transition Agreement is qualified in its entirety by reference to the full text of the Helvey Transition Agreement,
which is filed as an exhibit to this Annual Report on Form 10-K.
Item 10.
Directors,
Executive
Officers
and
Corporate
Governance
PART III
The information required by this item will be included in our Proxy Statement for the 2018 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2017 , 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 2018 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2017 , and is incorporated herein by reference.
95
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 2018 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2017 , 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 2018 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2017 , 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 2018 Annual Meeting of Stockholders to be filed with the SEC within
120 days of the fiscal year ended December 31, 2017 , 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 2018
Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2017 is not deemed “filed” as part of this Annual
Report on Form 10-K.
PART IV
96
Item 15.
Exhibits
and
Financial
Statement
Schedules
Documents filed as part of this report are as follows:
1. Consolidated Financial Statements:
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 below 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).
Exhibit Index
Exhibit
Number
3.1
3.2
4.1
4.2
10.1*
10.2*
10.3*
Exhibit Description
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.
Indenture, dated as of December 8, 2017, by and between the Registrant and
U.S. Bank National Association, as trustee (including the form of 5.75%
Convertible Senior Notes Due 2021).
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.
The Registrant’s 2009 Equity Incentive Plan, including forms of stock option
agreements.
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 Mark Goldin, dated as
of May 24, 2010.
Employment Agreement between the Registrant and Brian L. Swartz, dated
as of May 1, 2016
Amended and Restated Employment Agreement between the Registrant and
David J. Carter, dated as of November 8, 2010.
97
Form
S-1/A
S-1/A
8-K
8-K
Incorporated by Reference
File No.
333-169621
Exhibit
3.2
333-169621
001-35098
3.4
4.1
Filing Date
November 9, 2010
November 9, 2010
June 17, 2013
001-35098
4.1
December 8, 2017
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
333-169621
10.11
September 29, 2010
10-Q
001-35098
10.1
August 5, 2016
S-1/A
333-169621
10.9
November 9, 2010
Exhibit
Number
10.10A*
2014 Sales Commission Plan between the Registrant and David J. Carter.
Exhibit Description
10.10B*
2015 Sales Commission Plan between the Registrant and David J. Carter.
10.10C*
2016 Sales Commission Plan between the Registrant and David J. Carter.
10.10D*
2017 Sales Commission Plan between the Registrant and David J. Carter.
10.11*
10.12*
Transition Agreement between the Registrant and David J. Carter, dated as of
February 27, 2018.
Amended and Restated Unlimited Term Employment Contract between the
Registrant and Vincent Belliveau.
Incorporated by Reference
Form
10-Q
10-Q
10-Q
10-Q
File No.
001-35098 10.1
Exhibit
Filing Date
August 7, 2014
001-35098 10.1
001-35098 10.1
001-35098 10.1
May 8, 2015
May 6, 2016
May 5, 2017
S-1/A
333-169621
10.10
February 11, 2011
10.13A*
2014 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.13B*
2015 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.13C*
2016 Sales Commission Plan between the Registrant and Vincent Belliveau.
10.13D*
2017 Sales Commission Plan between the Registrant and Vincent Belliveau.
10-Q
10-Q
10-Q
10-Q
001-35098 10.2
001-35098 10.2
001-35098 10.2
001-35098 10.2
August 7, 2014
May 8, 2015
May 6, 2016
May 5, 2017
10.14*
10.15*
10.16*
10.17*
10.18*
10.19
10.20
10.21
10.22
10.23
10.24
Employment Agreement between the Registrant and Jeffrey Lautenbach,
dated November 28, 2017.
Form of Change of Control Severance Agreement between the Registrant and
certain of its executive officers
Transition Agreement between the Registrant and Kirsten Helvey, dated as of
February 27, 2018.
Description of 2016 Executive Bonus Plan
Description of 2017 Executive Bonus Plan
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
Investment Agreement, dated as of November 8, 2017, by and between, inter
alia, the Registrant and Silver Lake Credit Partners, L.P., as amended
21.1
List of subsidiaries of the Registrant
98
10-Q
001-35098
10.4
August 7, 2013
8-K
8-K
S-1
001-35098 n/a
001-35098 n/a
March 18, 2016
March 5, 2017
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
001-35098
10.1
10-Q
001-35098
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.
99
Item 16.
Form
10-K
Summary
None.
100
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 27, 2018 .
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 Brian L.
Swartz, 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
Date
/s/ Adam L. Miller
President, Chief Executive Officer and Director (principal executive officer)
February 27, 2018
Adam L. Miller
/s/ Brian L. Swartz
Chief Financial Officer (principal financial and accounting officer)
February 27, 2018
Brian L. Swartz
/s/ R.C. Mark Baker
Director
R.C. Mark Baker
/s/ Harold W. Burlingame
Director
Harold W. Burlingame
/s/ Dean Carter
Director
Dean Carter
/s/ Robert Cavanaugh
Director
Robert Cavanaugh
101
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
Signature
Title
Date
/s/ Joseph Osnoss
Director
Joseph Osnoss
/s/ Joseph P. Payne
Director
Joseph P. Payne
/s/ Kristina Salen
Director
Kristina Salen
/s/ Steffan Tomlinson
Director
Steffan Tomlinson
102
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
CORNERSTONE OnDEMAND, INC.
EMPLOYMENT AGREEMENT
Exhibit 10.1
This Employment Agreement (the “Agreement”) is effective on November 28, 2017 (the “Effective Date”) by and between Cornerstone OnDemand, Inc.,
a Delaware corporation (the “Company”), and Jeffrey Lautenbach (“Executive”).
RECITALS
WHEREAS, the Company wishes to retain the services of Executive and Executive wishes to commence employment with the Company on the terms and
subject to the conditions set forth in this Agreement;
NOW THEREFORE, in consideration of the foregoing recital and the respective undertakings of the Company and Executive set forth below, the
Company and Executive agree as follows:
1.
Duties and Scope of Employment . Starting on or about January 2, 2018, with the actual date to be mutually agreed by the parties (the “ Start
Date ”), Executive will serve as the Company’s President, Global Field Operations. Executive shall have the authority generally allowed to persons discharging the
duties of such positions. Executive shall perform his duties faithfully and satisfactorily to the performance standards reasonably expected of a person in such
positions. Executive will render such business and professional services in the performance of his duties, consistent with Executive’s position within the Company,
as will reasonably be assigned to him by the Company’s Chief Executive Officer. Executive will devote substantially his full business efforts and time to the
performance of Executive’s duties hereunder, provided however, that Executive may serve on outside board positions that are not competitive with the Company
subject to the requirement that such service on outside boards of directors does not materially interfere with Executive’s performance of his duties under this
Agreement and the Company’s Board of Directors (the “ Board ”) approves such board membership (which will not be unreasonably withheld). Executive’s
principal place of employment shall be at his home, but Executive shall travel to the Company’s offices located in Santa Monica, California as often as required to
perform Executive’s duties and/or as requested by the Company’s Chief Executive Officer.
2.
At-Will Employment . Subject to the terms hereof, Executive’s employment with the Company will be “at-will” employment and may be
terminated by Company at any time with or without cause or with or without notice. However, as described in the Change of Control Severance Agreement (the “
CoC Agreement ”) to be entered into between Executive and the Company, Executive may be entitled to severance benefits depending upon the circumstances of
Executive’s termination of employment, subject to the terms and conditions of the CoC Agreement.
3.
Term of Agreement . Subject to Section 2, this Agreement will have an initial term of three (3) years, commencing on the Start Date (the “
Initial Term ”). On the third anniversary of the Start Date, this Agreement will renew automatically for additional one (1) year terms (each an “ Additional Term
”), unless either party provides the other party with written notice of non-renewal at least ninety (90) days prior to the date of automatic renewal. Notwithstanding
the foregoing provisions of this paragraph, (a) if a Change of Control (as defined in the CoC Agreement) occurs when there are fewer than twelve (12) months
remaining during the Initial Term or an Additional Term, the term of this Agreement will extend automatically through the date that is twelve (12) months
following the effective date of the Change of Control, or (b) if an initial occurrence of an act or omission by the Company constituting the grounds for “Good
Reason” as defined in and in accordance with Section 6(g) of the CoC Agreement has occurred (the “ Initial Grounds ”), and the expiration date of the Company
cure period (as such term is used in Section 6(g) of the CoC Agreement) with respect to such Initial Grounds could occur following the expiration of the Initial
Term or an Additional Term, the term of this Agreement will extend automatically through the date that is thirty (30) days following the expiration of such cure
period. If Executive becomes entitled to benefits under Section 3 of the CoC Agreement during the term of this Agreement, this Agreement will not terminate until
all of the obligations of the parties hereto with respect to this Agreement have been satisfied.
4.
Compensation .
(a)
Base Salary . Executive shall receive an annual base salary of $400,000 (“ Base Salary ”) payable in accordance with the
Company’s normal payroll practices and be subject to the usual, required withholdings. Executive’s salary will be subject to review and any adjustments will be
made based upon the Company’s normal performance review practice.
(b)
Performance Bonus . Executive will be eligible for an annual performance bonus with a target level of 100% of Base Salary based
upon performance criteria as established by the Compensation Committee of the Board (the “Compensation Committee”) and subject to the terms and conditions of
the Company’s executive bonus plan for the applicable fiscal year. Any earned bonus will be paid as soon as practicable after the Board or the Compensation
Committee determines that the bonus has been earned, but in no event will the bonus be paid after the later of (i) the fifteenth (15th) day of the third (3rd) month
following the close of the Company’s fiscal year in which the bonus is earned or (ii) March 15 following the calendar year in which the bonus is earned.
(c)
First-Year Bonus . During the first year of Executive’s employment only, separate from and in addition to any performance bonus
described in Section 4(b) above, Executive will be eligible receive a bonus of $80,000, paid in four quarterly payments of $20,000 each, subject to Executive’s
continued employment by the Company through each applicable three-month anniversary of his Start Date, and subject further to any applicable tax withholding.
Any such amounts will be paid on the first scheduled payroll date following the applicable quarterly vesting date.
(d)
Equity Awards .
(i)
Restricted Stock Units . Subject to approval of the Compensation Committee, following the Start Date, Executive will be
granted an award of restricted stock units based on a target value of two million two hundred thousand dollars ($2,200,000) (the “ Initial RSU Award ”) pursuant
to the terms of the Company’s 2010 Equity Incentive Plan (the “ Equity Plan ”). A portion of the Initial RSU Award may be performance-based, provided that: (i)
both the proportionality of performance-based units to time-based units and the performance metrics for the performance-based units are generally consistent with
grants made to other senior executives of the Company; and (ii) the vesting period for the Initial RSU Award does not exceed four (4) years. The Initial RSU
Award will be subject to the terms and conditions of the Equity Plan and to a restricted stock unit agreement consistent with the terms of this Agreement by and
between Executive and the Company (each, an “ RSU Agreement ”), each of which documents are incorporated herein by reference.
(ii)
Additional Future Equity Awards . Executive will be eligible to receive awards of stock options, restricted stock units or
other equity awards covering shares of Company common stock pursuant to any plans or arrangements the Company may have in effect from time to time,
including but not limited to any focal grants. The Board or the Compensation Committee will determine in its discretion whether Executive will be granted any
such equity awards and the terms of any such award in accordance with the terms of any applicable plan or arrangement that may be in effect from time to time.
5.
Other Benefits . Executive shall be entitled to participate in executive benefit plans and programs of the Company, if any, on the same terms
and conditions as other similarly-situated employees to the extent that Executive’s position, tenure, salary, age, health and other qualifications make Executive
eligible to participate in such plans or programs, subject to the rules and regulations applicable thereto. The Company reserves the right to cancel or change the
benefit plans and programs it offers to its employees at any time.
6.
Vacations; Holidays, Sick Days . Executive shall be entitled to annual paid vacation, paid holidays, and paid sick leave in accordance with the
Company’s applicable policies, which may change from time to time.
7.
Expenses . The Company will reimburse Executive for standard business expenses pursuant to the Company’s standard policies in effect from
time to time. In the event that any expense reimbursements are taxable to Executive, such reimbursements will be made in the time frame specified by Treasury
Regulation Section 1.409A-3(i)(1)(iv) unless another time frame that complies with or is exempt from “Section 409A” (as defined below) is specified in the
Company’s expense reimbursement policy.
8.
Change of Control Agreement . Subject to approval by the Compensation Committee, Executive and the Company will enter into the CoC
Agreement in substantially the form presented to Executive concurrently with this Agreement, and such document is incorporated herein by reference.
9.
Section 409A . It is the intent of this Agreement to be exempt from or comply with the requirements of Section 409A (as defined below) so
that none of the payments and benefits to be provided under this Agreement will be subject to the additional tax imposed under Section 409A, and any ambiguities
or ambiguous terms in this Agreement will be interpreted to be so exempt or so comply. In no event will the Company reimburse Executive for any taxes imposed
or other costs incurred as a result of Section 409A. The Company and Executive agree to work together in good faith to consider amendments to this Agreement
and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition under Section
409A prior to actual payment to Executive. For purposes of this Agreement, “ Section 409A ” means Section 409A of the Internal Revenue Code of 1986, as
amended, and the final regulations and any guidance promulgated thereunder and any state law equivalent.
Proprietary Information and Inventions Agreement . Executive agrees to enter into the Company’s standard Employment, Confidential
Information, Invention Assignment, and Arbitration Agreement (the “ Confidentiality Agreement ”), which agreement is incorporated herein by reference.
10.
11.
No Conflict . Executive represents and warrants that his employment by the Company as described herein shall not conflict with and will not
be constrained by any prior employment or consulting agreement or relationship.
12.
Miscellaneous .
provisions).
(a)
Governing Law . This Agreement will be governed by the laws of the State of California (with the exception of its conflict of law
(b)
Assignment . This Agreement and all rights hereunder shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees, successors and assigns. This
Agreement is personal in nature, and neither of the parties to this Agreement shall, without the written consent of the other, assign or transfer this Agreement or
any right or obligation under this Agreement to any other person or entity; except that the Company may assign this Agreement to any of its affiliates or wholly-
owned subsidiaries or to any successor-in-interest by virtue of a reorganization, merger or other form of business combination, provided, that such assignment will
not relieve the Company of its obligations hereunder. Any attempted assignment, transfer, conveyance or other disposition of Executive’s right to compensation or
other benefits will be null and void.
(c)
Notices . All notices, requests, demands and other communications called for hereunder will be in writing and will be deemed given
(a) on the date of delivery if delivered personally; (b) one (1) day after being sent overnight by a well-established commercial overnight service, or (c) four (4) days
after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at
such other addresses as the parties may later designate in writing:
If to the Company:
Attn : General Counsel
Cornerstone OnDemand, Inc.,
1601 Cloverfield Blvd., Suite 620
Santa Monica, CA 90404
If to Executive:
at the last residential address known by the Company
Acknowledgment . Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his
private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, including that Executive is waiving
his right to a jury trial, and is knowingly and voluntarily entering into this Agreement.
(d)
unenforceable or void, this Agreement will continue in full force and effect without said provision.
(e)
Severability . In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal,
Integration . This Agreement, along with the documents incorporated by reference herein, represents the entire agreement and
understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral. No waiver,
alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by the Company and Executive.
(f)
agreement or the Confidentiality Agreement, will be settled by arbitration pursuant to the arbitration provisions set forth in the Confidentiality Agreement.
(g)
Arbitration . Any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of this
(h)
(i)
Agreement.
Tax Withholding . All payments made pursuant to this Agreement will be subject to withholding of applicable taxes.
Headings . All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this
and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.
(j)
Counterparts . This Agreement may be executed in counterparts, PDF or facsimile, each an original and each having the same force
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY:
Cornerstone OnDemand, Inc.
By: /s/ Adam Miller
Adam Miller, Chief Executive Officer
EXECUTIVE:
/s/ Jeffrey Lautenbach
Jeffrey Lautenbach
[Signature Page to Employment Agreement]
Form of Employee Confidentiality, Non-Disclosure, Non-Recruiting, and Assignment of Inventions Agreement
Exhibit A
TRANSITION AGREEMENT AND RELEASE OF CLAIMS
Exhibit 10.2
This transition agreement and release of claims (this “ Agreement
”) is made by and between Cornerstone OnDemand, Inc. (the “ Company
”), and David
Carter (“ Executive
”). The Company and Executive are sometimes collectively referred to herein as the “ Parties
” and individually referred to as a “ Party
.”
WHEREAS , Executive is employed by the Company as Chief Sales Officer;
RECITALS
WHEREAS , Executive previously signed a confidentiality agreement with the Company (the “ Confidentiality
Agreement
”);
WHEREAS , Executive signed a Change of Control Severance Agreement with the company on April 29, 2013 (the “ Change
of
Control
Agreement
”),
which, among other things, provides for certain severance benefits to be paid to Executive by the Company upon the termination of Executive’s employment
including following a Change of Control (as defined in the Change of Control Agreement) of the Company;
WHEREAS , the Company and Executive have entered into Stock Option Agreements, pursuant to which Executive was granted the option to purchase
shares of the Company’s common stock (each such grant, an “ Option
” and together, the “ Options
”) and have entered into Restricted Stock Unit Award
Agreements, granting Executive the right to receive an award of Restricted Stock Units (each such award, an “ RSU
Award
” and together, the “ RSU
Awards
”),
each subject to the terms and conditions of the Company’s equity plan under which it was granted (the 1999 Stock Plan, the 2009 Equity Incentive Plan or the 2010
Equity Incentive Plan, as applicable, each, a “ Plan
”), and the terms and conditions of the Stock Option Agreement or the Restricted Stock Unit Award
Agreement, as applicable, related to the award (collectively with the Plans, “ Stock
Agreements
”);
WHEREAS , Executive’s employment with the Company is expected to terminate effective March 31, 2018 (the “ Expected
Termination
Date
”);
WHEREAS , subject to Executive’s fulfillment of the terms and conditions of this Agreement, in consideration of Executive’s execution of this
Agreement and provided that Executive does not revoke the Agreement under Section 5 below, and subject to Executive signing and not revoking the
Supplemental Separation Agreement attached hereto as Exhibit A (the “ Supplemental
Separation
Agreement
”), in accordance with the terms below, Executive
will be entitled to the severance benefits set forth in Section 2 below; and
WHEREAS , the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions and demands that Executive may
have against the Company and any of the Releasees (as defined below), including, but not limited to, any and all claims arising out of or in any way related to
Executive’s employment relationship with the Company and the termination of that relationship.
NOW THEREFORE , for good and valuable consideration, including the mutual promises and covenants made herein, the Company and Executive
hereby agree as follows:
1.
Transition; Termination Date; Employment Status .
COVENANTS
(a)
Transition . From the Effective Date through the Termination Date, the Parties agree that Executive will continue to be
employed pursuant to the current terms of his employment; provided, however, that Executive acknowledges that he is not eligible to receive any bonus
for the Company’s 2018 fiscal year. Prior to the Termination Date, Executive will continue in his full-time role as Chief Sales Officer, reporting to Adam
Miller, President and Chief Executive Officer. On the Termination Date, Executive agrees that Executive will be deemed to have resigned from all officer
and/or director positions held at the Company and its affiliates voluntarily, without any further required action by Executive, as of the Termination Date
and Executive, at the request of the Company, will execute any documents reasonably necessary to reflect Executive’s resignation.
(b)
Termination Date . Executive’s termination date will occur on the Expected Termination Date,
or earlier as provided in Section 1(c) (the date of Executive’s actual termination of employment with the Company, the “ Termination
Date
”).
(c)
Employment Status . Executive is free to terminate his employment at any time prior to the Expected Termination Date, for
any reason or for no reason. Similarly, the Company is free to terminate Executive’s employment at any time prior to the Expected Termination Date, for
any reason or for no reason. As described in Section 2, Executive may be entitled to severance benefits depending on the circumstances of Executive’s
termination of employment with the Company.
2.
Consideration . If Executive remains employed with the Company through the Expected Termination Date, or, if prior to the Expected
Termination Date, Executive’s employment with the Company is terminated by the Company without Cause (as such term is defined in the Change of Control
Agreement), then subject to (i) Executive’s execution of this Agreement and Executive’s fulfillment of all of its terms and conditions, and provided that Executive
does not revoke the Agreement under Section 5 below, and (ii) Executive’s execution of the Supplemental Separation Agreement, which must become effective
and irrevocable no later than the sixtieth (60 th ) day following the Termination Date (the “ Supplemental
Separation
Agreement
Release
Deadline
”) and
Executive’s fulfillment of all of its terms and conditions, Executive will receive the following consideration:
Separation Payment . The Company agrees to pay Executive a lump sum payment equal to Three Hundred Thirty-Five
Thousand Dollars ($335,000) (the “ Severance
”). This payment will be made, less applicable withholding taxes, to Executive within ten (10) days after
the Effective Date of the Supplemental Separation Agreement, and in all cases the payment will be made no later than March 15, 2019.
(a)
(b)
COBRA . If Executive elects continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended (“ COBRA
”), within the time period prescribed pursuant to COBRA for Executive and Executive’s eligible dependents, then the
Company will reimburse Executive for the COBRA premiums for such coverage (at the coverage levels in effect immediately prior to the Termination
Date) until the earlier of (A) a period of twelve (12) months from the Termination Date, or (B) the date upon which Executive and/or Executive’s eligible
dependents become covered under similar plans. The reimbursements will be made by the Company to Executive consistent with the Company’s normal
expense reimbursement policy. However, if the Company determines in its sole discretion that it cannot provide the foregoing benefit without potentially
violating, or being subject to an excise tax under, applicable law (including, without limitation, Section 2716 of the Public Health Service Act), the
Company will in lieu thereof provide to Executive a taxable monthly payment (“ Healthcare
Premium
Payment
”), payable on the last day of a given
month, in an amount equal to the monthly COBRA premium that Executive would be required to pay to continue Executive’s group health coverage in
effect on the Termination Date (which amount will be based on the premium for the first month of COBRA coverage), which payments will be made
regardless of whether Executive elects COBRA continuation coverage and will commence on the month following Executive’s Termination Date and will
end on the earlier of (x) the date upon which Executive obtains other employment or (y) the date the Company has paid an amount equal to twelve (12)
payments. For the avoidance of doubt, the taxable payments in lieu of COBRA reimbursements may be used for any purpose, including, but not limited
to, continuation coverage under COBRA, and will be subject to all applicable tax withholdings.
(c)
Equity . On the Termination Date, but subject to the effectiveness of this Agreement and the Supplemental Separation
Agreement as provided herein and to the provisions of Section 17, Executive’s vesting in each Option and each RSU Award shall accelerate as to the
number of shares subject to each Option and each RSU Award that otherwise would have vested within the twelve (12) month period immediately
following the Termination Date had Executive remained employed by the Company through such period. The Parties agree that for purposes of
determining the number of shares of the Company’s common stock that Executive is entitled to purchase from the Company, pursuant to the exercise of
the outstanding Options, or that Executive has vested in, pursuant to the RSU Awards, in each case as of the Termination Date, Executive will be
considered to have vested only through the Termination Date and will not vest in any of Executive’s Options or RSU Awards thereafter. The post-
termination exercise period of Executive’s vested Options will be extended such that Executive may exercise that portion of his Options vested as of the
Termination Date through March 31, 2020; provided, however, in no event may the Options be exercised following their maximum expiration date and
the Options will be subject to earlier termination in the event of certain corporate transactions as provided for in the Plan under which the Options were
granted. This Agreement acts as an amendment to the Stock Agreements and Executive acknowledges and agrees that the incentive stock option status
and/or holding periods for favorable tax treatment of any Options that were originally designated as incentive stock options pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended, may be impacted by the terms of this Agreement. Executive’s Options, the shares purchased thereunder and
Executive’s RSU Awards will continue to be governed by the terms and conditions of the applicable Stock Agreement, as each has been modified by this
Agreement.
General . Executive acknowledges that without this Agreement, he is otherwise not entitled to the consideration listed in
this Section 2 and that the consideration provided in this Section 2 is greater than the consideration he would otherwise be entitled to receive upon a
termination without cause pursuant to the terms of Section 3(a) of the Change of Control Agreement.
(d)
3.
Payment of Salary and Receipt of All Benefits . Executive acknowledges and represents that, other than the consideration to be paid in
accordance with the terms and conditions of the Agreement and Executive’s final wages, including any accrued vacation/paid time off, which will be paid on the
Termination Date, the Company has paid or provided all salary, wages, bonuses, accrued vacation/paid time off, premiums, leaves, housing allowances, relocation
costs, interest, severance, outplacement costs, fees, reimbursable expenses, commissions, draws, stock, Options or other equity awards (including RSU Awards),
vesting, and any and all other benefits and compensation due to Executive and that no other reimbursements or compensation are owed to Executive.
4.
Release of Claims . Executive agrees that the consideration to be paid in accordance with the terms and conditions of the Agreement
represents settlement in full of all outstanding obligations owed to Executive by the Company and its current and former officers, directors, employees, agents,
investors, attorneys, stockholders, administrators, affiliates, benefit plans, plan administrators, insurers, trustees, divisions, and subsidiaries, and predecessor and
successor corporations and assigns (collectively, the “ Releasees
”). Executive, on Executive’s own behalf and on behalf of Executive’s respective heirs, family
members, executors, agents, and assigns, hereby and forever releases the Releasees from, and agrees not to sue concerning, or in any manner to institute, prosecute,
or pursue, any claim, complaint, charge, duty, obligation, demand, or cause of action relating to any matters of any kind, whether presently known or unknown,
suspected or unsuspected, that Executive may possess against any of the Releasees arising from any omissions, acts, facts, or damages that have occurred up until
and including the Effective Date of this Agreement, including, without limitation the following:
any and all claims relating to or arising from Executive’s employment relationship with the Company and the termination
of that relationship, including claims under any offer letter, employment agreement, or other agreement with the Company, including, but not limited to,
the Change of Control Agreement;
(a)
any and all claims relating to, or arising from, Executive’s right to purchase, or actual purchase of shares of stock of the
Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate
law, and securities fraud under any state or federal law;
(b)
(c)
any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination;
harassment; retaliation; breach of contract, both express and implied; breach of covenant of good faith and fair dealing, both express and implied;
promissory estoppel; negligent or intentional infliction of emotional distress; fraud; negligent or intentional misrepresentation; negligent or intentional
interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault;
battery; invasion of privacy; false imprisonment; conversion; and disability benefits;
(d)
any and all claims for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the
Civil Rights Act of 1964; the Civil Rights Act of 1991; the Rehabilitation Act of 1973; the Americans with Disabilities Act of 1990; the Equal Pay Act;
the Fair Labor Standards Act; the Fair Credit Reporting Act; the Age Discrimination in Employment Act of 1967; the Older Workers Benefit Protection
Act; the Employee Retirement Income Security Act of 1974; the Worker Adjustment and Retraining Notification Act; the Family and Medical Leave Act;
the Sarbanes-Oxley Act of 2002; the Immigration Control and Reform Act; the California Family Rights Act; the California Labor Code; the California
Workers’ Compensation Act; the California Fair Employment and Housing Act; the Unruh Civil Rights Act; the California Equal Pay Law; the California
Unfair Business Practices Act; and the California Worker Adjustment and Retraining Notification Act;
(e)
(f)
(g)
any and all claims for violation of the federal, or any state, constitution;
any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;
any claim for any loss, cost, damage, or expense arising out of any dispute over the non-withholding or other tax treatment
of any of the proceeds received by Executive as a result of this Agreement; and
(h)
any and all claims for attorneys’ fees and costs.
Executive agrees that the release set forth in this Section 4 (the “ Release
”) will be and remain in effect in all respects as a complete general release as to the
matters released. The Release does not extend to any severance obligations due Executive under the Agreement. The Release does not release claims that cannot be
released as a matter of law, including, but not limited to, Executive’s right to file a charge with or participate in a charge by the Equal Employment Opportunity
Commission, or any other local, state, or federal administrative body or government agency that is authorized to enforce or administer laws related to employment,
against the Company (with the understanding that any such filing or participation does not give Executive the right to recover any monetary damages against the
Company; Executive’s release of claims herein bars Executive from recovering such monetary relief from the Company). Executive represents that Executive has
made no assignment or transfer of any right, claim, complaint, charge, duty, obligation, demand, cause of action, or other matter waived or released by this Section
4. Nothing in this Agreement waives Executive’s rights to indemnification or any payments under any fiduciary insurance policy, if any, provided by any act or
agreement of the Company, state or federal law or policy of insurance.
5.
Acknowledgment of Waiver of Claims under ADEA . Executive acknowledges that Executive is waiving and releasing any rights Executive
may have under the Age Discrimination in Employment Act of 1967 (“ ADEA
”) and that this waiver and release is knowing and voluntary. Executive agrees that
this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date of this Agreement. Executive acknowledges
that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further acknowledges
that Executive has been advised by this writing that (a) Executive should consult with an attorney prior
to executing this Agreement; (b) Executive has at least
twenty-one (21) days within which to consider this Agreement; (c) Executive has seven (7) days following the execution of this Agreement by the Parties to revoke
the Agreement; (d) this Agreement will not be effective until the revocation period has expired; and (e) nothing in this Agreement prevents or precludes Executive
from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties or
costs for doing so, unless specifically authorized by federal law. In the event Executive signs this Agreement and delivers it to the Company in less than the
twenty-one (21)-day period identified above, Executive hereby acknowledges that Executive has freely and voluntarily chosen to waive the time period allotted for
considering this Agreement. Executive acknowledges and understands that revocation must be accomplished by a written notification to the Chief Legal Officer of
the Company that is received prior to the Effective Date. The Parties agree that changes, whether material or immaterial, do not restart the running of the twenty-
one (21)-day period.
6.
California Civil Code Section 1542 . Executive acknowledges that Executive has been advised to consult with legal counsel and is familiar
with the provisions of California Civil Code Section 1542, a statute that otherwise prohibits the release of unknown claims, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN
HIS OR HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HIS MUST HAVE
MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
Executive, being aware of California Civil Code Section 1542, agrees to expressly waive any rights Executive may have thereunder, as well as under any other
statute or common law principles of similar effect.
7.
No Pending or Future Lawsuits . Executive represents that Executive has no lawsuits, claims, or actions pending in Executive’s name, or on
behalf of any other person or entity, against the Company or any of the other Releasees. Executive also represents that Executive does not intend to bring any
claims on Executive’s own behalf or on behalf of any other person or entity against the Company or any of the other Releasees.
8.
Sufficiency of Consideration . Executive hereby acknowledges and agrees that Executive has received good and sufficient consideration for
every promise, duty, release, obligation, agreement and right contained in this Release.
9.
Confidential Information . Subject to Section 26 governing Protected Activity, Executive reaffirms and agrees to observe and abide by the
terms of the Confidentiality Agreement, specifically including the provisions therein regarding nondisclosure of the Company’s trade secrets and confidential and
proprietary information, which agreement will continue in force; provided, however, that as to any provisions regarding solicitation of employees contained in the
Confidentiality Agreement that conflict with the provisions regarding solicitation of employees contained in this Agreement, the provisions of this Agreement will
control.
10.
Return of Company Property; Passwords and Password-protected Documents . No later than the Termination Date, Executive confirms that
Executive will return to the Company in good working order all keys, files, records (and copies thereof), equipment (including, but not limited to, computer
hardware, software and printers, wireless handheld devices, cellular
phones and pagers), access or credit cards, Company identification, and any other Company-owned property in Executive’s possession or control. Executive
further confirms that no later than the Termination Date, Executive will cancel all accounts for Executive’s benefit, if any, in the Company’s name, including, but
not limited to, credit cards, telephone charge cards, cellular phone and/or pager accounts and computer accounts. Executive also confirms that as of the
Termination Date, Executive will deliver all passwords in use by Executive at the time of Executive’s termination, a list of any documents that Executive created
or of which Executive is otherwise aware that are password-protected, along with the password(s) necessary to access such password-protected documents.
11.
No Cooperation . Subject to Section 26 governing Protected Activity, Executive agrees that Executive will not knowingly encourage,
counsel, or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any
third party against any of the Releasees, unless under a subpoena or other court order to do so or as related directly to the ADEA waiver in this Agreement.
Executive agrees both to immediately notify the Company upon receipt of any such subpoena or court order, and to furnish, within three (3) business days of its
receipt, a copy of such subpoena or other court order. If approached by anyone for counsel or assistance in the presentation or prosecution of any disputes,
differences, grievances, claims, charges, or complaints against any of the Releasees, Executive will state no more than that Executive cannot provide any such
counsel or assistance.
12.
Nondisparagement . Executive agrees that Executive will not in any way, directly or indirectly, do or say anything at any time which
disparages the Company, its business interests or reputation, or that of any of the other Releasees.
13.
No Admission of Liability . Executive understands and acknowledges that this Agreement constitutes a compromise and settlement of any
and all actual or potential disputed claims by Executive. No action taken by the Company hereto, either previously or in connection with this Agreement, will be
deemed or construed to be (a) an admission of the truth or falsity of any actual or potential claims or (b) an acknowledgment or admission by the Company of any
fault or liability whatsoever to Executive or to any third party.
14.
Solicitation of Employees . Executive agrees that for a period of twelve (12) months immediately following the Termination Date, Executive
will not directly or indirectly (a) solicit, induce, recruit or encourage any of the Company’s employees to leave their employment at the Company or (b) attempt to
solicit, induce, recruit or encourage, either for Executive or for any other person or entity, any of the Company’s employees to leave their employment.
15.
Agreement.
Costs . The Parties will each bear their own costs, attorneys’ fees and other fees incurred in connection with the preparation of this
16.
Arbitration . THE PARTIES AGREE THAT ANY AND ALL DISPUTES ARISING OUT OF THE TERMS OF THIS AGREEMENT,
THEIR INTERPRETATION, AND ANY OF THE MATTERS HEREIN RELEASED, WILL BE SUBJECT TO ARBITRATION IN LOS ANGELES COUNTY,
BEFORE JUDICIAL ARBITRATION & MEDIATION SERVICES (“ JAMS
”), PURSUANT TO ITS EMPLOYMENT ARBITRATION RULES &
PROCEDURES (“JAMS RULES”). THE ARBITRATOR MAY GRANT INJUNCTIONS AND OTHER RELIEF IN SUCH DISPUTES. THE ARBITRATOR
WILL ADMINISTER AND CONDUCT ANY ARBITRATION IN ACCORDANCE WITH CALIFORNIA LAW, INCLUDING THE CALIFORNIA CODE OF
CIVIL PROCEDURE, AND THE ARBITRATOR WILL APPLY SUBSTANTIVE AND PROCEDURAL CALIFORNIA LAW TO ANY DISPUTE OR CLAIM,
WITHOUT REFERENCE TO ANY CONFLICT-OF-LAW PROVISIONS OF ANY JURISDICTION. TO THE EXTENT THAT THE JAMS RULES
CONFLICT WITH CALIFORNIA LAW, CALIFORNIA LAW WILL TAKE PRECEDENCE. THE DECISION OF THE ARBITRATOR WILL BE FINAL,
CONCLUSIVE, AND BINDING ON THE PARTIES TO THE ARBITRATION. THE PARTIES AGREE THAT THE PREVAILING PARTY IN ANY
ARBITRATION WILL BE ENTITLED TO INJUNCTIVE RELIEF IN ANY COURT OF COMPETENT JURISDICTION TO ENFORCE THE ARBITRATION
AWARD. THE PARTIES TO THE ARBITRATION WILL EACH PAY AN EQUAL SHARE OF THE COSTS AND EXPENSES OF SUCH ARBITRATION,
AND EACH PARTY WILL SEPARATELY PAY FOR ITS RESPECTIVE COUNSEL FEES AND EXPENSES; PROVIDED, HOWEVER, THAT THE
ARBITRATOR WILL AWARD ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, EXCEPT AS PROHIBITED BY LAW. THE PARTIES
HEREBY AGREE TO WAIVE THEIR RIGHT TO HAVE ANY DISPUTE BETWEEN THEM RESOLVED IN A COURT OF LAW BY A JUDGE OR JURY.
NOTWITHSTANDING THE FOREGOING, THIS SECTION WILL NOT PREVENT EITHER PARTY FROM SEEKING INJUNCTIVE RELIEF (OR ANY
OTHER PROVISIONAL REMEDY) FROM ANY COURT HAVING JURISDICTION OVER THE PARTIES AND THE SUBJECT MATTER OF THEIR
DISPUTE RELATING TO THIS AGREEMENT AND THE AGREEMENTS INCORPORATED HEREIN BY REFERENCE. SHOULD ANY PART OF THE
ARBITRATION AGREEMENT CONTAINED IN THIS PARAGRAPH CONFLICT WITH ANY OTHER ARBITRATION AGREEMENT BETWEEN THE
PARTIES, THE PARTIES AGREE THAT THIS ARBITRATION AGREEMENT WILL GOVERN.
17.
Taxes; Section 409A . Executive agrees and understands that he is responsible for payment, if any, of personal local, personal state, and/or
personal federal taxes on the payments and any other consideration provided hereunder by the Company and any penalties or assessments thereon. It is intended
that none of the payments or benefits under this Agreement will constitute deferred compensation under Section 409A of the Internal Revenue Code of 1986, as
amended, any final regulations and guidance under that statute, and any applicable state law equivalent, as each may be amended or promulgated from time to time
(“Section 409A”), but rather such payments and benefits will be exempt from Section 409A as payable only within the “short-term deferral period” pursuant to
Treasury Regulation Section 1.409A-1(b)(4), or otherwise be exempt or comply with Section 409A so that none of the payments to be provided under this
Agreement will be subject to the additional tax imposed under Section 409A, and any ambiguities or ambiguous terms will be interpreted in such manner. In order
to comply with the “short-term deferral” exception from Section 409A, in no event will the Severance be paid later than March 15, 2019. Each payment and benefit
payable under this Agreement or otherwise is intended to constitute a separate payment under Treasury Regulation Section 1.409A-2(b)(2). Notwithstanding the
foregoing, in the unlikely event that it is necessary to avoid subjecting Executive to an additional tax under Section 409A, payment of all or a portion of the
separation-related payments or benefits payable under this Agreement and any other separation-related deferred compensation (within the meaning of Section
409A) payable to Executive will be delayed until the date that is six (6) months and one (1) day following Executive’s separation from service (within the meaning
of Section 409A), except that in the event of Executive’s death, any such delayed payments will be paid as soon as practicable after the date of Executive’s death.
In no event will the Company reimburse Executive for any taxes that may be imposed on Executive as a result of Section 409A. In no event will Executive have
discretion to determine the taxable year of payment of any severance payments.
18.
Authority . The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this Agreement. Executive represents and warrants that Executive has the capacity to act
on Executive’s own behalf and on behalf of all who might claim through Executive to bind them to the terms and conditions of this Agreement. Each Party
warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action
released herein.
19.
No Representations . Executive represents that Executive has had the opportunity to consult with an attorney, and has carefully read and
understands the scope and effect of the provisions of this Agreement. Executive has not relied upon any representations or statements made by the Company that
are not specifically set forth in this Agreement.
20.
Severability . In the event that any provision or any portion of any provision hereof or any surviving agreement made a part hereof becomes
or is declared by a court of competent jurisdiction or arbitrator to be illegal, unenforceable, or void, this Agreement will continue in full force and effect without
said provision or portion of provision.
21.
Entire Agreement . This Agreement (including the Supplemental Separation Agreement) represents the entire agreement and understanding
between the Company and Executive concerning the subject matter of this Agreement and Executive’s employment with and separation from the Company and the
events leading thereto and associated therewith, and supersedes and replaces any and all prior agreements and understandings concerning the subject matter of this
Agreement and Executive’s relationship with the Company, with the exception of Section 5 of the Change of Control Agreement (“ Limitation on Payments ”), the
Confidentiality Agreement, and the Stock Agreements with the Company, except as modified by this Agreement.
22.
the Company.
No Oral Modification . This Agreement may only be amended in writing signed by Executive and the Chairman of the Board of Directors of
23.
Governing Law . This Agreement will be governed by the laws of the State of California, without regard for choice-of-law provisions.
Executive consents to personal and exclusive jurisdiction and venue in the State of California.
24.
Effective Date . Executive understands that this Agreement will be null and void if not executed by Executive within twenty-one (21) days
from the date this Agreement is presented to Executive. Each Party has seven (7) days after that Party signs this Agreement to revoke it. This Agreement will
become effective on the eighth (8th) day after Executive signed this Agreement, so long as it has been signed by the Parties and has not been revoked by either
Party before that date (the “Effective Date”).
25.
Counterparts . This Agreement may be executed in counterparts and by facsimile, and each counterpart and facsimile will have the same
force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned.
26.
Protected Activity Not Prohibited . Executive understands that nothing in this Agreement shall in any way limit or prohibit Executive from
engaging for a lawful purpose in any Protected Activity. For purposes of this Agreement, “Protected
Activity” shall mean filing a charge or complaint, or otherwise communicating, cooperating, or participating with, any state, federal, or other governmental agency,
including the Securities and Exchange Commission, the Equal Employment Opportunity Commission, and the National Labor Relations Board (“Government
Agencies”). Executive understands that in connection with such Protected Activity, Executive is permitted to disclose documents or other information as permitted
by law, and without giving notice to, or receiving authorization from, the Company. Notwithstanding the foregoing, Executive agrees to take all reasonable
precautions to prevent any unauthorized use or disclosure of any information that may constitute Company confidential information under the Confidentiality
Agreement to any parties other than the Government Agencies. Executive further understands that “Protected Activity” does not include the disclosure of any
Company attorney-client privileged communications, and that any such disclosure without the Company’s written consent shall constitute a material breach of this
Agreement. Any language in the Confidentiality Agreement regarding Executive’s right to engage in Protected Activity that conflicts with, or is contrary to, this
paragraph is superseded by this Agreement. In addition, pursuant to the Defend Trade Secrets Act of 2016, Executive is notified that an individual will not be held
criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (i) is made in confidence to a federal, state, or local
government official (directly or indirectly) or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) is made in a
complaint or other document filed in a lawsuit or other proceeding, if (and only if) such filing is made under seal. In addition, an individual who files a lawsuit for
retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the individual’s attorney and use the trade secret information
in the court proceeding, if the individual files any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court
order.
27.
Voluntary Execution of Agreement . Executive understands and agrees that Executive executed this Agreement voluntarily, without any
duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of Executive’s claims against the Company
and any of the other Releasees. Executive expressly acknowledges that:
(a) Executive has read this Agreement;
own choice or has elected not to retain legal counsel;
(b) Executive has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of Executive’s
(c) Executive understands the terms and consequences of this Agreement and of the releases it contains; and
(d) Executive is fully aware of the legal and binding effect of this Agreement.
* * * * *
IN WITNESS WHEREOF , the Parties have executed this Agreement on the respective dates set forth below.
COMPANY CORNERSTONE ONDEMAND, INC.
By: /s/ Adam Miller
Name: Adam Miller
Title: President & CEO
Dated: February 27, 2018
EXECUTIVE
DAVID CARTER, an individual
/s/ David Carter
Dated: February 19, 2018
EXHIBIT A
SUPPLEMENTAL SEPARATION AGREEMENT
This Supplemental Separation Agreement (the “ Supplemental
Separation
Agreement
”) is entered into as of _____________________ , by and
between Cornerstone OnDemand, Inc. (the “ Company
”) and David Carter (“ Executive
”) (collectively, the “ Parties
”). Any terms capitalized and not
specifically defined herein will have the meaning ascribed to them under the Transition Agreement and Release of Claims, dated _____________________
(the “ Transition
Agreement
”).
WHEREAS, the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that Executive may
have against the Company and any of the Releasees, including, but not limited to, any and all claims arising out of or in any way related to Executive’s
employment with and services to the Company, including, but not limited to, from the Effective Date of the Transition Agreement through the Effective Date of
this Supplemental Separation Agreement.
NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Executive hereby agree as follows:
1.
Consideration . The Company agrees to pay Executive, less applicable withholding, the severance described in Section 2 of the Transition
Agreement, pursuant to the terms and conditions thereof.
2.
Acknowledgments and Agreements .
commissions and any and all other benefits due to Executive as of the Effective Date of this Supplemental Separation Agreement.
(a)
Executive acknowledges and represents that the Company will have paid all salary, wages, bonuses, accrued vacation,
Except as set forth in Section 2(c) of the Transition Agreement, Executive’s Options, the shares purchased thereunder and
Executive’s RSU Awards will continue to be governed by the terms and conditions of the applicable Stock Agreement, as each has been modified by the
Transition Agreement.
(b)
3.
Release of Claims . Executive agrees that the consideration described in Section 1 hereof represents consideration for both (A) Executive’s
acknowledgments and agreements under Section 2 and (B) a release and waiver of any and all claims against the Company and any of the Releasees relating to his
employment with the Company, including, but not limited to, from the Effective Date of the Transition Agreement through the Effective Date of this Supplemental
Separation Agreement, as well as any claims under any local ordinance or state or federal employment law, including laws prohibiting discrimination in
employment on the basis of race, sex, age (in particular, any claim under the Age Discrimination in Employment Act), disability, national origin, or religion, as
well as any claims for wrongful discharge, breach of contract, attorneys’ fees, costs, or any claims of amounts due for fees, commissions, stock options, expenses,
salary, bonuses, profit sharing or fringe benefits. Executive further acknowledges and agrees that the terms of Sections 4 and 6 of the Transition Agreement
will also apply to this Supplemental Separation Agreement and are hereby incorporated and extended through the Effective Date of this Supplemental
Separation Agreement.
4.
Confidential Information and Non-Solicitation . Subject to Section 7 governing Protected Activity, Executive acknowledges and reaffirms his
obligation to keep confidential all non-public information concerning the Company that Executive acquired during the course of his employment with the
Company, as stated more fully in the Confidentiality Agreement Executive signed at the beginning of his employment, which remains in full force and effect.
Subject to Section 7 governing Protected Activity, Executive affirms his obligation to keep all Company Information confidential and not to disclose it to any third
party in the future. Subject to Section 7 governing Protected Activity, the Confidentiality Agreement is incorporated herein by this reference, and Executive agrees
to continue to be bound by the terms of the Confidentiality Agreement.
5.
Return of Company Property . As part of Executive’s existing and continuing obligation to the Company, Executive agrees that Executive has
returned to the Company, all Company information, including files, records, computer access codes and instruction manuals, as well as any Company assets or
equipment that Executive has in his possession or under his control. Executive further agrees not to keep any copies of Company information. Executive confirms
that he has returned to the Company in good working order all keys, files, records (and copies thereof), equipment (including, but not limited to, computer
hardware, software and printers, wireless handheld devices, cellular phones and pagers), access or credit cards, Company
identification, Company vehicles and any other Company-owned property in Executive’s possession or control and have left intact all electronic Company
documents, including, but not limited to, those that Executive developed or helped to develop during his employment. Executive further confirms that he has
cancelled all accounts for his benefit, if any, in the Company’s name, including, but not limited to, credit cards, telephone charge cards, cellular phone and/or pager
accounts and computer accounts.
6.
Acknowledgments and Right to Revoke . Executive acknowledges that he has been given twenty-one (21) days after receipt of this
Supplemental Separation Agreement to consider this Supplemental Separation Agreement. By signing this Supplemental Separation Agreement, Executive
acknowledges that he was offered a period of at least twenty-one (21) days to consider the terms of this Supplemental Separation Agreement but, to the extent not
taken, Executive choose to waive this consideration period. If Executive does not accept this Supplemental Separation Agreement within that time, it will become
null and void. Executive is advised to consult with an attorney prior to executing this Supplemental Separation Agreement. Executive represents and agrees that he
fully understands his right to discuss all aspects of this Supplemental Separation Agreement with his private attorney, that he has availed herself of this right, that
he has carefully read and fully understands all of the provisions of this Supplemental Separation Agreement, and that he is voluntarily entering into this
Supplemental Separation Agreement. Executive understands and agrees that the waiver of rights contained in this Supplemental Separation Agreement is only an
exchange for the consideration specified herein, and that he would not otherwise be entitled to such consideration. Once Executive has signed the Supplemental
Separation Agreement, Executive can revoke his acceptance within seven (7) days by so notifying Adam Weiss, General Counsel, 1601 Cloverfield Blvd, Suite
600 South, Santa Monica, CA 90404 This Supplemental Separation Agreement will become effective on the eighth day following Executive signing it (the “
Effective
Date
”).
7.
Protected Activity Not Prohibited . Executive understands that nothing in this Supplemental Separation Agreement shall in any way limit or
prohibit Executive from engaging for a lawful purpose in any Protected Activity. For purposes of this Supplemental Separation Agreement, “ Protected
Activity
”
shall mean filing a charge or complaint, or otherwise communicating, cooperating, or participating with, any state, federal, or other governmental agency, including
the Securities and Exchange Commission, the Equal Employment Opportunity Commission, and the National Labor Relations Board (“ Government
Agencies
”).
Executive understands that in connection with such Protected Activity, Executive is permitted to disclose documents or other information as permitted by law, and
without giving notice to, or receiving authorization from, the Company. Notwithstanding the foregoing, Executive agrees to take all reasonable precautions to
prevent any unauthorized use or disclosure of any information that may constitute Company confidential information under the Confidentiality Agreement to any
parties other than the Government Agencies. Executive further understands that “ Protected
Activity
” does not include the disclosure of any Company attorney-
client privileged communications, and that any such disclosure without the Company’s written consent shall constitute a material breach of this Supplemental
Separation Agreement. Any language in the Confidentiality Agreement regarding Executive’s right to engage in Protected Activity that conflicts with, or is
contrary to, this paragraph is superseded by this Supplemental Separation Agreement. In addition, pursuant to the Defend Trade Secrets Act of 2016, Executive is
notified that an individual will not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (i) is made
in confidence to a federal, state, or local government official (directly or indirectly) or to an attorney solely for the purpose of reporting or investigating a suspected
violation of law, or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if (and only if) such filing is made under seal. In addition,
an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the individual’s attorney
and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal and does not disclose the
trade secret, except pursuant to court order.
8.
Entire Agreement . This Supplemental Separation Agreement, the Stock Agreements, the Transition Agreement, and the Confidentiality
Agreement, constitute the entire agreement and understanding between the Parties concerning the subject matter of this Supplemental Separation Agreement and
with the exception of Section 5 of the Change of Control Agreement (“ Limitation on Payments ”), all prior and contemporaneous representations, understandings,
and agreements concerning the subject matter of this Supplemental Separation Agreement (other than the Confidentiality Agreement) have been superseded by the
terms of this Supplemental Separation Agreement.
IN WITNESS WHEREOF, the Parties have executed this Supplemental Separation Agreement on the respective dates set forth below.
COMPANY CORNERSTONE ONDEMAND, INC.
By:
Name:
Title:
Dated:
EXECUTIVE
DAVID CARTER, an individual
(Signature)
Dated:
TRANSITION AGREEMENT AND RELEASE OF CLAIMS
Exhibit 10.3
This transition agreement and release of claims (this “ Agreement
”) is made by and between Cornerstone OnDemand, Inc. (the “ Company
”), and
Kirsten Helvey (“ Executive
”). The Company and Executive are sometimes collectively referred to herein as the “ Parties
” and individually referred to as a “
Party
.”
WHEREAS , Executive is employed by the Company as Chief Operating Officer;
RECITALS
WHEREAS , Executive previously signed a confidentiality agreement with the Company (the “ Confidentiality
Agreement
”);
WHEREAS , Executive signed a Change of Control Severance Agreement with the company on April 29, 2013 (the “ Change
of
Control
Agreement
”),
which, among other things, provides for certain severance benefits to be paid to Executive by the Company upon the termination of Executive’s employment
including following a Change of Control (as defined in the Change of Control Agreement) of the Company;
WHEREAS , the Company and Executive have entered into Stock Option Agreements, pursuant to which Executive was granted the option to purchase
shares of the Company’s common stock (each such grant, an “ Option
” and together, the “ Options
”) and have entered into Restricted Stock Unit Award
Agreements, granting Executive the right to receive an award of Restricted Stock Units (each such award, an “ RSU
Award
” and together, the “ RSU
Awards
”),
each subject to the terms and conditions of the Company’s equity plan under which it was granted (the 1999 Stock Plan, the 2009 Equity Incentive Plan or the 2010
Equity Incentive Plan, as applicable, each, a “ Plan
”), and the terms and conditions of the Stock Option Agreement or the Restricted Stock Unit Award
Agreement, as applicable, related to the award (collectively with the Plans, “ Stock
Agreements
”);
WHEREAS , Executive’s employment with the Company is expected to terminate effective March 31, 2018 (the “ Expected
Termination
Date
”) and,
following such termination of employment, Executive is expected to provide consulting services to the Company;
WHEREAS , subject to Executive’s fulfillment of the terms and conditions of this Agreement, in consideration of Executive’s execution of this
Agreement and provided that Executive does not revoke the Agreement under Section 5 below, and subject to Executive signing and not revoking the
Supplemental Separation Agreement attached hereto as Exhibit A (the “ Supplemental
Separation
Agreement
”), in accordance with the terms below, Executive
will be entitled to the severance benefits set forth in Section 2 below; and
WHEREAS , the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions and demands that Executive may
have against the Company and any of the Releasees (as defined below), including, but not limited to, any and all claims arising out of or in any way related to
Executive’s employment relationship with the Company and the termination of that relationship.
NOW THEREFORE , for good and valuable consideration, including the mutual promises and covenants made herein, the Company and Executive
hereby agree as follows:
1.
Transition; Employment Termination Date; Employment Status .
COVENANTS
(a)
Transition . From the Effective Date through the Termination Date, the Parties agree that Executive will continue to be
employed pursuant to the current terms of her employment; provided, however, that Executive acknowledges that she is not eligible to receive any bonus
for the Company’s 2018 fiscal year. Prior to the Termination Date, Executive will continue in her full-time role as Chief Operating Officer, reporting to
Adam Miller, President and Chief Executive Officer. On the Termination Date, Executive agrees that Executive will be deemed to have resigned from all
officer and/or director positions held at the Company and its affiliates voluntarily, without any further required action by Executive, as of the Termination
Date and Executive, at the request of the Company, will execute any documents reasonably necessary to reflect Executive’s resignation.
provided in Section 1(c) (the date of Executive’s actual termination of employment with the Company, the “ Termination
Date
”).
(b)
Termination Date . Executive’s employment termination date will occur on the Expected Termination Date, or earlier as
(c)
Employment Status . Executive is free to terminate her employment at any time prior to the Expected Termination Date,
for any reason or for no reason. Similarly, the Company is free to terminate Executive’s employment at any time prior to the Expected Termination Date,
for any reason or for no reason. As described in Section 2, Executive may be entitled to severance benefits depending on the circumstances of Executive’s
termination of employment with the Company.
(d)
Post-Employment Consulting Services . Conditioned upon Executive’s timely execution and non-revocation of this
Agreement and the Supplemental Separation Agreement, and Executive’s satisfactory performance through the Termination Date, as determined by the
Company in its discretion, the Company agrees to offer Executive the opportunity to perform limited additional services for the Company as a Consultant
through July 31, 2018, in which role she shall provide consulting services (“ Consulting
Services
”) to the Company as an independent contractor
pursuant to the terms of Company’s standard consulting agreement (the “ Consulting
Agreement
”) attached hereto as Exhibit B . The Consulting
Agreement shall be entered into on the Termination Date. The term during which Executive shall provide Consulting Services shall hereinafter be referred
to as the “ Consulting
Term
” and the date such Consulting Services terminate, the “ Consulting
Services
Termination
Date
”. For purposes of
clarification, the Parties acknowledge and agree that, subject to Executive executing the Consulting Agreement on the Termination Date, there will be no
break in service in Executive’s service to the Company between the Termination Date and the commencement of the provision of Consulting Services and
Executive will not cease to be a Service Provider (as defined in the applicable Stock Agreement) as a result of such transition. Nothing in this Agreement
or the Consulting Agreement pertaining to Executive’s anticipated role as a Consultant shall in any way be construed to guarantee Executive any position
as a Consultant or constitute Executive as a continuing agent, officer, employee, or representative of the Company after the Termination Date, but
Executive shall perform the Consulting Services solely as an independent contractor, and subject to the terms and conditions set forth therein.
2.
Consideration . If Executive remains employed with the Company through the Expected Termination Date, or, if prior to the Expected
Termination Date, Executive’s employment with the Company is terminated by the Company without Cause (as such term is defined in the Change of Control
Agreement), then subject to (i) Executive’s execution of this Agreement and Executive’s fulfillment of all of its terms and conditions, and provided that Executive
does not revoke the Agreement under Section 5 below, and (ii) Executive’s execution of the Supplemental Separation Agreement, which must become effective
and irrevocable no later than the sixtieth (60th) day following the Termination Date (the “Supplemental Separation Agreement Release Deadline”) and Executive’s
fulfillment of all of its terms and conditions, Executive will receive the following consideration:
(a)
Separation Payment . The Company agrees to pay Executive a lump sum payment equal to one hundred percent (100%) of
Executive’s annual base salary as in effect immediately prior to the Termination Date, for a total of Three Hundred Fifty Thousand Dollars ($350,000)
(the “ Severance
”). This payment will be made, less applicable withholding taxes, to Executive within ten (10) days after the Effective Date of the
Supplemental Separation Agreement, and in all cases the payment will be made no later than March 15, 2019.
(b)
COBRA . If Executive elects continuation coverage pursuant to the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended (“ COBRA
”), within the time period prescribed pursuant to COBRA for Executive and Executive’s eligible dependents, then the
Company will reimburse Executive for the COBRA premiums for such coverage (at the coverage levels in effect immediately prior to the Termination
Date) until the earlier of (A) a period of twelve (12) months from the Termination Date, or (B) the date upon which Executive and/or Executive’s eligible
dependents become covered under similar plans. The reimbursements will be made by the Company to Executive consistent with the Company’s normal
expense reimbursement policy. However, if the Company determines in its sole discretion that it cannot provide the foregoing benefit without potentially
violating, or being subject to an excise tax under, applicable law (including, without limitation, Section 2716 of the Public Health Service Act), the
Company will in lieu thereof provide to Executive a taxable monthly payment (“ Healthcare
Premium
Payment
”), payable on the last day of a given
month, in an amount equal to the monthly COBRA premium that Executive would be required to pay to continue Executive’s group health coverage in
effect on the Termination Date (which amount will be based on the premium for the first month of COBRA coverage), which payments will be made
regardless of whether Executive elects COBRA continuation coverage and will commence on the month following Executive’s Termination Date and will
end on the earlier of (x) the date upon which Executive obtains other employment or (y) the date the Company has paid an amount equal to twelve (12)
payments. For the avoidance of doubt, the taxable payments in lieu of COBRA reimbursements
may be used for any purpose, including, but not limited to, continuation coverage under COBRA, and will be subject to all applicable tax withholdings.
(c)
Equity . On the Termination Date, but subject to the effectiveness of this Agreement and the Supplemental Separation
Agreement as provided herein and to the provisions of Section 17, (i) Executive’s vesting in each Option and each RSU Award shall accelerate as to the
number of shares subject to each Option and each RSU Award that otherwise would have vested within the twelve (12) month period immediately
following the Termination Date had Executive remained employed by the Company through such period, and (ii) the vesting tranches applicable to any
equity awards subject to time-based vesting shall be credited by twelve (12) months. The Parties agree that for purposes of determining the number of
shares of the Company’s common stock that Executive is entitled to purchase from the Company, pursuant to the exercise of the outstanding Options, or
that Executive has vested in, pursuant to the RSU Awards, in each case as of the Termination Date (or the Consulting Services Termination Date, if later),
Executive will be considered to have vested only through the Termination Date (or the Consulting Services Termination Date, if later) and will not vest in
any of Executive’s Options or RSU Awards thereafter. For purposes of clarification, any equity awards that are subject to performance-based vesting will
remain outstanding and eligible to vest in accordance with their terms while Executive remains a Service Provider, but such awards will not be subject to
the acceleration described in (i) and (ii) above. In addition, the post-termination exercise period of Executive’s vested Options will be extended such that
Executive may exercise that portion of her Options vested as of the Termination Date (or the Consulting Services Termination Date, if later) through
March 31, 2020; provided, however, in no event may the Options be exercised following their maximum expiration date and the Options will be subject to
earlier termination in the event of certain corporate transactions as provided for in the Plan under which the Options were granted. This Agreement acts as
an amendment to the Stock Agreements and Executive acknowledges and agrees that the incentive stock option status and/or holding periods for
favorable tax treatment of any Options that were originally designated as incentive stock options pursuant to Section 422 of the Internal Revenue Code of
1986, as amended, may be impacted by the terms of this Agreement. Executive’s Options, the shares purchased thereunder and Executive’s RSU Awards
will continue to be governed by the terms and conditions of the applicable Stock Agreement, as each has been modified by this Agreement.
(d)
Executive Coach . Executive will be reimbursed for her reasonable expenses relating to executive coaching in an amount
not to exceed Ten Thousand Dollars ($10,000) (the “ Outplacement
Expenses
”) upon her submission of receipts consistent with the Company’s normal
expense reimbursement policy. The reimbursements of the Outplacement Expenses are intended to constitute reimbursements for “reasonable
outplacement expenses” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended. In order to be reimbursed pursuant to
this Section 2(d), the Outplacement Expenses must be incurred no later than December 31, 2020 and no such reimbursements for Outplacement Services
will be made beyond the third taxable year of Executive following Executive’s taxable year in which the Termination Date occurred.
this Section 2.
(e)
General . Executive acknowledges that without this Agreement, she is otherwise not entitled to the consideration listed in
3.
Payment of Salary and Receipt of All Benefits . Executive acknowledges and represents that, other than the consideration to be paid in
accordance with the terms and conditions of the Agreement, the Consulting Agreement and Executive’s final wages, including any accrued vacation/paid time off,
which will be paid on the Termination Date, the Company has paid or provided all salary, wages, bonuses, accrued vacation/paid time off, premiums, leaves,
housing allowances, relocation costs, interest, severance, outplacement costs, fees, reimbursable expenses, commissions, draws, stock, Options or other equity
awards (including RSU Awards), vesting, and any and all other benefits and compensation due to Executive and that no other reimbursements or compensation are
owed to Executive.
4.
Release of Claims . Executive agrees that the consideration to be paid in accordance with the terms and conditions of the Agreement
represents settlement in full of all outstanding obligations owed to Executive by the Company and its current and former officers, directors, employees, agents,
investors, attorneys, stockholders, administrators, affiliates, benefit plans, plan administrators, insurers, trustees, divisions, and subsidiaries, and predecessor and
successor corporations and assigns (collectively, the “ Releasees
”). Executive, on Executive’s own behalf and on behalf of Executive’s respective heirs, family
members, executors, agents, and assigns, hereby and forever releases the Releasees from, and agrees not to sue concerning, or in any manner to institute, prosecute,
or pursue, any claim, complaint, charge, duty, obligation, demand, or cause of action relating to any matters of any kind, whether presently known or unknown,
suspected or unsuspected, that Executive may possess against any of the Releasees arising from any omissions, acts, facts, or damages that have occurred up until
and including the Effective Date of this Agreement, including, without limitation the following:
any and all claims relating to or arising from Executive’s employment relationship with the Company and the termination
of that relationship, including claims under any offer letter, employment agreement, or other agreement with the Company, including, but not limited to,
the Change of Control Agreement;
(a)
any and all claims relating to, or arising from, Executive’s right to purchase, or actual purchase of shares of stock of the
Company, including, without limitation, any claims for fraud, misrepresentation, breach of fiduciary duty, breach of duty under applicable state corporate
law, and securities fraud under any state or federal law;
(b)
(c)
any and all claims for wrongful discharge of employment; termination in violation of public policy; discrimination;
harassment; retaliation; breach of contract, both express and implied; breach of covenant of good faith and fair dealing, both express and implied;
promissory estoppel; negligent or intentional infliction of emotional distress; fraud; negligent or intentional misrepresentation; negligent or intentional
interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault;
battery; invasion of privacy; false imprisonment; conversion; and disability benefits;
(d)
any and all claims for violation of any federal, state, or municipal statute, including, but not limited to, Title VII of the
Civil Rights Act of 1964; the Civil Rights Act of 1991; the Rehabilitation Act of 1973; the Americans with Disabilities Act of 1990; the Equal Pay Act;
the Fair Labor Standards Act; the Fair Credit Reporting Act; the Age Discrimination in Employment Act of 1967; the Older Workers Benefit Protection
Act; the Employee Retirement Income Security Act of 1974; the Worker Adjustment and Retraining Notification Act; the Family and Medical Leave Act;
the Sarbanes-Oxley Act of 2002; the Immigration Control and Reform Act; the California Family Rights Act; the California Labor Code; the California
Workers’ Compensation Act; the California Fair Employment and Housing Act; the Unruh Civil Rights Act; the California Equal Pay Law; the California
Unfair Business Practices Act; and the California Worker Adjustment and Retraining Notification Act;
(e)
(f)
(g)
any and all claims for violation of the federal, or any state, constitution;
any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;
any claim for any loss, cost, damage, or expense arising out of any dispute over the non-withholding or other tax treatment
of any of the proceeds received by Executive as a result of this Agreement; and
(h)
any and all claims for attorneys’ fees and costs.
Executive agrees that the release set forth in this Section 4 (the “ Release
”) will be and remain in effect in all respects as a complete general release as to the
matters released. The Release does not extend to any severance obligations due Executive under the Agreement. The Release does not release claims that cannot be
released as a matter of law, including, but not limited to, Executive’s right to file a charge with or participate in a charge by the Equal Employment Opportunity
Commission, or any other local, state, or federal administrative body or government agency that is authorized to enforce or administer laws related to employment,
against the Company (with the understanding that any such filing or participation does not give Executive the right to recover any monetary damages against the
Company; Executive’s release of claims herein bars Executive from recovering such monetary relief from the Company). Executive represents that Executive has
made no assignment or transfer of any right, claim, complaint, charge, duty, obligation, demand, cause of action, or other matter waived or released by this Section
4. Nothing in this Agreement waives Executive’s rights to indemnification or any payments under any fiduciary insurance policy, if any, provided by any act or
agreement of the Company, state or federal law or policy of insurance.
5.
Acknowledgment of Waiver of Claims under ADEA. Executive acknowledges that Executive is waiving and releasing any rights Executive
may have under the Age Discrimination in Employment Act of 1967 (“ ADEA
”) and that this waiver and release is knowing and voluntary. Executive agrees that
this waiver and release does not apply to any rights or claims that may arise under the ADEA after the Effective Date of this Agreement. Executive acknowledges
that the consideration given for this waiver and release is in addition to anything of value to which Executive was already entitled. Executive further acknowledges
that Executive has been advised by this writing that (a) Executive should consult with an attorney prior
to executing this Agreement; (b) Executive has at least
twenty-one (21) days within which to consider this Agreement; (c) Executive has seven (7) days following the execution of this Agreement by the Parties to revoke
the Agreement; (d) this Agreement will not be effective until the revocation period has expired; and (e) nothing in this Agreement prevents or precludes Executive
from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties or
costs for doing so, unless specifically authorized by federal law. In the event Executive signs this Agreement and delivers it to the Company in less than the
twenty-one (21)-day period identified above, Executive hereby acknowledges that Executive has freely and
voluntarily chosen to waive the time period allotted for considering this Agreement. Executive acknowledges and understands that revocation must be
accomplished by a written notification to the Chief Legal Officer of the Company that is received prior to the Effective Date. The Parties agree that changes,
whether material or immaterial, do not restart the running of the twenty-one (21)-day period.
6.
California Civil Code Section 1542 . Executive acknowledges that Executive has been advised to consult with legal counsel and is familiar
with the provisions of California Civil Code Section 1542, a statute that otherwise prohibits the release of unknown claims, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN
HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE
MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
7.
Executive, being aware of California Civil Code Section 1542, agrees to expressly waive any rights Executive may have thereunder, as well as
under any other statute or common law principles of similar effect.
8.
No Pending or Future Lawsuits . Executive represents that Executive has no lawsuits, claims, or actions pending in Executive’s name, or on
behalf of any other person or entity, against the Company or any of the other Releasees. Executive also represents that Executive does not intend to bring any
claims on Executive’s own behalf or on behalf of any other person or entity against the Company or any of the other Releasees.
9.
Sufficiency of Consideration . Executive hereby acknowledges and agrees that Executive has received good and sufficient consideration for
every promise, duty, release, obligation, agreement and right contained in this Release.
10.
Confidential Information . Subject to Section 26 governing Protected Activity, Executive reaffirms and agrees to observe and abide by the
terms of the Confidentiality Agreement, specifically including the provisions therein regarding nondisclosure of the Company’s trade secrets and confidential and
proprietary information, which agreement will continue in force; provided, however, that as to any provisions regarding solicitation of employees contained in the
Confidentiality Agreement that conflict with the provisions regarding solicitation of employees contained in this Agreement, the provisions of this Agreement will
control.
11.
Return of Company Property; Passwords and Password-protected Documents . No later than the Termination Date, Executive confirms that
Executive will return to the Company in good working order all keys, files, records (and copies thereof), equipment (including, but not limited to, computer
hardware, software and printers, wireless handheld devices, cellular phones and pagers), access or credit cards, Company identification, and any other Company-
owned property in Executive’s possession or control. Executive further confirms that no later than the Termination Date, Executive will cancel all accounts for
Executive’s benefit, if any, in the Company’s name, including, but not limited to, credit cards, telephone charge cards, cellular phone and/or pager accounts and
computer accounts. Executive also confirms that as of the Termination Date, Executive will deliver all passwords in use by Executive at the time of Executive’s
termination, a list of any documents that Executive created or of which Executive is otherwise aware that are password-protected, along with the
password(s) necessary to access such password-protected documents.
12.
No Cooperation . Subject to Section 26 governing Protected Activity, Executive agrees that Executive will not knowingly encourage,
counsel, or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any
third party against any of the Releasees, unless under a subpoena or other court order to do so or as related directly to the ADEA waiver in this Agreement.
Executive agrees both to immediately notify the Company upon receipt of any such subpoena or court order, and to furnish, within three (3) business days of its
receipt, a copy of such subpoena or other court order. If approached by anyone for counsel or assistance in the presentation or prosecution of any disputes,
differences, grievances, claims, charges, or complaints against any of the Releasees, Executive will state no more than that Executive cannot provide any such
counsel or assistance.
13.
Nondisparagement . Executive agrees that Executive will not in any way, directly or indirectly, do or say anything at any time which
disparages the Company, its business interests or reputation, or that of any of the other Releasees.
14.
No Admission of Liability . Executive understands and acknowledges that this Agreement constitutes a compromise and settlement of any
and all actual or potential disputed claims by Executive. No action taken by the Company hereto, either previously or in connection with this Agreement, will be
deemed or construed to be (a) an admission of the truth or
falsity of any actual or potential claims or (b) an acknowledgment or admission by the Company of any fault or liability whatsoever to Executive or to any third
party.
15.
Solicitation of Employees . Executive agrees that for a period of twelve (12) months immediately following the Termination Date, Executive
will not directly or indirectly (a) solicit, induce, recruit or encourage any of the Company’s employees to leave their employment at the Company or (b) attempt to
solicit, induce, recruit or encourage, either for Executive or for any other person or entity, any of the Company’s employees to leave their employment.
16.
Agreement.
Costs . The Parties will each bear their own costs, attorneys’ fees and other fees incurred in connection with the preparation of this
17.
Arbitration . THE PARTIES AGREE THAT ANY AND ALL DISPUTES ARISING OUT OF THE TERMS OF THIS AGREEMENT,
THEIR INTERPRETATION, AND ANY OF THE MATTERS HEREIN RELEASED, WILL BE SUBJECT TO ARBITRATION IN LOS ANGELES COUNTY,
BEFORE JUDICIAL ARBITRATION & MEDIATION SERVICES (“ JAMS
”), PURSUANT TO ITS EMPLOYMENT ARBITRATION RULES &
PROCEDURES (“JAMS RULES”). THE ARBITRATOR MAY GRANT INJUNCTIONS AND OTHER RELIEF IN SUCH DISPUTES. THE ARBITRATOR
WILL ADMINISTER AND CONDUCT ANY ARBITRATION IN ACCORDANCE WITH CALIFORNIA LAW, INCLUDING THE CALIFORNIA CODE OF
CIVIL PROCEDURE, AND THE ARBITRATOR WILL APPLY SUBSTANTIVE AND PROCEDURAL CALIFORNIA LAW TO ANY DISPUTE OR CLAIM,
WITHOUT REFERENCE TO ANY CONFLICT-OF-LAW PROVISIONS OF ANY JURISDICTION. TO THE EXTENT THAT THE JAMS RULES
CONFLICT WITH CALIFORNIA LAW, CALIFORNIA LAW WILL TAKE PRECEDENCE. THE DECISION OF THE ARBITRATOR WILL BE FINAL,
CONCLUSIVE, AND BINDING ON THE PARTIES TO THE ARBITRATION. THE PARTIES AGREE THAT THE PREVAILING PARTY IN ANY
ARBITRATION WILL BE ENTITLED TO INJUNCTIVE RELIEF IN ANY COURT OF COMPETENT JURISDICTION TO ENFORCE THE ARBITRATION
AWARD. THE PARTIES TO THE ARBITRATION WILL EACH PAY AN EQUAL SHARE OF THE COSTS AND EXPENSES OF SUCH ARBITRATION,
AND EACH PARTY WILL SEPARATELY PAY FOR ITS RESPECTIVE COUNSEL FEES AND EXPENSES; PROVIDED, HOWEVER, THAT THE
ARBITRATOR WILL AWARD ATTORNEYS’ FEES AND COSTS TO THE PREVAILING PARTY, EXCEPT AS PROHIBITED BY LAW. THE PARTIES
HEREBY AGREE TO WAIVE THEIR RIGHT TO HAVE ANY DISPUTE BETWEEN THEM RESOLVED IN A COURT OF LAW BY A JUDGE OR JURY.
NOTWITHSTANDING THE FOREGOING, THIS SECTION WILL NOT PREVENT EITHER PARTY FROM SEEKING INJUNCTIVE RELIEF (OR ANY
OTHER PROVISIONAL REMEDY) FROM ANY COURT HAVING JURISDICTION OVER THE PARTIES AND THE SUBJECT MATTER OF THEIR
DISPUTE RELATING TO THIS AGREEMENT AND THE AGREEMENTS INCORPORATED HEREIN BY REFERENCE. SHOULD ANY PART OF THE
ARBITRATION AGREEMENT CONTAINED IN THIS PARAGRAPH CONFLICT WITH ANY OTHER ARBITRATION AGREEMENT BETWEEN THE
PARTIES, THE PARTIES AGREE THAT THIS ARBITRATION AGREEMENT WILL GOVERN.
18.
Taxes; Section 409A . Executive agrees and understands that she is responsible for payment, if any, of personal local, personal state, and/or
personal federal taxes on the payments and any other consideration provided hereunder by the Company and any penalties or assessments thereon. It is intended
that none of the payments or benefits under this Agreement will constitute deferred compensation under Section 409A of the Internal Revenue Code of 1986, as
amended, any final regulations and guidance under that statute, and any applicable state law equivalent, as each may be amended or promulgated from time to time
(“ Section
409A
”), but rather such payments and benefits will be exempt from Section 409A as payable only within the “short-term deferral period” pursuant to
Treasury Regulation Section 1.409A-1(b)(4), or otherwise be exempt or comply with Section 409A so that none of the payments to be provided under this
Agreement will be subject to the additional tax imposed under Section 409A, and any ambiguities or ambiguous terms will be interpreted in such manner. In order
to comply with the “short-term deferral” exception from Section 409A, in no event will the Severance be paid later than March 15, 2019. Each payment and benefit
payable under this Agreement or otherwise is intended to constitute a separate payment under Treasury Regulation Section 1.409A-2(b)(2). Notwithstanding the
foregoing, in the unlikely event that it is necessary to avoid subjecting Executive to an additional tax under Section 409A, payment of all or a portion of the
separation-related payments or benefits payable under this Agreement and any other separation-related deferred compensation (within the meaning of Section
409A) payable to Executive will be delayed until the date that is six (6) months and one (1) day following Executive’s separation from service (within the meaning
of Section 409A), except that in the event of Executive’s death, any such delayed payments will be paid as soon as practicable after the date of Executive’s death.
In no event will the Company reimburse Executive for any taxes that may be imposed on Executive as a result of Section 409A. In no event will Executive have
discretion to determine the taxable year of payment of any severance payments.
19.
Authority . The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this Agreement. Executive represents and warrants that Executive has the capacity to act
on Executive’s own behalf and on behalf of all who might claim through Executive to bind them to the terms and conditions of this Agreement. Each Party
warrants and represents that there are
no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.
20.
No Representations . Executive represents that Executive has had the opportunity to consult with an attorney, and has carefully read and
understands the scope and effect of the provisions of this Agreement. Executive has not relied upon any representations or statements made by the Company that
are not specifically set forth in this Agreement.
21.
Severability . In the event that any provision or any portion of any provision hereof or any surviving agreement made a part hereof becomes
or is declared by a court of competent jurisdiction or arbitrator to be illegal, unenforceable, or void, this Agreement will continue in full force and effect without
said provision or portion of provision.
22.
Entire Agreement . This Agreement (including the Supplemental Separation Agreement and the Consulting Agreement) represents the entire
agreement and understanding between the Company and Executive concerning the subject matter of this Agreement and Executive’s employment with and
separation from the Company and the events leading thereto and associated therewith, and supersedes and replaces any and all prior agreements and
understandings concerning the subject matter of this Agreement and Executive’s relationship with the Company, with the exception of Section 5 of the Change of
Control Agreement (“ Limitation on Payments ”), the Confidentiality Agreement, and the Stock Agreements with the Company, except as modified by this
Agreement.
23.
the Company.
No Oral Modification . This Agreement may only be amended in writing signed by Executive and the Chairman of the Board of Directors of
24.
Governing Law . This Agreement will be governed by the laws of the State of California, without regard for choice-of-law provisions.
Executive consents to personal and exclusive jurisdiction and venue in the State of California.
25.
Effective Date . Executive understands that this Agreement will be null and void if not executed by Executive within twenty-one (21) days
from the date this Agreement is presented to Executive. Each Party has seven (7) days after that Party signs this Agreement to revoke it. This Agreement will
become effective on the eighth (8 th ) day after Executive signed this Agreement, so long as it has been signed by the Parties and has not been revoked by either
Party before that date (the “ Effective
Date
”).
26.
Counterparts . This Agreement may be executed in counterparts and by facsimile, and each counterpart and facsimile will have the same
force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned.
27.
Protected Activity Not Prohibited . Executive understands that nothing in this Agreement shall in any way limit or prohibit Executive from
engaging for a lawful purpose in any Protected Activity. For purposes of this Agreement, “ Protected
Activity
” shall mean filing a charge or complaint, or
otherwise communicating, cooperating, or participating with, any state, federal, or other governmental agency, including the Securities and Exchange Commission,
the Equal Employment Opportunity Commission, and the National Labor Relations Board (“ Government
Agencies
”). Executive understands that in connection
with such Protected Activity, Executive is permitted to disclose documents or other information as permitted by law, and without giving notice to, or receiving
authorization from, the Company. Notwithstanding the foregoing, Executive agrees to take all reasonable precautions to prevent any unauthorized use or disclosure
of any information that may constitute Company confidential information under the Confidentiality Agreement to any parties other than the Government Agencies.
Executive further understands that “ Protected
Activity
” does not include the disclosure of any Company attorney-client privileged communications, and that any
such disclosure without the Company’s written consent shall constitute a material breach of this Agreement. Any language in the Confidentiality Agreement
regarding Executive’s right to engage in Protected Activity that conflicts with, or is contrary to, this paragraph is superseded by this Agreement. In addition,
pursuant to the Defend Trade Secrets Act of 2016, Executive is notified that an individual will not be held criminally or civilly liable under any federal or state
trade secret law for the disclosure of a trade secret that (i) is made in confidence to a federal, state, or local government official (directly or indirectly) or to an
attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) is made in a complaint or other document filed in a lawsuit or other
proceeding, if (and only if) such filing is made under seal. In addition, an individual who files a lawsuit for retaliation by an employer for reporting a suspected
violation of law may disclose the trade secret to the individual’s attorney and use the trade secret information in the court proceeding, if the individual files any
document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.
28.
Voluntary Execution of Agreement . Executive understands and agrees that Executive executed this Agreement voluntarily, without any
duress or undue influence on the part or behalf of the Company or any third party, with the full intent of releasing all of Executive’s claims against the Company
and any of the other Releasees. Executive expressly acknowledges that:
(a)
(b)
Executive has read this Agreement;
Executive has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of
Executive’s own choice or has elected not to retain legal counsel;
(c)
(d)
Executive understands the terms and consequences of this Agreement and of the releases it contains; and
Executive is fully aware of the legal and binding effect of this Agreement.
* * * * *
IN WITNESS WHEREOF , the Parties have executed this Agreement on the respective dates set forth below.
COMPANY CORNERSTONE ONDEMAND, INC.
By: /s/ Adam Miller
Name: Adam Miller
Title: President & CEO
Dated: February 27, 2018
EXECUTIVE
KIRSTEN HELVEY, an individual
/s/ Kirsten Helvey
Dated: February 27, 2018
EXHIBIT A
SUPPLEMENTAL SEPARATION AGREEMENT
This Supplemental Separation Agreement (the “ Supplemental
Separation
Agreement
”) is entered into as of _____________________ , by and
between Cornerstone OnDemand, Inc. (the “ Company
”) and Kirsten Helvey (“ Executive
”) (collectively, the “ Parties
”). Any terms capitalized and not
specifically defined herein will have the meaning ascribed to them under the Transition Agreement and Release of Claims, dated _____________________
(the “ Transition
Agreement
”).
WHEREAS, the Parties wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions, and demands that Executive may
have against the Company and any of the Releasees, including, but not limited to, any and all claims arising out of or in any way related to Executive’s
employment with and services to the Company, including, but not limited to, from the Effective Date of the Transition Agreement through the Effective Date of
this Supplemental Separation Agreement.
NOW, THEREFORE, in consideration of the mutual promises made herein, the Company and Executive hereby agree as follows:
1.
Consideration . The Company agrees to pay Executive, less applicable withholding, the severance described in Section 2 of the Transition
Agreement, pursuant to the terms and conditions thereof.
2.
Acknowledgments and Agreements .
commissions and any and all other benefits due to Executive as of the Effective Date of this Supplemental Separation Agreement.
(a)
Executive acknowledges and represents that the Company will have paid all salary, wages, bonuses, accrued vacation,
Except as set forth in Section 2(c) of the Transition Agreement, Executive’s Options, the shares purchased thereunder and
Executive’s RSU Awards will continue to be governed by the terms and conditions of the applicable Stock Agreement, as each has been modified by the
Transition Agreement.
(a)
1.
Release of Claims . Executive agrees that the consideration described in Section 1 hereof represents consideration for both (A) Executive’s
acknowledgments and agreements under Section 2 and (B) a release and waiver of any and all claims against the Company and any of the Releasees relating to her
employment with the Company, including, but not limited to, from the Effective Date of the Transition Agreement through the Effective Date of this Supplemental
Separation Agreement, as well as any claims under any local ordinance or state or federal employment law, including laws prohibiting discrimination in
employment on the basis of race, sex, age (in particular, any claim under the Age Discrimination in Employment Act), disability, national origin, or religion, as
well as any claims for wrongful discharge, breach of contract, attorneys’ fees, costs, or any claims of amounts due for fees, commissions, stock options, expenses,
salary, bonuses, profit sharing or fringe benefits. Executive further acknowledges and agrees that the terms of Sections 4 and 6 of the Transition Agreement
will also apply to this Supplemental Separation Agreement and are hereby incorporated and extended through the Effective Date of this Supplemental
Separation Agreement.
2.
Confidential Information and Non-Solicitation . Subject to Section 7 governing Protected Activity, Executive acknowledges and reaffirms her
obligation to keep confidential all non-public information concerning the Company that Executive acquired during the course of her employment with the
Company, as stated more fully in the Confidentiality Agreement Executive signed at the beginning of her employment, which remains in full force and effect.
Subject to Section 7 governing Protected Activity, Executive affirms her obligation to keep all Company Information confidential and not to disclose it to any third
party in the future. Subject to Section 7 governing Protected Activity, the Confidentiality Agreement is incorporated herein by this reference, and Executive agrees
to continue to be bound by the terms of the Confidentiality Agreement.
3.
Return of Company Property . As part of Executive’s existing and continuing obligation to the Company, Executive agrees that Executive has
returned to the Company, all Company information, including files, records, computer access codes and instruction manuals, as well as any Company assets or
equipment that Executive has in her possession or under her control. Executive further agrees not to keep any copies of Company information. Executive confirms
that she has returned to the Company in good working order all keys, files, records (and copies thereof), equipment (including, but not limited to, computer
hardware, software and printers, wireless handheld devices, cellular phones and pagers), access or credit cards, Company
identification, Company vehicles and any other Company-owned property in Executive’s possession or control and have left intact all electronic Company
documents, including, but not limited to, those that Executive developed or helped to develop during her employment. Executive further confirms that she has
cancelled all accounts for her benefit, if any, in the Company’s name, including, but not limited to, credit cards, telephone charge cards, cellular phone and/or pager
accounts and computer accounts.
4.
Acknowledgments and Right to Revoke . Executive acknowledges that she has been given twenty-one (21) days after receipt of this
Supplemental Separation Agreement to consider this Supplemental Separation Agreement. By signing this Supplemental Separation Agreement, Executive
acknowledges that she was offered a period of at least twenty-one (21) days to consider the terms of this Supplemental Separation Agreement but, to the extent not
taken, Executive choose to waive this consideration period. If Executive does not accept this Supplemental Separation Agreement within that time, it will become
null and void. Executive is advised to consult with an attorney prior to executing this Supplemental Separation Agreement. Executive represents and agrees that
she fully understands her right to discuss all aspects of this Supplemental Separation Agreement with her private attorney, that she has availed herself of this right,
that she has carefully read and fully understands all of the provisions of this Supplemental Separation Agreement, and that she is voluntarily entering into this
Supplemental Separation Agreement. Executive understands and agrees that the waiver of rights contained in this Supplemental Separation Agreement is only an
exchange for the consideration specified herein, and that she would not otherwise be entitled to such consideration. Once Executive has signed the Supplemental
Separation Agreement, Executive can revoke her acceptance within seven (7) days by so notifying Adam Weiss, General Counsel, 1601 Cloverfield Blvd, Suite
600 South, Santa Monica, CA 90404 This Supplemental Separation Agreement will become effective on the eighth day following Executive signing it (the “
Effective
Date
”).
5.
Protected Activity Not Prohibited . Executive understands that nothing in this Supplemental Separation Agreement shall in any way limit or
prohibit Executive from engaging for a lawful purpose in any Protected Activity. For purposes of this Supplemental Separation Agreement, “ Protected
Activity
”
shall mean filing a charge or complaint, or otherwise communicating, cooperating, or participating with, any state, federal, or other governmental agency, including
the Securities and Exchange Commission, the Equal Employment Opportunity Commission, and the National Labor Relations Board (“ Government
Agencies
”).
Executive understands that in connection with such Protected Activity, Executive is permitted to disclose documents or other information as permitted by law, and
without giving notice to, or receiving authorization from, the Company. Notwithstanding the foregoing, Executive agrees to take all reasonable precautions to
prevent any unauthorized use or disclosure of any information that may constitute Company confidential information under the Confidentiality Agreement to any
parties other than the Government Agencies. Executive further understands that “ Protected
Activity
” does not include the disclosure of any Company attorney-
client privileged communications, and that any such disclosure without the Company’s written consent shall constitute a material breach of this Supplemental
Separation Agreement. Any language in the Confidentiality Agreement regarding Executive’s right to engage in Protected Activity that conflicts with, or is
contrary to, this paragraph is superseded by this Supplemental Separation Agreement. In addition, pursuant to the Defend Trade Secrets Act of 2016, Executive is
notified that an individual will not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (i) is made
in confidence to a federal, state, or local government official (directly or indirectly) or to an attorney solely for the purpose of reporting or investigating a suspected
violation of law, or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if (and only if) such filing is made under seal. In addition,
an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the individual’s attorney
and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal and does not disclose the
trade secret, except pursuant to court order.
6.
Entire Agreement . This Supplemental Separation Agreement, the Stock Agreements, the Transition Agreement, the Consulting Agreement
and the Confidentiality Agreement, constitute the entire agreement and understanding between the Parties concerning the subject matter of this Supplemental
Separation Agreement and with the exception of Section 5 of the Change of Control Agreement (“ Limitation on Payments ”), all prior and contemporaneous
representations, understandings, and agreements concerning the subject matter of this Supplemental Separation Agreement (other than the Confidentiality
Agreement) have been superseded by the terms of this Supplemental Separation Agreement.
IN WITNESS WHEREOF, the Parties have executed this Supplemental Separation Agreement on the respective dates set forth below.
COMPANY CORNERSTONE ONDEMAND, INC.
By:
Name:
Title:
Dated:
EXECUTIVE
KIRSTEN HELVEY, an individual
(Signature)
Dated:
EXHIBIT B
CONSULTING AGREEMENT
March 31, 2018
Dear Ms. Helvey:
We are pleased to offer you a contract with Cornerstone OnDemand, Inc. (the “Company”) as a Consultant (in accordance with the definition of the term
“Consultant” in the Company’s 2010 Equity Incentive Plan), commencing on April 1, 2018, as mutually agreed by the parties. The details of the Consulting
Agreement will include the following:
A. Company and you agree that as of April 1, 2018, you are no longer a full-time employee of the Company.
B. Company and you hereby agree that commencing on April 1, 2018, you shall become a Consultant for the Company, and shall reserve at least ten (10)
hours per month (at times to be determined solely by Consultant) to perform consulting services for Company, subject to the terms set forth herein. The
Agreement will run through July 31, 2018, unless extended by a written amendment hereto.
C. Company shall pay Consultant for reserving time, as set forth in Section (B), whether or not it is used, at the rate set forth below in Section (D); provided,
however, the Company will not terminate or otherwise end the consulting relationship with Consultant without cause before July 31, 2018. Additional
hours required will be at a rate of $250.00 per hour.
D. Company shall pay Consultant $2,500.00 per month (the “Consulting Fee”) for reserving ten (10) hours per month, to be paid monthly in advance. As
needed, Consultant may invoice the Company for additional work performed at a rate of $250.00 per hour provided those hours have been preapproved in
writing by the Company’s CEO. Consultant acknowledges and agrees that the Company has made no representations to Consultant regarding the tax
consequences of any amounts received by Consultant pursuant to this Agreement. Consultant agrees to pay federal or state taxes, if any, which are
required by law to be paid with respect to this Consulting Agreement.
E. The vesting of shares and restricted stock units and the exercise of Consultant’s stock options shall continue to be governed by the terms and conditions of
the Company’s 2010 Equity Incentive Plan and the respective stock option and restricted stock unit award agreements.
As a Consultant to the Company, you will be expected to abide by Company rules and regulations. Any confidentiality and invention assignment
agreements that governed your employment by the Company (collectively, “Confidentiality Agreements”) likewise will continue to apply to your consultancy
hereunder.
To indicate your acceptance of the Company’s Consulting Agreement, please sign and date this letter in the space provided below and return it to the
Company. If not fully executed within five (5) days from the date of this letter, this agreement shall expire. This letter, along with the Confidentiality Agreements,
set forth the terms of the Consulting Agreement with the Company and supersede any prior representations or agreements, whether written or oral. This letter may
not be modified or amended except by a written agreement, signed by an officer of the Company and by you.
We look forward to having you continue your relationship with Cornerstone OnDemand as a consultant.
Sincerely,
Cornerstone OnDemand, Inc.
By: ___________________________
Name:
Title:
ACCEPTED AND AGREED TO this
__________________________
__________________________
Name:
Exhibit 10.4
INVESTMENT AGREEMENT
by and among
CORNERSTONE ONDEMAND, INC.
and
SILVER LAKE CREDIT PARTNERS, L.P.
and the other parties named herein
Dated as of November 8, 2017
Table of Contents
ARTICLE I Definitions
Section 1.01.
Section 1.02.
ARTICLE II Sale and Purchase of the NOTES
Section 2.01.
Section 2.02.
Section 2.03.
Definitions
General Interpretive Principles
Sale and Purchase of the Notes
Closing
Termination Prior to Closing
ARTICLE III REPRESENTATIONS AND WARRANTIES
Section 3.01.
Section 3.02.
Representations and Warranties of the Company
Representations and Warranties of the Purchaser
ARTICLE IV ADDITIONAL AGREEMENTS
Section 4.01.
Section 4.02.
Section 4.03.
Section 4.04.
Section 4.05.
Section 4.06.
Section 4.07.
Section 4.08.
Section 4.09.
Section 4.10.
Section 4.11.
Section 4.12.
Section 4.13.
Section 4.14.
Section 4.15.
Section 4.16.
Section 4.17.
Section 4.18.
Section 4.19.
Section 4.20.
Section 4.21.
Section 4.22.
Section 4.23.
Section 4.24.
ARTICLE V REGISTRATION RIGHTS
Section 5.01.
Section 5.02.
Section 5.03.
Section 5.04.
Section 5.05.
Section 5.06.
Taking of Necessary Action
Restricted Period
Exchange Listing
Securities Laws
Lost, Stolen, Destroyed or Mutilated Securities
Antitrust Approval
Board Nomination; Observer; Committees
VCOC Letter
Financing Cooperation
Certain Tax Matters
Section 16 Matters
D&O Indemnification / Insurance Priority Matters
Conversion Price Matters
Transfers of SL Securities that are Global Securities
Par Value
Participation Rights
Conduct of Business
Standstill
Indenture Amendments and Supplements; Cooperation
Anti-Takeover Provisions
Tax Treatment
Indemnification
Certain Amendments
Guaranteed Obligations
Registration Statement
Registration Limitations and Obligations
Registration Procedures
Expenses
Registration Indemnification
Facilitation of Sales Pursuant to Rule 144
ARTICLE VI MISCELLANEOUS
Section 6.01.
Survival of Representations and Warranties
i
Page
1
1
11
12
12
12
14
14
14
21
24
24
24
27
27
27
27
28
34
34
36
36
36
37
37
37
38
40
40
43
43
43
44
45
45
46
46
47
51
55
55
58
58
58
Notices
Entire Agreement; Third Party Beneficiaries; Amendment
Counterparts
Public Announcements
Expenses
Successors and Assigns
Governing Law; Jurisdiction; Waiver of Jury Trial
Severability
Specific Performance
Headings
Non-Recourse
59
60
60
61
61
61
62
63
63
63
64
Section 6.02.
Section 6.03.
Section 6.04.
Section 6.05.
Section 6.06.
Section 6.07.
Section 6.08.
Section 6.09.
Section 6.10.
Section 6.11.
Section 6.12.
Exhibit A: Form of Indenture
Exhibit B: Form of Joinder
Exhibit C: Form of Issuer Agreement
Annex A: Plan of Distribution
ii
INVESTMENT AGREEMENT
This INVESTMENT AGREEMENT (this “ Agreement ”), dated as of November 8, 2017, is by and among (i) Cornerstone OnDemand, Inc., a
Delaware corporation (together with any successor or assign pursuant to Section 6.07, the “ Company ”), (ii) Silver Lake Credit Partners, L.P., a Delaware limited
partnership (together with its successors and any Affiliate that becomes a Purchaser party hereto in accordance with Section 4.02 and Section 6.07, the “ Purchaser
”) and (iii) solely for the specific purpose set forth in Section 4.24, Silver Lake Group, L.L.C., a Delaware limited liability company (in such capacity, the “
Guarantor ”). Capitalized terms not otherwise defined where used shall have the meanings ascribed thereto in Article I.
WHEREAS, the Purchaser desires to purchase from the Company, and the Company desires to issue and sell to the Purchaser, the Company’s
5.75% Convertible Notes due 2021 (referred to herein as the “ Note ” or the “ Notes ”) in the form attached to the Indenture and to be issued in accordance with the
terms and conditions of the Indenture and this Agreement;
the existing notes described in the 2013 Indenture and a repurchase of Company Common Stock);
WHEREAS, the Company intends to use the proceeds from the issuance of the Notes for general corporate purposes (including the repayment of
a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system; and
WHEREAS, the Notes will not be of the same class (within the meaning of Rule 144A under the Securities Act) as securities which are listed on
WHEREAS, the Company and the Purchaser desire to set forth certain agreements herein.
legally bound hereby, the parties hereby agree as follows:
NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained and intending to be
ARTICLE I
DEFINITIONS
Section 1.01. Definitions . As used in this Agreement, the following terms shall have the meanings set forth below:
than four percent (4%) of the outstanding shares of Company Common Stock (assuming the conversion of the Notes into Company Common Stock).
“ 4% Minimum Ownership Threshold Test ” means that at the time of determination, the Silver Lake Group collectively Beneficially Owns less
than ten percent (10%) of the outstanding shares of Company Common Stock (assuming the conversion of the Notes into Company Common Stock).
“ 10% Minimum Ownership Threshold Test ” means that at the time of determination, the Silver Lake Group collectively Beneficially Owns less
“ 2013 Indenture ” shall have the meaning set forth in Section 3.01(f).
“ Action ” shall have the meaning set forth in Section 4.22(a).
“ Additional Investment Agreement ” shall have the meaning set forth in Section 4.16(a).
“ Additional Securities ” shall have the meaning set forth in Section 4.16(c).
“ Affiliate ” shall mean, with respect to any Person, any other Person which directly or indirectly controls or is controlled by or is under common
control with such Person. Notwithstanding the foregoing, (i) the Company and the Company’s Subsidiaries shall not be considered Affiliates of the Purchaser or
any of the Purchaser’s Affiliates and (ii) for purposes of the definitions of “Beneficially Own”, “Registrable Securities”, “Silver Lake Group”, “Standstill Period”
and “Third Party” and Sections 3.02(d), 3.02(f), 4.02, 4.06, 4.07, 4.18 and 6.07 no portfolio company of any Affiliate of Silver Lake Group, L.L.C. that serves as
general partner of, or manages or advises, any investment fund or other investment entity Affiliated with Silver Lake Group, L.L.C., the Purchaser or their
respective Affiliates shall be deemed an Affiliate of the Purchaser and its other Affiliates so long as such portfolio company (x) has not been directed, encouraged,
instructed, assisted, advised or supported by, or coordinated with, the Purchaser or any of its Affiliates or any SL Person in carrying out any act prohibited by this
Agreement or the subject matter of Section 4.18, (y) is not a member of a group (as such term is defined in Section 13(d)(3) of the Exchange Act) with either the
Purchaser or any of its Affiliates with respect to any securities of the Company, and (z) has not received from the Purchaser or any Affiliate of the Purchaser or any
SL Person, directly or indirectly, any Evaluation Material (as defined in the New Confidentiality Agreement) concerning the Company or its business. As used in
this definition, “control” (including its correlative meanings, “controlled by” and “under common control with”) shall mean possession, directly or indirectly, of
power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract
or otherwise).
“ Agreement ” shall have the meaning set forth in the preamble hereto.
“ Associate ” shall have the meaning set forth in Rule 12b-2 promulgated by the SEC under the Exchange Act; provided that (i) the Company
and the Company’s Subsidiaries will not be considered Associates of the Purchaser or any of its Affiliates and (ii) no portfolio company of the Purchaser or its
other Affiliates will be deemed Associates of the Purchaser or any of its other Affiliates.
“ Available ” shall mean, with respect to a Registration Statement, that such Registration Statement is effective and there is no stop order with
respect thereto and such Registration Statement does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, such that such Registration Statement will
be available for the resale of Registrable Securities and there is not a notice from the Company described in Section 5.03(c) in effect with respect to discontinuing
dispositions of Registrable Securities.
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“ Beneficially Own ”, “ Beneficially Owned ”, “ Beneficial Ownership ” or “ Beneficial Owner ” shall have the meaning set forth in Rule 13d-3
of the rules and regulations promulgated under the Exchange Act, except that for purposes of this Agreement the words “within sixty days” in Rule 13d-3(d)(1)(i)
shall not apply, to the effect that a person shall be deemed to be the Beneficial Owner of a security if that person has the right to acquire beneficial ownership of
such security at any time; provided , however , for purposes of this Agreement, the Purchaser, its Affiliates or any other person shall at all times be deemed to have
Beneficial Ownership of shares of Company Common Stock issuable upon conversion of the Notes directly or indirectly held by them, irrespective of any non-
conversion period specified in the Notes or this Agreement or any restrictions on transfer or voting contained in this Agreement.
“ Blackout Period ” shall mean in the event that the Company determines in good faith that any registration or sale pursuant to any Registration
Statement could reasonably be expected to materially adversely affect or materially interfere with any bona fide financing of the Company or any bona fide
material transaction under consideration by the Company or would require disclosure of information that has not been, and is not otherwise then required to be,
disclosed to the public, the premature disclosure of which would adversely affect the Company in any material respect, or the Registration Statement is otherwise
not Available for use (in each case as determined by the Company in good faith after consultation with outside counsel), a period of up to sixty (60) days; provided
that a Blackout Period may not be called by the Company more than twice in any period of twelve (12) consecutive months and the aggregate length of Blackout
Periods in any period of twelve (12) consecutive months may not exceed ninety (90) days.
“ Board of Directors ” shall mean the board of directors of the Company.
“ Bribery Act ” shall have the meaning set forth in Section 3.01(j).
are authorized or obligated by law or executive order to remain closed.
“ Business Day ” shall mean any day, other than a Saturday, Sunday or a day on which banking institutions in The City of New York, New York
“ Change in Control ” shall mean the occurrence of any of the following events: (i) there occurs a sale, transfer, conveyance or other disposition
of all or substantially all of the consolidated assets of the Company, (ii) any Person or “group” (as such term is used in Section 13 of the Exchange Act), directly or
indirectly, obtains Beneficial Ownership of 50% or more of the outstanding Company Common Stock, (iii) the Company consummates any merger, consolidation
or similar transaction, unless the stockholders of the Company immediately prior to the consummation of such transaction continue to hold (in substantially the
same proportion as their ownership of the Company Common Stock immediately prior to the transaction, other than changes in proportionality as a result of any
cash/stock election provided under the terms of the definitive agreement regarding such transaction) more than 50% of all of the voting power of the outstanding
shares of Voting Stock of the surviving or resulting entity in such transaction immediately following the consummation of such transaction or (iv) a majority of the
Board of Directors is no longer composed of (x) directors who were directors of the Company on the Closing Date and (y) directors who were nominated for
election or elected or appointed to the Board of Directors with the approval of a majority of the directors described in subclause (x) together with any incumbent
directors previously elected or appointed to the Board of Directors in accordance with this subclause (y).
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“ Closing ” shall have the meaning set forth in Section 2.02(a).
“ Closing Date ” shall have the meaning set forth in Section 2.02(a).
“ Committee ” shall have the meaning set forth in Section 4.07(g).
“ Company ” shall have the meaning set forth in the preamble hereto.
“ Company Common Stock ” shall mean the common stock, par value $0.0001 per share, of the Company.
“ Company Reports ” shall have the meaning set forth in Section 3.01(g)(i).
“ Conversion Price ” shall have the meaning set forth in the Indenture.
“ Conversion Rate ” shall have the meaning set forth in the Indenture.
“ Covered Persons ” shall have the meaning set forth in Section 4.07(h).
“ Definitive Proxy Statement ” means the Company’s definitive proxy statement for its annual meeting of stockholders pursuant to which the
Company’s stockholders are asked to vote on (i) the election of members of the Board of Directors to serve as “Class II” directors (with respect to Section 4.07(a)
(ii)) or “Class III” directors (with respect to Section 4.07(a)(i)) or (ii) the election of all members of the Board of Directors if the Board of Directors is not
classified.
“ DGCL ” shall mean the Delaware General Corporation Law.
“ Draft 10-Q ” shall have the meaning set forth in Section 3.01.
“ Eligible Participation Holders ” shall have the meaning set forth in Section 5.02(c).
“ Enforceability Exceptions ” shall have the meaning set forth in Section 3.01(c).
“ Exchange Act ” shall mean the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“ Excluded Securities ” shall have the meaning set forth in Section 4.16(c).
“ Extraordinary Transaction ” shall have the meaning set forth in Section 4.18(a)(iv).
“ FCPA ” shall have the meaning set forth in Section 3.01(j).
“ Free Writing Prospectus ” shall have meaning set forth in Section 5.03(a)(v).
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“ GAAP ” shall mean U.S. generally accepted accounting principles.
“ Global Security ” shall have the meaning set forth in the Indenture.
federal, state, local or foreign, and any applicable industry self-regulatory organization.
“ Governmental Entity ” shall mean any court, administrative agency or commission or other governmental authority or instrumentality, whether
“ Guarantee ” shall have the meaning set forth in Section 4.24(a).
“ Guaranteed Obligations ” shall have the meaning set forth in Section 4.24(a).
“ Guarantor ” shall have the meaning set forth in the preamble hereto.
thereunder.
“ HSR Act ” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated
“ Independence Requirements ” shall have the meaning set forth in Section 4.07(g).
“ Indemnified Persons ” shall have the meaning set forth in Section 5.05(a).
“ Indemnification Notice ” shall have the meaning set forth in Section 4.22(b).
“ Indemnitee ” shall have the meaning set forth in Section 4.22(a).
“ Indenture ” shall mean an indenture in the form attached hereto as Exhibit A , as amended, supplemented or otherwise modified from time to
time with the consent of the Purchaser and the Company prior to the Closing, it being agreed that the Company and the Purchaser shall consent to any changes
required by the Trustee that do not adversely affect the Company or the Purchaser, or the Purchaser’s financing sources, including with respect to timing and
mechanics of transfers and exchanges of Securities and interests therein, in any material respect.
“ Initial Conversion Rate ” shall have the meaning set forth in Section 4.13.
“ Initial Registration Statement ” shall have the meaning set forth in Section 5.01(a).
“ Initiating Holder ” shall have the meaning set forth in Section 5.02(c).
“ Intellectual Property ” shall have the meaning set forth in Section 3.01(p).
“ IRS ” means Internal Revenue Service.
“ Issuer Agreement ” shall have the meaning set forth in Section 4.09.
“ Joinder ” shall mean, with respect to any Person permitted to sign such document in accordance with the terms hereof, a joinder executed and
delivered by such Person, providing such Person to have all or a portion of the rights and obligations of a Purchaser under this Agreement, in the form and
substance substantially as attached hereto as Exhibit B or such other form as may be agreed to by the Company and the Purchaser.
5
“ Knowledge ” shall mean the actual knowledge, after reasonable inquiry within the Company, of the Company’s Chief Executive Officer, Chief
Financial Officer and General Counsel.
“ LinkedIn ” means LinkedIn Corporation or its Affiliates.
attorneys’ fees and expenses), judgments, fines, penalties, charges and amounts paid in settlement.
“ Losses ” shall mean all losses, claims, damages, liabilities, costs, expenses (including reasonable expenses of investigation and reasonable
“ Majority in Interest of Selling Holders ” shall mean the Initiating Holder(s) and/or Participating Holders for a particular offering that hold a
majority of the applicable Subject Securities being offered and sold by all Initiating Holder(s) and Participating Holders (e.g., if Notes are being offered and sold, a
majority of the Notes being offered and sold).
forty-eight hours by the Company and the underwriters.
“ Marketed Underwritten Offering ” shall mean an Underwritten Offering involving reasonable and customary marketing efforts in excess of
“ Material Adverse Effect ” shall mean any events, changes or developments that, individually or in the aggregate, have a material adverse effect
on the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, other than any event, change or development
resulting from or arising out of the following: (a) events, changes or developments generally affecting the economy, the financial or securities markets, or political,
legislative or regulatory conditions, in each case in the United States or elsewhere in the world, (b) events, changes or developments in the industries in which the
Company or any of its Subsidiaries conducts its business, (c) any adoption, implementation, promulgation, repeal, modification, reinterpretation or proposal of any
rule, regulation, ordinance, order, protocol or any other law of or by any national, regional, state or local Governmental Entity, or market administrator, (d) any
changes in GAAP or accounting standards or interpretations thereof, (e) earthquakes, any weather-related or other force majeure event or natural disasters or
outbreak or escalation of hostilities or acts of war or terrorism, (f) the announcement or the existence of, compliance with or performance under, this Agreement or
the transactions contemplated hereby, (g) any taking of any action or inaction at the request of the Purchaser, (h) any failure by the Company to meet any financial
projections or forecasts or estimates of revenues, earnings or other financial metrics for any period ( provided that the exception in this clause (h) shall not prevent
or otherwise affect a determination that any event, change, effect or development underlying such failure has resulted in a Material Adverse Effect so long as it is
not otherwise excluded by this definition), or (i) any changes in the share price or trading volume of the Company Common Stock or in the Company’s credit
rating ( provided that the exception in this clause (i) shall not prevent or otherwise affect a determination that any event, change, effect or development underlying
such failure has resulted in a Material Adverse Effect so long as it is not otherwise excluded by this definition); except, in each case with respect to subclauses (a)
through (e), to the extent that such event, change or development disproportionately affects the Company and its Subsidiaries, taken as a whole, relative to other
similarly situated companies in the industries in which the Company and its Subsidiaries operate.
6
“ NASDAQ ” shall mean the NASDAQ Stock Market.
Purchaser dated as of the date hereof and effective as of the Closing.
“ New Confidentiality Agreement ” shall mean the confidentiality agreement entered into by the Company, the Purchaser and an Affiliate of the
“ Note ” or “ Notes ” shall have the meaning set forth in the preamble hereto.
hereof.
“ Note Purchase Agreement ” means that certain Note Purchase Agreement by and between LinkedIn and the Company, dated as of the date
“ OFAC ” shall have the meaning set forth in Section 3.01(j).
“ Offer Notice ” shall have the meaning set forth in Section 4.16(a).
“ Offering Terms ” shall have the meaning set forth in Section 5.02(c).
“ Orderly Sale Amount ” shall have the meaning set forth in Section 5.02(d).
“ Participating Holder ” shall have the meaning set forth in Section 5.02(c).
“ Participation Notice ” shall have the meaning set forth in Section 4.16(a).
“ Participation Notice Period ” shall have the meaning set forth in Section 4.16(a).
“ Permitted Debt Financing Transaction ” shall have the meaning set forth in Section 4.02(a).
“ Permitted Loan ” shall have the meaning set forth in Section 4.02(a).
“ Permitted Transfers ” shall have the meaning set forth in Section 4.02(a).
“ Person ” or “ person ” shall mean an individual, corporation, limited liability or unlimited liability company, association, partnership, trust,
estate, joint venture, business trust or unincorporated organization, or a government or any agency or political subdivision thereof, or other entity of any kind or
nature.
“ Plan of Distribution ” shall mean the plan of distribution substantially in the form attached hereto as Annex A .
Company IV, L.L.C., dated as of August 11, 2017, as amended, modified or supplemented.
“ Prior Confidentiality Agreement ” shall mean the confidentiality agreement by and between the Company and Silver Lake Management
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“ Prohibited Transfers ” shall have the meaning set forth in Section 4.02(a).
“ Purchase Price ” means an amount equal to (i) two hundred ninety four million dollars ($294,000,000) less (ii) any expenses owed to the
Purchaser or its Affiliates as of the Closing pursuant to Section 6.06 less (iii) the Notes Consideration (as defined in the Note Purchase Agreement) to the extent the
transactions contemplated by the Note Purchase Agreement are consummated on or prior to the Closing Date.
“ Purchaser ” shall have the meaning set forth in the preamble hereto.
“ Purchaser Designee ” shall mean each individual then serving on the Board of Directors pursuant to the exercise of the Purchaser’s rights
pursuant to Section 4.07(a) and/or Section 4.07(e), together with any designee(s) of the Purchaser who is then standing for election to the Board of Directors
pursuant to Sections 4.07(a) and (b) or who is being proposed for election by the Purchaser pursuant to Section 4.07(e).
“ Registrable Securities ” shall mean the Subject Securities; provided that any Subject Securities will cease to be Registrable Securities upon the
earliest of (a) when such Subject Securities have been sold or otherwise disposed of pursuant to an effective Registration Statement or in compliance with Rule
144, (b) upon the later of the date (i) in the case of Subject Securities held by the Purchaser, no Purchaser Designee is on the Board of Directors and (ii) such
Subject Securities are held or Beneficially Owned by any Person that together with its Affiliates Beneficially Own Subject Securities representing less than (x)
1.0% of the outstanding shares of Company Common Stock as of such time and such Subject Securities are freely transferable under Rule 144 without regard to
volume or manner of sale limits or public information requirements (and, in the case of the Notes, such Subject Securities may be represented by an Unrestricted
Global Security (as defined in the Indenture) when sold) and (y) $25,000,000 in aggregate principal amount of Notes (subject to the first proviso in Section 5.02(c)
and the proviso in Section 5.02(g)), or (c) when such Subject Securities cease to be outstanding; provided , further , that any securities that have ceased to be
Registrable Securities in accordance with the foregoing definition shall not thereafter become Registrable Securities and any securities that are issued or distributed
in respect of securities that have ceased to be Registrable Securities are not Registrable Securities.
“ Registration Expenses ” shall mean all expenses incurred by the Company in complying with Article V, including all registration, filing and
listing fees, printing expenses, fees and disbursements of counsel (including local counsel if required) and independent public accountants for the Company and of
a single counsel for the holders of Registrable Securities, fees and expenses incurred by the Company in connection with complying with state securities or “blue
sky” laws, fees of the Financial Industry Regulatory Authority, Inc., all the Company’s internal expenses, transfer taxes, and fees of transfer agents and registrars,
but excluding any underwriting discounts and commissions, agency fees, brokers’ commissions and transfer taxes, in each case to the extent applicable to the
Registrable Securities of the selling holders; provided that Registration Expenses shall not include more than $50,000 per offering of fees and disbursements of
counsel and other advisors for the holders of Registrable Securities (or, in the case of an Underwritten Offering, $75,000 per offering).
8
“ Registration Statement ” shall mean any registration statement of the Company filed or to be filed with the SEC under the rules and regulations
promulgated under the Securities Act, including the related prospectus, amendments and supplements to such registration statement, and including pre- and post-
effective amendments, and all exhibits and all material incorporated by reference in such registration statement.
“ Registration Termination Date ” shall have the meaning set forth in Section 5.01(b).
“ Restricted Period ” shall mean the period commencing on the Closing Date and ending on the earlier of (i) the date that is twelve (12) months
following the Closing Date and (ii) the consummation of any Change in Control or entry into a definitive agreement for a transaction that, if consummated, would
result in a Change in Control.
any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such rule.
“ Rule 144 ” shall mean Rule 144 promulgated by the SEC pursuant to the Securities Act, as such rule may be amended from time to time, or
any similar rule or regulation hereafter adopted by the SEC having substantially the same effect as such rule.
“ Rule 405 ” shall mean Rule 405 promulgated by the SEC pursuant to the Securities Act, as such rule may be amended from time to time, or
“ SEC ” shall mean the U.S. Securities and Exchange Commission.
“ Section 4.12 Person ” shall have the meaning set forth in Section 4.12.
“ Securities Act ” shall mean the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“ Selling Holders ” shall have the meaning set forth in Section 5.03(a)(i).
“ Silver Lake Group ” shall mean the Purchaser together with its Affiliates, including SL Affiliates.
“ Silver Lake Indemnitors ” shall have the meaning set forth in Section 4.12.
fund or other investment entity Affiliated with Silver Lake Group, L.L.C. that has a direct or indirect investment in the Company.
“ SL Affiliate ” shall mean any Affiliate of Silver Lake Group, L.L.C. that serves as general partner of, or manages or advises, any investment
other Silver Lake management entity or general partner, in each case, that is serving on the Board of Directors.
“ SL Director ” shall mean each Purchaser Designee and any other person that is a managing director, officer, advisor or employee of SLTM or
“ SL Observer ” shall have the meaning in Section 4.07(f).
“ SL Person ” shall mean any SL Director or SL Observer.
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“ SLTM ” means Silver Lake Technology Management, L.L.C. or a successor thereto.
“ SL Securities ” shall have the meaning set forth in the Indenture.
“ Standstill Period ” shall mean the period commencing on the Closing Date and ending on the earliest of (i) the later of (A) the date that is six
(6) months following such time as there is no Purchaser Designee serving on the Board of Directors (and as of such time the Purchaser no longer has board
nomination rights pursuant to this Agreement or otherwise irrevocably waives in a writing delivered to the Company all of such rights) and (B) the three (3) year
anniversary of the Closing Date, (ii) the effective date of a Change in Control and (iii) ninety (90) days after the date on which the Purchaser and its Affiliates do
not Beneficially Own any Notes or any shares of Company Common Stock other than any shares of Company Common Stock issued to any person as
compensation for their service on the Board of Directors.
“ Stockholder Approval Requirement ” means (i) the issuance of such Additional Securities would require stockholder approval under the listing
requirements of NASDAQ or any other securities exchange upon which the Company Common Stock is then listed solely as a result of the issuance of the
Additional Securities to the Purchaser in such Additional Investment and (ii) the Company would not be required to seek any stockholder approval in connection
with the Additional Investment but for issuance of such Additional Securities to the Purchaser.
“ Subject Securities ” shall mean (i) the Notes; (ii) the shares of Company Common Stock issuable or issued upon conversion of the Notes; (iii)
any other shares of Company Common Stock acquired by the Purchaser after the effective date of this Agreement at a time when such Purchaser or its Affiliates
hold other Registrable Securities; provided , such holder delivers a written notice to the Company pursuant to the terms of this Agreement indicating that such
securities shall be treated as Subject Securities and provided that such notice relates to securities with a fair market value of at least $100,000; and (iv) any
securities issued as (or issuable upon the conversion, exercise or exchange of any warrant, right or other security that is issued as) a dividend, stock split,
combination or any reclassification, recapitalization, merger, consolidation, exchange or any other distribution or reorganization with respect to, or in exchange for,
or in replacement of, the securities referenced in clause (i), (ii) or (iii) (without giving effect to any election by the Company regarding settlement options upon
conversion) above or this clause (iv).
“ Subsidiary ” shall mean, with respect to any Person, any other Person of which 50% or more of the shares of the voting securities or other
voting interests are owned or controlled, or the ability to select or elect 50% or more of the directors or similar managers is held, directly or indirectly, by such first
Person or one or more of its Subsidiaries, or by such first Person, or by such first Person and one or more of its Subsidiaries.
“ Take-Down Notice ” shall have the meaning set forth in Section 5.02(c).
“ Take-Down Participation Notice ” shall have the meaning set forth in Section 5.02(c).
“ Target Registration Date ” shall have the meaning set forth in Section 5.01(a).
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“ Tax ” or “ Taxes ” shall mean all federal, state, local, and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains,
property, capital, sales, transfer, use, payroll, employment, severance, withholding, duties, intangibles, franchise, backup withholding, value-added, and other taxes
imposed by a Governmental Entity, together with all interest, penalties and additions to tax imposed with respect thereto.
Entity with respect to Taxes.
“ Tax Return ” shall mean a report, return or other document (including any amendments thereto) required to be supplied to a Governmental
“ Third Party ” shall mean a Person other than any member of the Silver Lake Group or any of their respective Affiliates.
“ Third Party Tender/Exchange Offer ” shall have the meaning set forth in Section 4.02(a).
“ Transaction Agreements ” shall have the meaning set forth in Section 3.01(c).
“ Transactions ” shall have the meaning set forth in Section 3.01(c).
Purchaser, which consent shall not be unreasonably withheld or delayed.
“ Trustee ” shall mean U.S. Bank National Association or another institutional trustee to be selected by the Company with the consent of
“ Underwritten Offering ” shall mean a sale of Registrable Securities to an underwriter or underwriters for reoffering to the public.
“ VCOC Letter ” shall have the meaning set forth in Section 4.08.
voting members of the governing body of the Company or any successor thereto.
“ Voting Stock ” shall mean securities of any class or kind having the power to vote generally for the election of directors, managers or other
“ WKSI ” shall mean a “well known seasoned issuer” as defined under Rule 405.
Section 1.02. General Interpretive Principles . Whenever used in this Agreement, except as otherwise expressly provided or
unless the context otherwise requires, any noun or pronoun shall be deemed to include the plural as well as the singular and to cover all genders. The name
assigned to this Agreement and the section captions used herein are for convenience of reference only and shall not be construed to affect the meaning,
construction or effect hereof. Whenever the words “include,” “includes,” or “including” are used in this Agreement, they shall be deemed to be followed by the
words “without limitation.” Unless otherwise specified, the terms “hereto,” “hereof,” “herein” and similar terms refer to this Agreement as a whole (including the
exhibits, schedules and disclosure statements hereto), and references herein to Articles or Sections refer to Articles or Sections of this Agreement. For the
avoidance of doubt, notwithstanding anything in this Agreement to the contrary, none of the Notes will have any right to vote, or except as expressly set forth in
Section 10.02(b) of the Indenture any right to receive any dividends or other distributions that are made or paid to the holders of the shares of Company Common
Stock.
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ARTICLE II
SALE AND PURCHASE OF THE NOTES
Company shall issue and sell to the Purchaser, and the Purchaser shall purchase and acquire from the Company for the Purchase Price, (i) three hundred million
dollars ($300,000,000) aggregate principal amount of Notes less (ii) the aggregate principal amount of the Purchased Notes (as defined in the Note Purchase
Agreement) to the extent such Purchased Notes are acquired by LinkedIn on or prior to the Closing Date.
Section 2.01. Sale and Purchase of the Notes . Subject to the terms and conditions of this Agreement, at the Closing the
Section 2.02. Closing .
(a)
Subject to the satisfaction or waiver of the conditions precedent set forth in Sections 2.02(c) and (d), the closing (the “Closing”) of
the purchase and sale of the Notes hereunder shall take place at the offices of Simpson Thacher & Bartlett LLP located at 2475 Hanover St., Palo Alto,
California 94304 at 11:00 a.m. New York time on a Business Day on or prior to December 8, 2017 selected by the Purchaser in a written notice delivered to the
Company at least two (2) Business Days prior to such date, provided that if the Purchaser fails to deliver to the Company any such written notice the Purchaser
shall be deemed to have selected December 8, 2017, or at such other place, time or date as may be mutually agreed upon in writing by the Company and the
Purchaser (the date on which the Closing actually occurs, the “Closing Date”).
(b)
To effect the purchase and sale of Notes, upon the terms and subject to the conditions set forth in this Agreement, at the Closing:
The Company shall, and shall instruct the Trustee to, execute and deliver the Indenture. The Company shall deliver the
(i)
fully executed Indenture to the Purchaser at the Closing, against payment in full by or on behalf of the Purchaser of the Purchase Price for the
Notes.
(ii)
The Company shall issue and deliver to the Purchaser the Notes through the facilities of the Depository Trust Company, or
at the option of the Purchaser, registered in the name of the Purchaser, against payment in full by or on behalf of the Purchaser of the Purchase
Price for the Notes.
(iii)
The Purchaser shall cause a wire transfer to be made in same day funds to an account of the Company designated in
writing by the Company to the Purchaser in an amount equal to the Purchase Price for the Notes.
(iv)
(or any successor form).
The Purchaser shall deliver to the Company a duly completed and executed IRS Form W-9 or applicable IRS Form W-8
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Closing:
(c)
The obligations of the Purchaser to purchase the Notes are subject to the satisfaction or waiver of the following conditions as of the
(i)
the Company shall have provided the applicable listing of additional shares notification to NASDAQ, and received
notification from NASDAQ that the listing of additional shares review process has been completed, and NASDAQ shall not have made any
objection (not subsequently withdrawn) that the consummation of the Transactions would violate NASDAQ listing rules applicable to the
Company and that if not withdrawn would result in the delisting of the Company Common Stock;
the purchase and sale of the Notes pursuant to Section 2.02(b) shall not be prohibited or enjoined by any court of
(ii)
competent jurisdiction;
(iii)
the Company and the Trustee shall have executed the Indenture on the Closing Date and delivered the Indenture to the
Purchaser, the Company shall have executed and delivered the Notes to the Purchaser and the Company shall have executed and delivered the
VCOC Letter;
(iv)
(A) the representations and warranties of the Company set forth in Sections 3.01(a)(i), (b), (c), (d), (e), (f)(i), (l) and (o)
shall be true and correct in all material respects on and as of the Closing Date (except for any representations and warranties that speak as of a
specific date, which shall be true and correct in all material respects as of such date), (B) the representations and warranties of the Company set
forth in Section 3.01(h)(ii) shall be true and correct on and as of the Closing Date and (C) the representations and warranties of the Company set
forth in Section 3.01 (other than Sections 3.01(a)(i), (b), (c), (d), (e), (f)(i), (h)(ii), (l) and (o)) shall be true and correct on and as of the Closing
Date (except for any representations and warranties that speak as of a specific date, which shall be true and correct as of such date) (without
giving effect to materiality, Material Adverse Effect, or similar phrases in the representations and warranties with respect to clauses (A) and (C)
of this Section 2.02(c)(iv)), except where the failure of such representations and warranties referenced in this clause (C) to be so true and correct,
individually or in the aggregate, has not had a Material Adverse Effect;
(v)
the Company shall have delivered to the Trustee, as custodian, the Global Securities registered in the name of The
Depository Trust Company (or a nominee thereof) and such Global Securities shall be eligible for book-entry settlement with The Depository
Trust Company;
(vi)
the Company or its Subsidiaries shall not have entered into a definitive agreement with a Third Party for a transaction that,
if consummated, would result in a Change in Control;
(vii)
the Company shall have performed and complied in all material respects with all agreements and obligations required by
this Agreement to be performed or complied with by it on or prior to the Closing Date; and
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(viii)
the Purchaser shall have received a certificate, dated the Closing Date, duly executed by an executive officer of the
Company on behalf of the Company, certifying that the conditions specified in Section 2.02(c)(iv) and (vii) have been satisfied.
(d)
The obligations of the Company to sell the Notes to the Purchaser are subject to the satisfaction or waiver of the following
conditions as of the Closing:
(i)
jurisdiction; and
the purchase and sale of the Notes pursuant to Section 2.02(b) shall not be prohibited or enjoined by any court of competent
(ii)
(iii)
the Trustee shall have executed and delivered the Indenture to the Company;
the representations and warranties of the Purchaser set forth in Section 3.02 shall be true and correct in all material
respects on and as of the Closing Date;
(iv)
the Purchaser shall have performed and complied in all material respects with all agreements and obligations required by
this Agreement to be performed or complied with by it on or prior to the Closing Date; and
(v)
the Company shall have received a certificate, dated the Closing Date, duly executed by the general partner, managing
member or authorized officer of the Purchaser on behalf of the Purchaser, certifying that the conditions specified in Section 2.02(d)(iii) and (iv)
have been satisfied.
Section 2.03. Termination Prior to Closing . If the Closing does not occur on or prior to 5:30 p.m. New York time on
December 29, 2017, this Agreement may be terminated by either of the parties hereto upon written notice to the other, and each of the parties hereto shall be
relieved of its duties and obligations arising under this Agreement after the date of such termination; provided , however , that the right to terminate this Agreement
under this Section 2.03 shall not be available to any party whose failure to comply with its obligations under this Agreement has been the primary cause of the
failure of the Closing to occur on or before such time; and provided further that no such termination shall relieve any party hereto of liability for any breach or
default under this Agreement prior to such termination.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01. Representations and Warranties of the Company . Except as disclosed in the Company Reports filed with or
furnished to the SEC and publicly available prior to the date hereof (excluding in each case any disclosures set forth in the risk factors or “forward-looking
statements” sections of such reports, and any other disclosures included therein to the extent they are predictive or forward-looking in nature), or in the Company’s
draft Form 10-Q for the fiscal quarter ended September 30, 2017 (the “ Draft 10-Q ”) that was made available to Purchaser prior to the execution of this
Agreement, the Company represents and warrants to the Purchaser, as of the date hereof and as of the Closing Date (except for the representations and warranties
that speak as of a specific date, which shall be made as of such date) as follows:
14
(a)
Existence and Power .
(i)
The Company is duly organized, validly existing and in good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to enter into each Transaction Agreement and to consummate the Transactions. The Company has all
requisite corporate power and authority to own, operate and lease its properties, rights and assets and to carry on its business as it is being
conducted on the date of this Agreement.
(ii)
Except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, has been
duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of each other jurisdiction in which it
owns or leases properties, rights and assets or conducts any business so as to require such qualification. Except as would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect, each Subsidiary of the Company that is a “significant subsidiary” (as
defined in Rule 1.02(w) of the SEC’s Regulation S-X) has been duly organized and is validly existing in good standing (to the extent that the
concept of “good standing” is recognized by the applicable jurisdiction) under the laws of its jurisdiction of organization.
(b)
Capitalization . The authorized share capital of the Company consists of 1,000,000,000 shares of Company Common Stock, par
value $0.0001 per share and 50,000,000 shares of preferred stock, par value $0.0001 per share. As of November 6, 2017, there were (i) 57,901,351 shares
of Company Common Stock issued and outstanding and no shares of preferred stock of the Company issued and outstanding, (ii) options to purchase an
aggregate of 5,389,575 shares of Company Common Stock outstanding, (iii) 5,630,754 shares of Company Common Stock underlying the Company’s
outstanding restricted, performance and deferred stock unit awards (assuming maximum achievement of performance-based awards), (iv) 3,139,276
shares of Company Common Stock reserved for issuance under the Company’s employee stock purchase plan, (v) 3,405,338 shares of Company
Common Stock reserved for issuance under the Company’s employee or director equity-based compensation plans, (vi) 0 shares of Company Common
Stock held in any employee benefit plan or trust funding any such plan, (vii) 4,681,674 shares of Company Common Stock reserved for issuance on
conversion of the senior convertible notes issued by the Company on June 17, 2013 and (viii) warrants to purchase 4,681,664 shares of Company
Common Stock issued and outstanding. Since November 6, 2017, (A) the Company has only issued options, restricted, performance and deferred stock
unit awards or other rights to acquire shares of Company Common Stock in the ordinary course of business consistent with past practice and (B) the only
shares of capital stock issued by the Company were pursuant to outstanding options, restricted, performance and deferred stock unit awards and other
compensatory rights to purchase shares of Company Common Stock granted to employees, directors or other service providers. All outstanding shares of
Company Common Stock are duly authorized, validly issued, fully paid and nonassessable, and are not subject to and were not issued in violation of any
preemptive or similar right, purchase option, call or right of first refusal or similar right. Except as set forth above, the Company has not issued any
securities, the holders of which have the right to vote with the stockholders of the Company on any matter. Except as provided in this Agreement, the
Notes and the Indenture and except as set forth in or contemplated by this Section 3.01(b), there are no existing options, warrants, calls, preemptive (or
similar) rights, subscriptions or other rights, agreements or commitments obligating the Company to issue, transfer or sell, or cause to be issued,
transferred or sold, any capital stock of the Company or any securities convertible into or exchangeable for such capital stock and there are no current
outstanding contractual obligations of the Company to repurchase, redeem or otherwise acquire any of its shares of capital stock, except with respect to
the acquisition of shares of Company Common Stock by the Company to satisfy the payment of the applicable exercise price or withholding taxes for
equity awards. Since December 31, 2016, the Company has not declared or paid any dividends.
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(c)
Authorization . The execution, delivery and performance of this Agreement, the Indenture, the Notes, the VCOC Letter and each
Issuer Agreement (the “ Transaction Agreements ”) and the consummation of the transactions contemplated herein and therein (collectively, the “
Transactions ”), have been duly authorized by the Board of Directors and all other necessary corporate action on the part of the Company. Assuming this
Agreement constitutes the valid and binding obligation of the Purchaser, this Agreement is a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to the limitation of such enforcement by (A) the effect of bankruptcy, insolvency,
reorganization, receivership, conservatorship, arrangement, moratorium or other laws affecting or relating to creditors’ rights generally or (B) the rules
governing the availability of specific performance, injunctive relief or other equitable remedies and general principles of equity, regardless of whether
considered in a proceeding in equity or at law (the “ Enforceability Exceptions ”). On the Closing Date, the Indenture will be duly executed and delivered
by the Company and, assuming the Indenture will be a valid and binding obligation of the Trustee, the Indenture will be a valid and binding obligation of
the Company enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions. Assuming the VCOC Letter
constitutes the valid and binding obligation of the Purchaser or other Affiliate thereof party thereto, on the Closing Date, the VCOC Letter will be a valid
and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions. Pursuant
to resolutions previously provided to the Purchaser, the Board of Directors or a committee thereof composed solely of two or more “non-employee
directors” as defined in Rule 16b-3 of the Exchange Act has approved, and at the request of the Purchaser will approve in advance of the Closing, for the
express purpose of exempting each such transaction from Section 16(b) of the Exchange Act, pursuant to Rule 16b-3 thereunder to the extent applicable,
the transactions contemplated by the Transaction Agreements, including the acquisition of the Notes, any disposition of such Notes upon the conversion
thereof, any acquisition of Company Common Stock upon conversion of the Notes, any deemed acquisition or disposition in connection therewith, and all
transactions with the Company related thereto.
(d)
General Solicitation; No Integration . Other than with respect to the Silver Lake Group and its Affiliates and LinkedIn, neither the
Company nor any other Person or entity authorized by the Company to act on its behalf has engaged in a general solicitation or general advertising
(within the meaning of Regulation D of the Securities Act) of investors with respect to offers or sales of the Notes. The Company has not, directly or
indirectly, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which, to its
Knowledge, is or will be integrated with the Notes sold pursuant to this Agreement.
16
(e)
Valid Issuance . The Notes have been duly authorized by all necessary corporate action of the Company. When issued and sold
against receipt of the consideration therefor, the Notes will be valid and legally binding obligations of the Company, enforceable in accordance with their
terms, subject to the limitation of such enforcement by the Enforceability Exceptions. The Company has available for issuance the maximum number of
shares (including make-whole shares) of Company Common Stock initially issuable upon conversion of the Notes if such conversion were to occur
immediately following Closing. The Company Common Stock to be issued upon conversion of the Notes in accordance with the terms of the Notes has
been duly authorized, and when issued upon conversion of the Notes, all such Company Common Stock will be validly issued, fully paid and
nonassessable and free of pre-emptive or similar rights.
(f)
Non-Contravention/No Consents . The execution, delivery and performance of the Transaction Agreements, the issuance of the
shares of Company Common Stock upon conversion of the Notes in accordance with their terms and the consummation by the Company of the
Transactions, does not conflict with, violate or result in a breach of any provision of, or constitute a default under, or result in the termination of or
accelerate the performance required by, or result in a right of termination or acceleration under, (i) the certificate of incorporation or bylaws of the
Company, (ii) the Indenture, dated as of June 17, 2013, by and between the Company and U.S. Bank National Association, as trustee, relating to the
Company’s 1.50% senior convertible notes due 2018, as amended (the “ 2013 Indenture ”), and any securities issued thereunder, or any other mortgage,
note, indenture, deed of trust, lease, license, loan agreement or other agreement binding upon the Company or any of its Subsidiaries or (iii) any permit,
government license, judgment, order, decree, ruling, injunction, statute, law, ordinance, rule or regulation applicable to the Company or any of its
Subsidiaries, other than in the cases of clauses (ii) and (iii) as would not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Assuming the accuracy of the representations of the Purchaser set forth herein, other than (A) any required filings or approvals under the
HSR Act or any foreign antitrust or competition laws, requirements or regulations in connection with the issuance of shares of Company Common Stock
upon the conversion of the Notes, (B) the filing of a Supplemental Listing Application with the NASDAQ, (C) any required filings pursuant to the
Exchange Act or the rules of the SEC or the NASDAQ or (D) as have been obtained prior to the date of this Agreement, no consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental Entity is required on the part of the Company or any of its Subsidiaries in
connection with the execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the Transactions
(in each case other than the transactions contemplated by Article V or Section 4.16), except for any consent, approval, order, authorization, registration,
declaration, filing, exemption or review the failure of which to be obtained or made, individually or in the aggregate, would not reasonably be expected to
have a Material Adverse Effect.
17
(g)
Reports; Financial Statements .
(i)
The Company has filed or furnished, as applicable all forms, reports, schedules, prospectuses, registration statements and
other statements and documents required to be filed or furnished by it with the SEC under the Exchange Act or the Securities Act since January
1, 2016 (including, for the avoidance of doubt, its annual report on Form 10-K for the fiscal year ended December 31, 2016, as amended by that
Form 10-K/A filed on May 1, 2017, collectively, the “Company Reports”). As of its respective date, and, if amended, as of the date of the last
such amendment, each Company Report complied in all material respects as to form with the applicable requirements of the Securities Act and
the Exchange Act, and any rules and regulations promulgated thereunder applicable to such Company Report. As of its respective date, and, if
amended, as of the date of the last such amendment, no Company Report (including for purposes of this sentence, the Draft 10-Q to the
Knowledge of the Company) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. The Company is a WKSI
eligible to file a Registration Statement on Form S-3 under the Securities Act.
(ii)
Each of the consolidated balance sheets, and the related consolidated statements of income, changes in stockholders’
equity and cash flows, included in the Company Reports filed with the SEC under the Exchange Act (including for purposes of this sentence, the
Draft 10-Q to the Knowledge of the Company): (A) have been prepared from, and are in accordance with, the books and records of the Company
and its Subsidiaries, (B) fairly present in all material respects the consolidated financial position of the Company and its consolidated
Subsidiaries as of the dates shown and the results of the consolidated operations, changes in stockholders’ equity and cash flows of the Company
and its consolidated Subsidiaries for the respective fiscal periods or as of the respective dates therein set forth, subject, in the case of any
unaudited financial statements, to normal recurring year-end audit adjustments, (C) have been prepared in accordance with GAAP consistently
applied during the periods involved, except as otherwise set forth therein or in the notes thereto, and in the case of unaudited financial statements
except for the absence of footnote disclosure, and (D) otherwise comply in all material respects with the requirements of the SEC.
18
(h)
Absence of Certain Changes . Since December 31, 2016, (i) until the date hereof, the Company and its Subsidiaries have conducted
their respective businesses in all material respects in the ordinary course of business, and (ii) no events, changes or developments have occurred that,
individually or in the aggregate, have had or would reasonably be expected to have a Material Adverse Effect.
(i)
No Undisclosed Liabilities, etc . As of the date hereof, there are no liabilities of the Company or any of its Subsidiaries that would
be required by GAAP to be reflected on the face of the balance sheet, except (i) liabilities reflected or reserved against in the financial statements
contained in the Company Reports or in the Draft 10-Q, (ii) liabilities incurred since December 31, 2016 in the ordinary course of business and (iii)
liabilities that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(j)
Compliance with Applicable Law . Each of the Company and its Subsidiaries has complied in all respects with, and is not in default
or violation in any respect of, any law, statute, order, rule, regulation, policy or guideline of any federal, state or local governmental authority applicable
to the Company or such Subsidiary, other than such non-compliance, defaults or violations that, individually or in the aggregate, have not had and would
not reasonably be expected to have a Material Adverse Effect. Except as would not constitute a Material Adverse Effect, since January 1, 2013, none of
the Company, any of its Subsidiaries or, any of their respective directors, officers, agents or employees have (i) used any corporate, Company (and/or
Subsidiary) funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity or unlawfully offered or
provided, directly or indirectly, anything of value to (or received anything of value from) any foreign or domestic government employee or official, in
each case in violation of, or (ii) otherwise violated, any provision of the United States Foreign Corrupt Practices Act of 1977, as amended, and any rules
or regulations promulgated thereunder (the “ FCPA ”), or the UK Bribery Act (the “ Bribery Act ”). Except as would not constitute a Material Adverse
Effect, since January 1, 2013, neither the Company, any of its Subsidiaries nor any of their respective directors, officers, agents or employees has directly
or indirectly taken any action in violation of any export restrictions, anti-boycott regulations, embargo regulations or other similar applicable United
States or foreign laws. Except as would not constitute a Material Adverse Effect, (i) none of the Company’s or any of its Subsidiaries’ directors, officers,
agents or employees is a “specially designated national” or blocked person under United States sanctions administered by the Office of Foreign Assets
Control of the U.S. Department of the Treasury (“ OFAC ”) and (ii) since January 1, 2013, neither the Company nor any of its Subsidiaries has engaged in
any business with any person with whom, or in any country in which, it is prohibited for a United States person to engage under applicable United States
sanctions administered by OFAC. Except as would not constitute a Material Adverse Effect, the Company and its Subsidiaries have instituted policies and
procedures reasonably designed to ensure compliance with the FCPA and the Bribery Act and have maintained such policies and procedures in force.
19
(k)
Legal Proceedings and Liabilities . As of the date hereof, neither the Company nor any of its Subsidiaries is a party to any, and there
are no pending, or to the Knowledge of the Company, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental
investigations of any nature against the Company or any of its Subsidiaries (i) that, individually or in the aggregate, have had or would reasonably be
expected to have a Material Adverse Effect or (ii) that challenge the validity of or seek to prevent the Transactions. As of the date hereof, neither the
Company nor any of its Subsidiaries is subject to any order, judgment or decree of a Governmental Entity that, individually or in the aggregate, has had or
would reasonably be expected to have a Material Adverse Effect. As of the date hereof, except as, individually or in the aggregate, has not had and would
not reasonably be expected to have a Material Adverse Effect, to the Knowledge of the Company, there is no investigation or review pending or
threatened by any Governmental Entity with respect to the Company or any of its Subsidiaries.
(l)
Investment Company Act . The Company is not, and immediately after receipt of payment for the Notes will not be, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.
(m)
Material Adverse Effect:
Taxes and Tax Returns . Except as, individually or in the aggregate, has not had and would not reasonably be expected to have a
(i)
the Company and each of its Subsidiaries has timely filed (taking into account all applicable extensions) all Tax Returns
required to be filed by it, and all such Tax Returns were correct and complete in all respects, and the Company and each of its Subsidiaries has
paid (or has had paid on its behalf) to the appropriate Governmental Entity all Taxes that are required to be paid by it, except, in each case, with
respect to matters contested in good faith or for which adequate reserves have been established in accordance with GAAP; and
(ii)
there are no disputes pending, or claims asserted in writing, in respect of Taxes of the Company or any of its Subsidiaries
for which reserves that are adequate under GAAP have not been established.
(n)
No Piggyback or Preemptive Rights . Other than this Agreement, there are no contracts, agreements or understandings between the
Company and any person granting such person the right (other than rights which have been waived in writing or otherwise satisfied) to (i) require the
Company to include in any Registration Statement filed pursuant to Article V any securities other than the Subject Securities or (ii) preemptive rights to
subscribe for the Company Common Stock issuable upon conversion of the Notes, except in each case of (i) and (ii), as may have been duly waived.
(o)
Brokers and Finders . The Company has not retained, utilized or been represented by, or otherwise become obligated to, any broker,
placement agent, financial advisor or finder in connection with the transactions contemplated by this Agreement whose fees the Purchaser would be
required to pay.
20
(p)
Intellectual Property . Except as, individually or in the aggregate, has not had and would not reasonably be expected to have a
Material Adverse Effect, the Company and its Subsidiaries own or possess sufficient rights to use all patents, patent applications, inventions, copyrights,
know-how, trade secrets, trademarks, service marks and trade names and other technology and intellectual property rights (collectively, “ Intellectual
Property ”) used in or necessary for the conduct of their respective businesses as currently conducted. To the Company’s Knowledge, the conduct of the
respective businesses of the Company and its Subsidiaries does not infringe the Intellectual Property of others in any material respect, and to the
Company’s Knowledge, no third party is infringing any Intellectual Property owned by the Company or any of its Subsidiaries in any material respect.
(q)
No Additional Representations .
(i)
The Company acknowledges that the Purchaser makes no representation or warranty as to any matter whatsoever except as
expressly set forth in Section 3.02 and in any certificate delivered by the Purchaser pursuant to this Agreement, and the Company has not relied
on or been induced by such information or any other representations or warranties (whether express or implied or made orally or in writing) not
expressly set forth in Section 3.02 and in any certificate delivered by the Purchaser pursuant to this Agreement.
(ii)
The Company acknowledges and agrees that, except for the representations and warranties expressly set forth in Section
3.02 and in any certificate delivered by the Purchaser pursuant to this Agreement, (i) no person has been authorized by the Purchaser to make
any representation or warranty relating to the Purchaser or otherwise in connection with the transactions contemplated hereby, and if made, such
representation or warranty must not be relied upon by the Company as having been authorized by the Purchaser, and (ii) any materials or
information provided or addressed to the Company or any of its Affiliates or representatives are not and shall not be deemed to be or include
representations or warranties of the Purchaser unless any such materials or information are the subject of any express representation or warranty
set forth in Section 3.02 of this Agreement and in any certificate delivered by the Purchaser pursuant to this Agreement.
Company, as of the date hereof and as of the Closing Date, as follows:
Section 3.02. Representations and Warranties of the Purchaser . The Purchaser represents and warrants to, and agrees with, the
(a)
Organization; Ownership . The Purchaser is a limited partnership, duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite limited partnership power and authority to own, operate and lease its properties and to carry on its
business as it is being conducted on the date of this Agreement.
21
(b)
Authorization; Sufficient Funds; No Conflicts .
(i)
The Purchaser has full partnership power and authority to execute and deliver this Agreement and to consummate the
Transactions to which it is a party. The execution, delivery and performance by the Purchaser of this Agreement and the consummation of the
Transactions to which it is a party have been duly authorized by all necessary partnership action on behalf of the Purchaser. No other
proceedings on the part of the Purchaser are necessary to authorize the execution, delivery and performance by the Purchaser of this Agreement
and consummation of the Transactions. This Agreement has been duly and validly executed and delivered by the Purchaser. Assuming this
Agreement constitutes the valid and binding obligation of the Company, this Agreement is a valid and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its terms, subject to the limitation of such enforcement by the Enforceability Exceptions.
(ii)
At and immediately prior to the Closing, the Purchaser will have cash in immediately available funds in excess of the
Purchase Price.
(iii)
The execution, delivery and performance of this Agreement by the Purchaser, the consummation by the Purchaser of the
Transactions to which it is a party and the compliance by the Purchaser with any of the provisions hereof and thereof will not conflict with,
violate or result in a breach of any provision of, or constitute a default under, or result in the termination of or accelerate the performance
required by, or result in a right of termination or acceleration under, (A) any provision of the Purchaser’s organizational documents, (B) any
mortgage, note, indenture, deed of trust, lease, license, loan agreement or other agreement binding upon the Purchaser or (C) any permit,
government license, judgment, order, decree, ruling, injunction, statute, law, ordinance, rule or regulation applicable to the Purchaser or any of
its Affiliates, other than in the cases of clauses (B) and (C) as would not reasonably be expected to materially and adversely affect or delay the
consummation of the Transactions to which it is a party by the Purchaser.
(c)
Consents and Approvals . No consent, approval, order or authorization of, or registration, declaration or filing with, or exemption or
review by, any Governmental Entity is required on the part of the Purchaser in connection with the execution, delivery and performance by the Purchaser
of this Agreement and the consummation by the Purchaser of the Transactions to which it is a party, except for any required filings or approvals under the
HSR Act or any foreign antitrust or competition laws, requirements or regulations in connection with the issuance of shares of Company Common Stock
upon the conversion of the Notes and any consent, approval, order, authorization, registration, declaration, filing, exemption or review the failure of
which to be obtained or made, individually or in the aggregate, would not reasonably be expected to adversely affect or delay the consummation of the
Transactions to which it is a party by the Purchaser.
22
(d)
Securities Act Representations .
(i)
`The Purchaser is an accredited investor (as defined in Rule 501 of the Securities Act) and is aware that the sale of the
Notes is being made in reliance on a private placement exemption from registration under the Securities Act. The Purchaser is acquiring the
Notes (and any shares of Company Common Stock issuable upon conversion of the Notes) for its own account, and not with a view toward, or
for sale in connection with, any distribution thereof in violation of any federal or state securities or “blue sky” law, or with any present intention
of distributing or selling such Notes (or any shares of Company Common Stock issuable upon conversion of the Notes) in violation of the
Securities Act. The Purchaser has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the
merits and risks of its investment in such Notes (and any shares of Company Common Stock issuable upon conversion of the Notes) and is
capable of bearing the economic risks of such investment. The Purchaser has been provided a reasonable opportunity to undertake and has
undertaken such investigation and has been provided with and has evaluated such documents and information as it has deemed necessary to
enable it to make an informed and intelligent decision with respect to the execution, delivery and performance of this Agreement.
(ii)
Neither the Purchaser nor any of its Affiliates is acting in concert, and neither the Purchaser nor any of its Affiliates has
any agreement or understanding, with any Person that is not an Affiliate of the Purchaser, and is not otherwise a member of a “group” (as such
term is used in Section 13(d)(3) of the Exchange Act), with respect to the Company or its securities, in each case, other than with respect to any
bona fide loan from one or more financial institutions.
(e)
Brokers and Finders . The Purchaser has not retained, utilized or been represented by, or otherwise become obligated to, any broker,
placement agent, financial advisor or finder in connection with the transactions contemplated by this Agreement whose fees the Company would be
required to pay.
(f)
Ownership of Shares . None of the Purchaser or its Affiliates Beneficially Own any shares of Company Common Stock (without
giving effect to the issuance of the Notes hereunder) other than any shares of Company Common Stock that may be owned by managing directors,
officers or other employees of SLTM or other Silver Lake management entity or general partner in their individual capacities.
(g)
No Additional Representations .
(i)
The Purchaser acknowledges that the Company does not make any representation or warranty as to any matter whatsoever
except as expressly set forth in Section 3.01 and in any certificate delivered by the Company pursuant to this Agreement, and specifically (but
without limiting the generality of the foregoing), that, except as expressly set forth in Section 3.01 and in any certificate delivered by the
Company pursuant to this Agreement, the Company makes no representation or warranty with respect to (A) any matters relating to the
Company, its business, financial condition, results of operations, prospects or otherwise, (B) any projections, estimates or budgets delivered or
made available to the Purchaser (or any of its Affiliates, officers, directors, employees or other representatives) of future revenues, results of
operations (or any component thereof), cash flows or financial condition (or any component thereof) of the Company and its Subsidiaries or (C)
the future business and operations of the Company and its Subsidiaries, and the Purchaser has not relied on or been induced by such information
or any other representations or warranties (whether express or implied or made orally or in writing) not expressly set forth in Section 3.01 and in
any certificate delivered by the Company pursuant to this Agreement.
23
(ii)
The Purchaser has conducted its own independent review and analysis of the business, operations, assets, liabilities, results
of operations, financial condition and prospects of the Company and its Subsidiaries and acknowledges the Purchaser has been provided with
sufficient access for such purposes. The Purchaser acknowledges and agrees that, except for the representations and warranties expressly set
forth in Section 3.01 and in any certificate delivered by the Company pursuant to this Agreement, (i) no person has been authorized by the
Company to make any representation or warranty relating to itself or its business or otherwise in connection with the transactions contemplated
hereby, and if made, such representation or warranty must not be relied upon by the Purchaser as having been authorized by the Company, and
(ii) any estimates, projections, predictions, data, financial information, memoranda, presentations or any other materials or information provided
or addressed to the Purchaser or any of its Affiliates or representatives are not and shall not be deemed to be or include representations or
warranties of the Company unless any such materials or information are the subject of any express representation or warranty set forth in Section
3.01 of this Agreement and in any certificate delivered by the Company pursuant to this Agreement.
ARTICLE IV
ADDITIONAL AGREEMENTS
Section 4.01. Taking of Necessary Action . Each of the parties hereto agrees to use its reasonable efforts promptly to take or
cause to be taken all action, and promptly to do or cause to be done all things necessary, proper or advisable under applicable laws and regulations (other than
waive such party’s rights hereunder) to consummate and make effective the sale and purchase of the Notes hereunder, subject to the terms and conditions hereof
and compliance with applicable law. In case at any time before or after the Closing any further action is necessary or desirable to carry out the purposes of the sale
and purchase of the Notes, the proper officers, managers and directors of each party to this Agreement shall take all such necessary action as may be reasonably
requested by, and at the sole expense of, the requesting party.
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Section 4.02. Restricted Period .
(a)
During the Restricted Period, notwithstanding any rights provided in Article V, the Purchaser shall not, without the Company’s
prior written consent, directly or indirectly, (x) sell, offer, transfer, assign, mortgage, hypothecate, gift, pledge or dispose of, enter into or agree to enter
into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, mortgage, hypothecation, gift, assignment or
similar disposition of (any of the foregoing, a “ transfer ”), any of the Notes or any shares of Company Common Stock issuable or issued upon conversion
of any of the Notes or (y) enter into or engage in any hedge, swap, short sale, derivative transaction or other agreement or arrangement that transfers to
any Third Party, directly or indirectly, in whole or in part, any of the economic consequences of ownership of the Notes or any shares of Company
Common Stock issuable or issued upon conversion of any of the Notes (such actions in clauses (x) and (y), “ Prohibited Transfers ”), other than, in the
case of clause (x) and/or clause (y), Permitted Transfers. “ Permitted Transfers ” shall mean any (i) (a) transfer of Purchaser or its Affiliates to one or
more Affiliates or other members of the Silver Lake Group or (b) a transfer of the Notes or any shares of Company Common Stock issuable or issued
upon conversion of any of the Notes to one or more Affiliates or other members of the Silver Lake Group that executes and delivers to the Company a
Joinder becoming a Purchaser party to this Agreement and a duly completed and executed IRS Form W-9 or applicable IRS Form W-8 (or any successor
form), (ii) transfer to the Company or any of its Subsidiaries, (iii) transfer to a Third Party for cash solely to the extent that all of the net proceeds of such
sale are solely used to satisfy a bona fide margin call (i.e., posted as collateral) pursuant to a Permitted Loan, or repay a Permitted Loan to the extent
necessary to satisfy a bona fide margin call on such Permitted Loan or avoid a bona fide margin call on such Permitted Loan, (iv) transfer to a Third Party
in connection with entry into a Permitted Debt Financing Transaction, (v) transfer with the prior written consent of the Company or (vi) tender of any
Company Common Stock into a Third Party Tender/Exchange Offer, as defined below, (and any related conversion of Notes to the extent required to
effect such tender or exchange) and any transfer effected pursuant to any merger, consolidation or similar transaction consummated by the Company (for
the avoidance of doubt, if such Third Party Tender/Exchange Offer does not close for any reason, the restrictions on transfer contained herein shall
continue to apply to any Company Common Stock received pursuant to the conversion of any Notes that had previously been converted to participate in
any such tender or exchange offer). “ Third Party Tender/Exchange Offer ” shall mean any tender or exchange offer made to all of the holders of
Company Common Stock by a Third Party for a number of outstanding shares of Voting Stock that, if consummated, would result in a Change in Control
solely to the extent that (x) the Board of Directors has recommended such tender or exchange offer in a Schedule 14D-9 under the Exchange Act or (y)
such tender or exchange offer is either (I) a tender or exchange offer for less than all of the outstanding shares of Company Common Stock or (II) part of
a two-step transaction and the consideration to be received in the second step of such transaction is not identical in the amount or form of consideration
(or the election of the type of consideration available to holders of Company Common Stock is not identical in the second-step of such transaction) as the
first step of such transaction. Any purported Prohibited Transfer in violation of this Section 4.02 shall be null and void ab initio. Notwithstanding the
foregoing, the Purchaser (or a controlled Affiliate of the Purchaser)
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shall be permitted to (1) mortgage, hypothecate, and/or pledge the Notes and/or the shares of Company Common Stock issuable or issued upon
conversion of the Notes in respect of one or more bona fide purpose (margin) or bona fide non-purpose loans (each, a “ Permitted Loan ”) or (2) enter into
any total return swap, asset swap or repurchase transaction with one or more banks or broker-dealers engaged in the business of financing debt securities
and similar instruments, which may or may not be secured by a pledge, hypothecation or other grant of security interest in the Notes and/or the shares of
Company Common Stock and/or related assets and/or cash, cash equivalents and/or letters of credit, including, without limitation, any transaction
pursuant to which the Purchaser or such controlled Affiliate thereof, as applicable, transfers Notes and/or shares of Company Common Stock held by it to
such bank or broker-dealer, provided that, in the case of any transaction described in this clause (2), such transaction is entered into solely for the purpose
of providing liquidity and leverage and the Purchaser or such controlled Affiliate retains 100% of the economic exposure to the underlying Notes and/or
shares of Company Common Stock, as the case may be, following any such transfer (each, a “ Permitted Debt Financing Transaction ”). Except with the
Company’s prior written consent, any Permitted Loan or Permitted Debt Financing Transaction entered into by the Purchaser or its controlled Affiliates
shall be with one or more financial institutions (or, in the case of a Permitted Debt Financing Transaction, with one or more banks or broker-dealers) and
nothing contained in this Agreement shall prohibit or otherwise restrict the ability of (x) any lender (or its securities Affiliate) or collateral agent to
foreclose upon and sell, dispose of or otherwise transfer the Notes and/or shares of Company Common Stock (including shares of Company Common
Stock issued upon conversion of the Notes following foreclosure on a Permitted Loan) mortgaged, hypothecated and/or pledged to secure the obligations
of the borrower following an event of default under a Permitted Loan or (y) any permitted counterparty to a Permitted Debt Financing Transaction to sell,
dispose of or otherwise transfer the Notes and/or shares of Company Common Stock (including shares of Company Common Stock issued upon
conversion of the Notes) purchased from Purchaser (or its controlled Affiliate) or held as a hedge in connection with an event of default by Purchaser or
its controlled Affiliate under such Permitted Debt Financing Transaction. For the avoidance of doubt, the events of default with respect to a Permitted
Debt Financing Transaction shall be credit events of the Purchaser and/or its controlled Affiliate, as obligors under such financing transaction, and other
events of default customary in margin lending and liquidity or debt leverage facilities. Notwithstanding the foregoing or anything to the contrary herein,
in the event that any lender or other creditor under a Permitted Loan transaction (including any agent or trustee on their behalf) or the permitted
counterparty in any Permitted Debt Financing Transaction or any Affiliate of the foregoing exercises any rights or remedies in respect of the Notes or the
shares of Company Common Stock issuable or issued upon conversion of the Notes or any other collateral for any Permitted Loan or Permitted Debt
Financing Transaction, as applicable, no lender, creditor, agent or trustee on their behalf or Affiliate of any of the foregoing (other than, for the avoidance
of doubt, the Purchaser or any of its Affiliates) shall be entitled to any rights or have any obligations or be subject to any transfer restrictions or limitations
hereunder (including, without limitation, the rights or benefits provided for in Section 4.06 and Section 4.07) except and to the extent for those expressly
provided for in Article V.
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(b)
Notwithstanding anything in this Agreement or elsewhere to the contrary, any sale of Notes or Company Common Stock pursuant
to Article V shall be subject to any applicable limitations set forth in this Section 4.02 and Article V but shall not be subject to any policies, procedures or
limitations (other than any applicable federal securities laws and any other applicable laws) otherwise applicable to the SL Persons with respect to trading
in the Company’s securities (other than as set forth in the definition of “ Blackout Period ”) and the Company acknowledges and agrees that such policies,
procedures or limitations applicable to the SL Persons shall not be violated by any such transfer pursuant to Article V, other than any applicable federal
securities laws and any other applicable laws.
listing of additional shares notification to NASDAQ and use its reasonable best efforts to cause the Company Common Stock issuable upon conversion of the
Notes to be approved for listing on the NASDAQ, as promptly as practicable, and in any event before the Closing.
Section 4.03. Exchange Listing . Promptly following the date hereof, the Company shall prepare and provide the applicable
Section 4.04. Securities Laws . The Purchaser acknowledges and agrees that, as of the Closing Date, the Notes (and the shares
of Company Common Stock that are issuable upon conversion of the Notes) have not been registered under the Securities Act or the securities laws of any state
and that they may be sold or otherwise disposed of only in one or more transactions registered under the Securities Act and, where applicable, such laws, or as to
which an exemption from the registration requirements of the Securities Act and, where applicable, such laws, is available. The Purchaser acknowledges that,
except as provided in Article V with respect to shares of Company Common Stock and the Notes, the Purchaser has no right to require the Company or any of its
Subsidiaries to register the Notes or the shares of Company Common Stock that are issuable upon conversion of the Notes.
Section 4.05. Lost, Stolen, Destroyed or Mutilated Securities . Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction or mutilation of any certificate for any security of the Company and, in the case of loss, theft or destruction, upon delivery of an undertaking
by the holder thereof to indemnify the Company (and, if requested by the Company, the delivery of an indemnity bond sufficient in the judgment of the Company
to protect the Company from any loss it may suffer if a certificate is replaced), or, in the case of mutilation, upon surrender and cancellation thereof, the Company
will issue a new certificate or, at the Company’s option, a share ownership statement representing such securities for an equivalent number of shares or another
security of like tenor, as the case may be.
Section 4.06. Antitrust Approval . The Company and the Purchaser acknowledge that one or more filings under the HSR Act
or foreign antitrust laws may be necessary in connection with the issuance of shares of Company Common Stock upon conversion of the Notes. The Purchaser will
promptly notify the Company if any such filing is required on the part of the Purchaser. To the extent reasonably requested, the Company, the Purchaser and any
other applicable Affiliate of the Purchaser will use reasonable efforts to cooperate in timely making or causing to be made all applications and filings under the
HSR Act or any foreign antitrust requirements in connection with the issuance of shares of Company Common Stock upon conversion of Notes held by the
Purchaser or any Affiliate of the Purchaser in a timely manner and as required by the law of the applicable jurisdiction; provided that, notwithstanding anything in
this Agreement to the contrary, the Company shall not have any responsibility or liability for failure of Purchaser or any of its Affiliates to comply with any
applicable law. For as long as there are Notes outstanding and owned by Purchaser or its Affiliates, the Company shall as promptly as reasonably practicable
provide (no more than four (4) times per calendar year) such information regarding the Company and its Subsidiaries as the Purchaser may reasonably request in
order to determine what foreign antitrust requirements may exist with respect to any potential conversion of the Notes. The Purchaser shall be responsible for the
payment of the filing fees associated with any such applications or filings.
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Section 4.07. Board Nomination; Observer; Committees .
(a)
The Company agrees to appoint to the Board of Directors as the initial Purchaser Designees effective as of the Closing (or such later
date as may be mutually agreed by the parties) (x) one (1) individual who meets the requirements set forth in the first sentence of Section 4.07(c) (such
Purchaser Designee to initially be Joseph Osnoss) and (y) one (1) individual nominated by the Purchaser who is reasonably acceptable to the Board of
Directors, in each case, by taking all necessary action to increase the size of the Board of Directors unless there otherwise is a vacancy in the Board of
Directors and in either event filling the vacancy thereby created with such individuals. The initial Purchaser Designee described in the immediately
preceding clause (x) shall be appointed as a “Class III” director and the initial Purchaser Designee described in the immediately preceding clause (y) shall
be appointed as a “Class II” director.
(i)
The Company agrees that, subject to satisfaction of the requirements set forth in the first sentence of Section 4.07(c), the
Purchaser shall have the right to nominate one (1) nominee at each meeting, or action by written consent, of the Company’s stockholders
pursuant to which individuals will be elected members to “Class III” of the Board of Directors (or at each meeting, or action by written consent,
of the Company’s stockholders pursuant to which individuals will be elected members of the Board of Directors if the Board of Directors is not
classified). Notwithstanding the foregoing, the Purchaser shall not have a right to nominate any member to the Board of Directors pursuant to
this Section 4.07(a)(i) (y) during any such time as the Silver Lake Group does not satisfy the 4% Minimum Ownership Threshold Test until such
time as the Silver Lake Group satisfies the 4% Minimum Ownership Threshold Test ( provided , that as of such time as the Silver Lake Group
satisfies the 4% Minimum Ownership Threshold Test either (A) the Purchaser has not irrevocably waived in a writing delivered to the Company
all of its board nomination rights pursuant to this Agreement or (B) the Company has not mailed to the Company’s stockholders the Definitive
Proxy Statement (or notice related thereto if the Company has elected notice and access delivery under SEC rules) unless, in each case, such
nomination right has previously terminated pursuant to clause (z) herein) and (z) from and after the date on which each of the following is
satisfied: (A) the Silver Lake Group does not satisfy the 4% Minimum Ownership Threshold Test and (B) Purchaser does not have a member of
the Board of Directors that was either appointed pursuant to Section 4.07(a)(x) or nominated pursuant to this Section 4.07(a)(i). For the
avoidance of doubt, the Purchaser’s rights under this Section 4.07(a)(i) may become effective and/or lose effect from time to time and any
number of times, subject to the limitations set forth in this Section 4.07(a)(i) (it being understood that such rights shall forever terminate upon
the satisfaction of clause (z) of the preceding sentence).
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(ii)
The Company further agrees that the Purchaser shall have the right to nominate one (1) additional nominee reasonably
acceptable to the Board of Directors at each meeting, or action by written consent, of the Company’s stockholders pursuant to which individuals
will be elected members to “Class II” of the Board of Directors (or at each meeting, or action by written consent, of the Company’s stockholders
pursuant to which individuals will be elected members of the Board of Directors if the Board of Directors is not classified). Notwithstanding the
foregoing, the Purchaser shall not have a right to nominate any member to the Board of Directors pursuant to this Section 4.07(a)(ii) (y) during
any such time as the Silver Lake Group does not satisfy the 10% Minimum Ownership Threshold Test until such time as the Silver Lake Group
satisfies the 10% Minimum Ownership Threshold Test ( provided , that as of such time as the Silver Lake Group satisfies the 10% Minimum
Ownership Threshold Test either (A) the Purchaser has not irrevocably waived in a writing delivered to the Company all of its board nomination
rights pursuant to this Agreement or (B) the Company has not mailed to the Company’s stockholders the Definitive Proxy Statement (or notice
related thereto if the Company has elected notice and access delivery under SEC rules) unless, in each case, such nomination right has previously
terminated pursuant to clause (z) herein) and (z) from and after the date on which each of the following is satisfied: (A) the Silver Lake Group
does not satisfy the 10% Minimum Ownership Threshold Test and (B) Purchaser does not have a member of the Board of Directors that was
either appointed pursuant to Section 4.07(a)(y) or nominated pursuant to this Section 4.07(a)(ii). For the avoidance of doubt, the Purchaser’s
rights under this Section 4.07(a)(ii) may become effective and/or lose effect from time to time and any number of times, subject to the
limitations set forth in this Section 4.07(a)(ii) (it being understood that such rights shall forever terminate upon the satisfaction of clause (z) of
the preceding sentence).
(iii)
It is the intent of the parties that this Section 4.07(a) comply with the applicable rules of any stock exchange upon which
the shares of Company Common Stock are listed, as the same may be amended from time to time. In furtherance of the foregoing, if
representatives of the applicable stock exchange upon which the shares of Company Common Stock are listed have informed the Company that
the 10% Minimum Ownership Threshold Test or the 4% Minimum Ownership Threshold, as applicable, fails at any time to comply with such
rules, the parties agree to negotiate in good faith to modify the 10% Minimum Ownership Threshold Test or the 4% Minimum Ownership
Threshold, as applicable, so as to comply with such rules while retaining the original intent as closely as possible so that the Purchaser preserves
its rights as originally contemplated hereby to the fullest extent possible.
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(iv)
Notwithstanding anything to the contrary contained herein, if the Company enters into a definitive agreement providing
for the consolidation or merger of the Company with or into any Person in a transaction that would, when consummated, constitute a Change in
Control (excluding for purposes of this Section 4.07(a)(iv), clauses (i), (ii) and (iv) of such definition), then, the Purchaser’s rights to designate a
Purchaser Designee under Sections 4.07(a)(i), 4.07(a)(ii) and 4.07(e) shall forever terminate upon the consummation of such Change in Control.
Subject to the terms and conditions of this Section 4.07 and applicable law, the Company agrees to include each Purchaser Designee
(b)
in its slate of nominees for election as directors of the Company at each of the Company’s meetings of stockholders or action by written consent of
stockholders pursuant to which directors of the applicable “Class” are to be elected (or at each meeting of stockholders or action by written consent of
stockholders pursuant to which directors are to be elected if the Board of Directors is not classified) and use its reasonable efforts to cause the election of
each such Purchaser Designee to the Board of Directors. The Company will be required to use the same level of efforts and provide the same level of
support as is used and/or provided for the other director nominees of the Company with respect to the applicable meeting of stockholders or action by
written consent. For the avoidance of doubt, failure of the stockholders of the Company to elect any Purchaser Designee to the Board of Directors shall
not affect the right of the Purchaser to nominate directors for election pursuant to this Section 4.07 in any future election of directors.
(c)
Each Purchaser Designee nominated pursuant to Section 4.07(a)(x) and Section 4.07(a)(i) must be a managing director, director,
officer, senior-level employee or advisor of SLTM or other Silver Lake management entity or general partner selected by the Purchaser. As a condition to
any Purchaser Designee’s appointment to the Board of Directors and nomination for election as a director of the Company at the Company’s annual
meetings of stockholders (i) the Purchaser and each Purchaser Designee must in all material respects provide to the Company (1) all information
reasonably requested by the Company that is required to be or customarily disclosed for directors, candidates for directors, and their affiliates and
representatives in a proxy statement or other filings under applicable law or regulation or stock exchange rules or listing standards, in each case, relating
to their nomination or election as a director of the Company or the Company’s operations in the ordinary course of business and (2) information
reasonably requested by the Company in connection with assessing eligibility, independence and other criteria applicable to directors or satisfying
compliance and legal or regulatory obligations, in each case, relating to their nomination or election as a director of the Company or the Company’s
operations in the ordinary course of business, with respect to the Purchaser, its Affiliates and the applicable Purchaser Designee, (ii) the Purchaser
Designee must submit to a customary background check consistent with what is required by the Company with respect to members of the Board of
Directors generally, and (iii) the Purchaser Designee must not serve as a board member or officer of any Person who has a material portion of their
business in direct competition with the Company (as determined mutually by the parties acting reasonably and in good faith) of the Company or its
Subsidiaries. The Company will make all information requests pursuant to this Section 4.07(c) in good faith in a timely manner that allows the Purchaser
and each Purchaser Designee a reasonable amount of time to provide such information, and will cooperate in good faith with the Purchaser and each
Purchaser Designee in connection with their efforts to provide the requested information.
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(d)
For so long as a SL Person or Purchaser Designee is serving or participating on the Board of Directors, (i) the Company shall not
implement or maintain any trading policy, equity ownership guidelines (including with respect to the use of Rule 10b5-1 plans and preclearance or
notification to the Company of any trades in the Company’s securities) or similar guideline or policy with respect to the trading of securities of the
Company that applies to the Purchaser or its Affiliates (including a policy that limits, prohibits, restricts Purchaser or its Affiliates from entering into any
hedging or derivative arrangements), in each case other than with respect to any SL Person or Purchaser Designee solely in his or her individual capacity,
except as provided herein, (ii) any share ownership requirement for any Purchaser Designee serving on the Board of Directors will be deemed satisfied by
the securities owned by the Purchaser and/or its Affiliates and under no circumstances shall any of such policies, procedures, processes, codes, rules,
standards and guidelines impose any restrictions on the Purchaser’s or its Affiliates’ transfers of securities pursuant to Article V (except as otherwise
provided therein with respect to Blackout Periods) and (iii) under no circumstances shall any policy, procedure, code, rule, standard or guideline
applicable to the Board of Directors be violated by any Purchaser Designee (x) accepting an invitation to serve on another board of directors of a company
whose principal line(s) of business do not compete with the principal line(s) of business of the Company or failing to notify an officer or director of the
Company prior to doing so, or (y) receiving compensation from the Purchaser or any of its Affiliates, or (z) failing to offer his or her resignation from the
Board of Directors except as otherwise expressly provided in this Agreement or pursuant to any majority voting policy adopted by the Board of Directors,
and, in each case of (i), (ii) and (iii), it is agreed that any such policies in effect from time to time that purport to impose terms inconsistent with this
Section 4.07 shall not apply to the extent inconsistent with this Section 4.07 (but shall otherwise be applicable to the Purchaser Designee).
(e)
Subject to the terms and conditions of this Section 4.07, if a vacancy on the Board of Directors is created as a result of a Purchaser
Designee’s death, resignation, disqualification or removal, in each case for whatever reason, or if the Purchaser desires to nominate a different individual
to replace any then-existing Purchaser Designee, then, at the request of the Purchaser, the Purchaser and the Company (acting through the Board of
Directors) shall work together in good faith to fill such vacancy or replace such nominee as promptly as reasonably practical with a replacement Purchaser
Designee subject to the terms and conditions hereof, and thereafter such individual shall as promptly as reasonably practical be appointed to the Board of
Directors to fill such vacancy and/or be nominated as a Company nominee as a “Purchaser Designee” pursuant to this Section 4.07 (as applicable). In the
event of an existing Purchaser Designee being replaced by the Purchaser as contemplated by the immediately preceding sentence, such right will only
apply if the existing Purchaser Designee resigns concurrently with the appointment of his or her replacement. For so long as the Board of Directors is
classified, such replacement Purchaser Designee shall be nominated to the same “Class” of directors as the prior Purchaser Designee or whichever
“Class” is furthest from being required to seek re-election.
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(f)
For so long as the Purchaser has the right to nominate a member of the Board of Directors pursuant to this Section 4.07, the
Purchaser shall have the right to designate one (1) observer (including any substitute observer designated by the Purchaser) (the “ SL Observer ”) who
shall be entitled to attend (in person or telephonically) all meetings of the Board of Directors and any Committee thereof (other than any executive
sessions of such meetings) and to receive copies of all notices, minutes, consents, agendas and other materials distributed to the Board of Directors and
any Committee thereof; provided , however , if the Company believes in good faith that excluding any such materials (or portions thereof) from the SL
Observer is necessary (x) to preserve attorney-client privilege, (y) to protect trade secrets or (z) due to an actual or potential conflict of interest, such
materials (or portions thereof) may be withheld from the SL Observer and the SL Observer may be excluded from any meeting or portion thereof related
to such matters upon reasonable prior notice to the SL Observer (to the extent practicable). The SL Observer shall be a managing director, officer, advisor
or employee of SLTM or other Silver Lake management entity or general partner selected by the Purchaser. Except as otherwise set forth herein, the SL
Observer may participate in discussions of matters brought to the Board of Directors or any Committee thereof; provided , that the SL Observer shall have
no voting rights with respect to actions taken or elected not to be taken by the Board of Directors or any Committee thereof and the SL Observer shall not
owe any fiduciary duty to the Company, its Subsidiaries or the holders of any class or series of Company securities. If the SL Observer is unable to attend
any meeting of the Board of Directors or a Committee thereof, the Purchaser shall have the right to designate a substitute SL Observer upon reasonable
prior written notice to the Board of Directors or such Committee. Any SL Observer shall be subject to the terms of the New Confidentiality Agreement.
(g)
For so long as the Purchaser is entitled to designate a Purchaser Designee who meets the Independence Requirements, each
committee of the Board of Directors (each, a “ Committee ”) shall include as a member at least one (1) Purchaser Designee who meets the Independence
Requirements. As used herein, “ Independence Requirements ” means any director and committee member independence requirements set forth pursuant
to applicable law and the applicable rules and regulations of any stock exchange on which the Company Common Stock is listed, including the
independence requirements established by the SEC, it being understood that the relationship of any Purchaser Designee with the Silver Lake Group will
not, by itself, prevent any such Purchaser Designee from satisfying the Independence Requirements. Notwithstanding the foregoing, if the Board of
Directors shall establish a Committee to consider (i) a proposed contract, transaction or other arrangement between the Purchaser (or any of its Affiliates),
on the one hand, and the Company or any of its Subsidiaries, on the other hand, (ii) the enforcement or waiver of the rights of the Company or any of its
Subsidiaries under any agreement between the Purchaser (or any of its Affiliates), on the one hand, and the Company or any of its Subsidiaries, on the
other hand, or (iii) a matter which the Board of Directors determines in good faith presents an actual or potential conflict of interest for the Purchaser
Designees, then the Purchaser Designees (and the SL Observer) may be excluded from participation in such Committee (and any portion of a Board
meeting at which such matters may be discussed by the full Board of Directors upon reasonable prior notice to the Purchaser Designees and the SL
Observer (to the extent practicable)).
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(h)
To the fullest extent permitted by the DGCL and subject to any express agreement that may from time to time be in effect, the
Company agrees that any Purchaser Designee, SL Person, Silver Lake Group and any SL Affiliate or any portfolio company thereof (collectively, “
Covered Persons ”) may, and shall have no duty not to, (i) invest in, carry on and conduct, whether directly, or as a partner in any partnership, or as a joint
venturer in any joint venture, or as an officer, director, stockholder, equityholder or investor in any person, or as a participant in any syndicate, pool, trust
or association, any business of any kind, nature or description, whether or not such business is competitive with or in the same or similar lines of business
as the Company or any of its Subsidiaries, (ii) do business with any client, customer, vendor or lessor of any of the Company or its Affiliates; and/or (iii)
make investments in any kind of property in which the Company may make investments. To the fullest extent permitted by the DGCL, the Company
renounces any interest or expectancy to participate in any business or investments of any Covered Person as currently conducted or as may be conducted
in the future, and waives any claim against a Covered Person and shall indemnify a Covered Person against any claim that such Covered Person is liable
to the Company or its stockholders for breach of any fiduciary duty solely by reason of such person’s participation in any such business or investment.
The Company shall pay in advance any reasonable out-of-pocket expenses incurred in defense of such claim as provided in this provision. Except as set
forth below, the Company agrees that in the event that a Covered Person acquires knowledge of a potential transaction or matter which may constitute a
corporate opportunity for both (x) the Covered Person and (y) the Company or its Subsidiaries, the Covered Person shall not have any duty to offer or
communicate information regarding such corporate opportunity to the Company or its Subsidiaries. To the fullest extent permitted by the DGCL, the
Company hereby renounces any interest or expectancy in any potential transaction or matter of which the Covered Person acquires knowledge, except for
any corporate opportunity which is expressly offered to a Covered Person in writing stating that such offer is intended solely for such Covered Person in
his or her capacity as a member of the Board of Directors, and waives any claim against each Covered Person and shall indemnify a Covered Person to
the extent permitted by the DGCL against any claim, that such Covered Person is liable to the Company or its stockholders for breach of any fiduciary
duty solely by reason of the fact that such Covered Person (A) pursues or acquires any corporate opportunity for its own account or the account of any
Affiliate or other person, (B) directs, recommends, sells, assigns or otherwise transfers such corporate opportunity to another person or (C) does not
communicate information regarding such corporate opportunity to the Company; provided , that, in each such case, any corporate opportunity which is
expressly offered to a Covered Person in writing stating that such offer is intended solely for such Covered Person in his or her capacity as a member of
the Board of Directors shall belong to the Company. The Company shall pay in advance any reasonable out-of-pocket expenses incurred in defense of
such claim as provided in this provision, except to the extent that it is determined by a final, non-appealable order of a Delaware court having competent
jurisdiction (or any other judgment which is not appealed in the applicable time) that (i) a Covered Person has breached this Section 4.07(h) or (ii) an SL
Director has breached its fiduciary duties to the Company, in which case any such advanced expenses shall be promptly reimbursed to the Company.
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(i)
For the avoidance of doubt, without limiting any other rights of the Purchaser or its Affiliates under this Agreement, each SL Person
and Purchaser Designee shall be entitled to receive Board fees and compensation and expense reimbursement according to the Company’s standard
policies with respect to service on the Board of Directors or any Committee (for this purpose, an SL Observer shall be treated the same as an SL Director,
except such SL Observer shall not be entitled to receive any Board fees or compensation).
For the avoidance of doubt, notwithstanding anything in this Agreement or the Notes to the contrary, transferees of the Notes and/or
the shares of Company Common Stock (other than Affiliates of the Purchaser who sign a Joinder) shall not have any rights pursuant to this Section 4.07.
(j)
Section 4.08. VCOC Letter . The Company shall deliver to the Purchaser at the Closing and from time to time any Affiliate of
the Purchaser to whom the Purchaser’s rights and obligations under this Agreement are assigned in accordance with this Agreement a letter substantially consistent
with the form thereof previously furnished by the Purchaser (the “ VCOC Letter ”).
Section 4.09. Financing Cooperation .
(a)
If requested by the Purchaser, the Company will provide the following cooperation in connection with the Purchaser obtaining any
Permitted Loan or Permitted Debt Financing Transaction: (i) entering into an issuer agreement (an “Issuer Agreement”) with each lender in the form
attached hereto as Exhibit C, and subject to the consent of the Company (which will not be unreasonably withheld or delayed), with such changes thereto
as are requested by such lender, (ii) if so requested by such lender or counterparty, as applicable, re-registering the pledged Notes and/or shares of
Company Common Stock to be issued upon conversion of the Notes, as applicable, in the name of the relevant lender, counterparty, custodian or similar
party to a Permitted Loan or Permitted Debt Financing Transaction, with respect to Permitted Loans solely as securities intermediary and only to the
extent such Purchaser or its Affiliates continues to beneficially own such pledged Notes and/or shares of Company Common Stock, (iii) entering into
customary triparty agreements with each lender and the Purchaser relating to the delivery of the Notes to the relevant lender for crediting to the relevant
collateral accounts upon funding of the loan and payment of the purchase price including a right for such lender as a third party beneficiary of the
Company’s obligation under Article II to issue the Notes upon payment of the purchase price therefor in accordance with the terms of this Agreement
(including satisfaction of the conditions set forth in Section 2.02(d)) and/or (iv) such other cooperation and assistance as the Purchaser may reasonably
request that will not unreasonably disrupt the operation of the Company’s business.
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(b)
Anything in Section 4.09(a) to the contrary notwithstanding, the Company’s obligation to deliver an Issuer Agreement in
connection with a Permitted Loan is conditioned on (x) the Purchaser delivering to the Company a copy of the loan agreement for the Permitted Loan to
which the Issuer Agreement relates and (y) the Purchaser certifying to the Company in writing that (A) the loan agreement with respect to which the
Issuer Agreement is being delivered constitutes a Permitted Loan being entered into in accordance with this Agreement, the Purchaser has pledged the
Notes and/or the underlying shares of Company Common Stock as collateral to the lenders under such Permitted Loan and that the execution of such
Permitted Loan and the terms thereof do not violate the terms of this Agreement, (B) to the extent applicable, whether the registration rights under Article
V are being assigned to the lenders under that Permitted Loan, (C) that an event of default (as contemplated by the Margin Loan Agreement as defined in
the Issuer Agreement) constitutes the only circumstances under which the lenders under the Permitted Loan may foreclose on the Notes and/or the
underlying shares of Company Common Stock and a transfer to a Third Party for cash constitutes the only circumstances under which the Purchaser may
sell the Notes and/or the underlying shares of Company Common Stock in order to satisfy a margin call or repay a Permitted Loan, in each case to the
extent necessary to satisfy or avoid a bona fide margin call on such Permitted Loan and that such provisions do not violate the terms of this Agreement
and (D) the Purchaser acknowledges and agrees that the Company will be relying on such certificate when entering into the Issuer Agreement and any
inaccuracy in such certificate will be deemed a breach of this Agreement. Purchaser acknowledges and agrees that the statements and agreements of the
Company in an Issuer Agreement are solely for the benefit of the applicable lenders party thereto and that in any dispute between the Company and the
Purchaser under this Agreement the Purchaser shall not be entitled to use the statements and agreements of the Company in an Issuer Agreement against
the Company.
(c)
The Company’s obligation to deliver an Issuer Agreement in connection with a Permitted Debt Financing Transaction is
conditioned on (x) the Purchaser delivering to the Company a copy of the agreement for such Permitted Debt Financing Transaction and (y) the Purchaser
certifying to the Company in writing that (A) the counterparty to such Permitted Debt Financing Transaction is a bank or broker-dealer that is engaged in
the business of financing debt securities and similar instruments, (B) the execution of such Permitted Debt Financing Transaction and the terms thereof do
not violate the terms of this Agreement, (C) to the extent applicable, whether the registration rights under Article V are being assigned to the counterparty
under that Permitted Debt Financing Transaction, (D) that an event of default (which shall be only credit events of the Purchaser and/or its controlled
Affiliate and other events of default customary in margin lending and liquidity or debt leverage facilities) by the Purchaser or its controlled Affiliate
constitutes the only circumstances under which the counterparty or counterparties under the Permitted Debt Financing Transaction may exercise rights
and remedies to transfer to itself or sell, during the Restricted Period, the Notes and/or the underlying shares of Company Common Stock purchased from
Purchaser (or its controlled Affiliate) or held as a hedge.
(d)
Upon request by the Purchaser, the Company shall consider in good faith any amendments to this Agreement, the Indenture or the
Notes proposed by the Purchaser necessary to facilitate the consummation of a Permitted Loan transaction or Permitted Debt Financing Transaction, and
the Company shall consent to any such amendment that is not adverse in any respect to the interests of the Company (as determined in good faith by the
Company or the Board of Directors, excluding any SL Directors), it being acknowledged that the registration of the Notes for resale by the Target
Registration Date is not adverse to the interests of the Company.
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Section 4.10. Certain Tax Matters . Notwithstanding anything herein to the contrary, the Company shall have the right to
deduct and withhold from any payment or distribution made with respect to the Notes (or the issuance of shares of Company Common Stock upon conversion of
the Notes) such amounts as are required to be deducted or withheld with respect to the making of such payment or distribution (or issuance) under any applicable
Tax law. To the extent that any amounts are so deducted or withheld, such deducted or withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the person in respect of which such deduction or withholding was made. In the event the Company previously remitted any amounts to a
Governmental Entity on account of Taxes required to be deducted or withheld in respect of any payment or distribution (or deemed distribution) on any Notes, the
Company shall be entitled to offset any such amounts against any amounts otherwise payable in respect of such Notes (or the issuance of shares of Company
Common Stock upon conversion of the Notes).
Section 4.11. Section 16 Matters . If the Company becomes a party to a consolidation, merger or other similar transaction, or if
the Company proposes to take or omit to take any other action under Section 4.16 (including granting to the Purchaser the right to participate in any issuance of
Additional Securities) or if there is any event or circumstance that may result in the Silver Lake Group and/or any SL Person being deemed to have made a
disposition or acquisition of equity securities of the Company or derivatives thereof for purposes of Section 16 of the Exchange Act (including the purchase by the
Purchaser of any Additional Securities under Section 4.16), and if any SL Person is serving or participating on the Board of Directors at such time or has served on
the Board of Directors during the preceding six months, then upon request of the Purchaser or any Purchaser Designee, (i) the Board of Directors or a Committee
composed solely of two or more “non-employee directors” as defined in Rule 16b-3 of the Exchange Act will pre-approve such acquisition or disposition of equity
securities of the Company or derivatives thereof for the express purpose of exempting the Silver Lake Group’s or any SL Person’s interests (in each case, to the
extent such persons may be deemed to be a director or “directors by deputization”) in such transaction from Section 16(b) of the Exchange Act pursuant to Rule
16b-3 thereunder to the extent applicable and (ii) if the transaction involves (A) a merger or consolidation to which the Company is a party and the Company
Common Stock is, in whole or in part, converted into or exchanged for equity securities of a different issuer, (B) a potential acquisition or deemed acquisition, or
disposition or deemed disposition, by the Silver Lake Group or any SL Person of equity securities of such other issuer or derivatives thereof and (C) an Affiliate or
other designee of the Purchaser or its Affiliates will serve on the board of directors (or its equivalent) of such other issuer, then the Company shall require that such
other issuer pre-approve any such acquisitions of equity securities or derivatives thereof for the express purpose of exempting the interests of the Silver Lake
Group’s and any SL Person’s (in each case, to the extent such persons may be deemed to be a director or “directors by deputization” of such other issuer) in such
transactions from Section 16(b) of the Exchange Act pursuant to Rule 16b-3 thereunder to the extent applicable.
Section 4.12. D&O Indemnification / Insurance Priority Matters . Each Purchaser Designee who serves as a member of the
Board of Directors (including an SL Director) (collectively, the “ Section 4.12 Persons ”) shall be eligible to enter into an indemnification agreement consistent
with the form thereof previously furnished by the Company. The Company acknowledges and agrees that any Section 4.12 Person who is a partner, member,
employee, advisor or consultant of any member of the Silver Lake Group may have certain rights to indemnification, advancement of expenses and/or insurance
provided by the applicable member of the Silver Lake Group (collectively, the “ Silver Lake Indemnitors ”). The Company acknowledges and agrees that the
Company shall be the indemnitor of first resort with respect to any indemnification, advancement of expenses and/or insurance provided in the Company’s
certificate of incorporation, bylaws and/or indemnification agreement (including Section 5.05 hereof) to any Section 4.12 Person, in his or her capacity as a
director of the Company or any of its subsidiaries, as applicable (such that the Company’s obligations to such indemnitees in their capacities as directors are
primary and any obligation of the Silver Lake Indemnitors to advance expenses or to provide indemnification or insurance for the same expenses or liabilities
incurred by such indemnitees are secondary). Such indemnitees shall, in their capacities as directors, be entitled to all the rights to indemnification, advancement of
expenses and entitled to insurance to the extent provided under (i) the certificate of incorporation and/or bylaws of the Company as in effect from time to time
and/or (ii) such other agreement (including Section 5.05 hereof), if any, between the Company and such indemnitees, without regard to any rights such indemnitees
may have against the Silver Lake Indemnitors. No advancement or payment by the Silver Lake Indemnitors on behalf of such indemnitees with respect to any
claim for which such indemnitees have sought indemnification, advancement of expenses or insurance from the Company in their capacities as directors shall
affect the foregoing and the Silver Lake Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of
the rights of recovery of such indemnitees against the Company.
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Section 4.13. Conversion Price Matters . The Conversion Price on the Closing Date will equal $42.00, and the Conversion
Rate on the Closing Date (the “ Initial Conversion Rate ”) shall be the quotient (rounded to four decimal places) of $1,000 divided by such Conversion Price;
provided , that if any event shall occur between the date hereof and the Closing Date (inclusive) that would have resulted in an adjustment to the Conversion Rate
pursuant to Article 10 of the Indenture if the Notes had been issued and outstanding since the date hereof, the Initial Conversion Rate and the share amounts in the
table of “Make-Whole Applicable Increases” set forth in Section 10.14(b) of the Indenture shall be adjusted in the same manner as would have been required by
Article 10 of the Indenture if the Notes had been issued and outstanding since the date hereof and the Conversion Price, Initial Conversion Rate and “Make-Whole
Applicable Increases” table included in the Indenture shall reflect such adjustment.
Section 4.14. Transfers of SL Securities that are Global Securities . The Purchaser agrees that (i) except in the case of a
foreclosure under a Permitted Loan pursuant to which the lender thereunder is obligated to exchange the foreclosed interest in SL Securities that are Global
Securities for a Global Security other than an SL Security, Purchaser and its Affiliates will only transfer their interests in SL Securities that are Global Securities to
a Third Party if such Person receives such transferred interest in a Global Security other than an SL Security and (ii) Purchaser and its Affiliates may only transfer
an interest in SL Securities that are Global Securities to an Affiliate of Purchaser if such Affiliate continues to hold such transferred interest in Global Securities
that are SL Securities and not any other Global Security.
increase the par value per share of the Company Common Stock to above $0.0001 per share.
Section 4.15. Par Value . While the Purchaser owns any Notes, the Company will not, without the consent of the Purchaser,
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Section 4.16. Participation Rights .
(a)
Until the earlier of (i) such time as there is no SL Director serving on the Board of Directors and the Purchaser is no longer entitled
to designate a director nominee pursuant to Section 4.07 and (ii) the eighteen (18) month anniversary of the Closing Date, whenever the Company or any
of its Subsidiaries proposes to issue, directly or indirectly (including, through any underwriters) any Additional Securities that are not Excluded Securities
(such proposed issuance, an “Additional Investment”), the Company will consult with the Purchaser reasonably in advance of undertaking such issuance
and, if and only if the Purchaser notifies the Company within five (5) Business Days following such consultation of its preliminary interest in receiving an
offer to participate in such issuance (which indication shall not be binding upon the Purchaser), the Company will provide written notice of such proposed
issuance to the Purchaser (an “Offer Notice”) at least ten (10) Business Days prior to the proposed date of the purchase agreement, investment agreement
or other agreement (the “Additional Investment Agreement”). Each Offer Notice shall include the applicable purchase price per security for such
Additional Investment, the aggregate amount of the proposed Additional Investment and the other material terms and conditions of such Additional
Investment, including the proposed closing date. The Offer Notice shall constitute the Company’s offer to issue such Additional Investment to the
Purchaser substantially on the terms and conditions specified in the Offer Notice, which offer shall be irrevocable for five (5) Business Days following the
date the Offer Notice is received by the Purchaser (the “Participation Notice Period”). The Purchaser may elect to purchase up to all of the Additional
Securities on the terms proposed; provided that to the extent the issuance of Additional Securities to the Purchaser would result in a Stockholder Approval
Requirement, the Purchaser may elect to purchase up to an amount of Additional Securities that would not cause the Stockholder Approval Requirement.
If the Company believes the issuance of Additional Securities to the Purchaser would result in a Stockholder Approval Requirement, the Company shall
notify the Purchaser reasonably in advance of undertaking such issuance, and the Company will consider in good faith any proposed revisions made by
the Purchaser to the terms of the proposed Additional Investment that (i) would only be applicable to the Purchaser, (ii) would not result in the Company
needing to obtain stockholder approval in connection with the Additional Investment as a result of the issuance of Additional Securities to the Purchaser
and (iii) are not, in the aggregate, materially adverse to the terms of the Additional Investment. If the Purchaser elects to purchase all or a portion of such
Additional Investment specified in the Offer Notice, the Purchaser shall deliver to the Company during the Participation Notice Period a written notice
stating the aggregate amount of the proposed Additional Investment that the Purchaser offers to purchase (the “Participation Notice”). Notwithstanding
the foregoing, in the event that the Company is seeking stockholder approval for any Third Party in connection with the Additional Investment or for any
other matter that may be needed to consummate the proposed issuance of Additional Securities, then the Company shall also seek stockholder approval in
connection with the issuance of the Additional Securities to the Purchaser.
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(b)
If the Purchaser does not deliver a Participation Notice during the Participation Notice Period (or if, prior to the expiration of the
Participation Notice Period, the Purchaser delivers to the Company a written notice declining to participate in the Additional Investment specified in the
Offer Notice), the Purchaser shall be deemed to have waived its right to participate in such Additional Investment under this Section 4.16 and the
Company shall thereafter be free to issue during the sixty (60) Business Day period following the expiration of the Participation Notice Period (or the
receipt by the Company of a written notice from the Purchaser declining to participate in such Additional Investment) such proposed Additional
Investment to one or more Third Parties on terms and conditions no more favorable to any such Third Party than those set forth in the Offer Notice, unless
otherwise agreed by the Purchaser and the Company. Any obligation of the Company and the Purchaser to participate in any Additional Investment shall
in all cases be conditioned on applicable antitrust clearance or approval under antitrust or other applicable law, and the closing date for such Additional
Investment by the Purchaser shall not occur until the later of (x) at least fifteen (15) Business Days after the Purchaser’s receipt of such clearance or
approval or the Purchaser’s waiver of such conditions and (y) at least eleven (11) Business Days after the Company and the Purchaser enter into the
Additional Investment Agreement in respect of such Additional Investment, in each case of (x) and (y), unless otherwise agreed by the Purchaser and the
Company. The Purchaser may from time to time designate one or more of its Affiliates through which the participation right in this Section 4.16 may be
exercised.
(c)
The issuance of “ Additional Securities ” means the issuance of any equity security, or instrument convertible into or exchangeable
for any equity security, of the Company or any of its Subsidiaries, or the granting of any option, warrant, commitment or right by the Company or any of
its Subsidiaries with respect to any of the foregoing. The issuance of “ Excluded Securities ” means any issuance of (i) Additional Securities as initial
and/or deferred consideration to the selling Persons in an acquisition by the Company or its Subsidiaries (including, for the avoidance of doubt, whether
structured as a merger, consolidation, asset or stock purchase, or other similar transaction), (ii) Additional Securities to a third-party financial institution
in connection with a bona fide borrowing by the Company or its Subsidiaries, (iii) Additional Securities to the Company’s directors, employees, advisors
or consultants (including as a result of the exercise of any option to subscribe for, purchase or otherwise acquire shares of Company Common Stock or
upon the vesting or delivery of any award of restricted stock units (including performance-based restricted stock units) that corresponds to Company
Common Stock and/or an option to subscribe for, purchase or otherwise acquire shares of Company Common Stock, including under the Company’s
employee stock purchase plan), (iv) Additional Securities by a wholly-owned Subsidiary of the Company to the Company or another wholly-owned
Subsidiary of the Company, (v) Additional Securities in connection with any stock split, stock combination, stock dividend, distribution or
recapitalization, (vi) Additional Securities in a bona fide underwritten public offering (including a marketed “Rule 144A” offering of debt securities to
accredited investors through one or more initial purchasers and hedging activities related thereto), (vii) Additional Securities issued upon the conversion
of the notes described in the 2013 Indenture or the exercise of any warrants outstanding as of the date of this Agreement, and (viii) Additional Securities
issued in connection with a strategic partnership or commercial arrangement, other than (x) with a private equity firm or similar financial institution or (y)
an issuance whose primary purpose is the provision of financing. If the Purchaser elects to purchase the Additional Securities pursuant to this Section
4.16, the Purchaser, at its expense, shall make any filings required in connection with such participation under antitrust or other applicable law promptly
following the delivery to the Company of the corresponding Participation Notice and shall use reasonable efforts to obtain applicable antitrust clearance
and/or approval under antitrust or other applicable laws.
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(d)
Notwithstanding anything to the contrary contained herein, if the Company enters into a definitive agreement providing for the
consolidation or merger of the Company with or into any Person in a transaction that would, when consummated, constitute a Change in Control
(excluding for purposes of this Section 4.16, clauses (i), (ii) and (iv) of such definition), then, the Purchaser’s rights under this Section 4.16 shall forever
terminate upon the consummation of such Change in Control.
Section 4.17. Conduct of Business . The Company agrees that, prior to the earlier of the Closing Date and the termination of
this Agreement pursuant to Section 2.03, without the prior written consent of Purchaser, the Company will not, and will cause each of the Subsidiaries not to, take
any action or fail to take any action that would violate Section 4.07 of the Indenture (assuming, for the purpose of determining compliance with this Section 4.17,
that the Notes were issued on the date hereof).
Section 4.18. Standstill .
(a)
The Purchaser agrees that, during the Standstill Period, it shall not, and shall cause each of its Affiliates not to, directly or indirectly,
in any manner, alone or in concert with others take any of the following actions without the prior consent of the Company (acting through a resolution of
the Company’s directors not including any SL Directors):
(i)
make, engage in, or in any way participate in, directly or indirectly, any “solicitation” of proxies (as such terms are used in
the proxy rules of the SEC but without regard to the exclusion set forth in Rule 14a-1(l)(2)(iv)) or consents to vote, or seek to advise, encourage
or influence any person with respect to the voting of any securities of the Company for the election of individuals to the Board of Directors or to
approve any proposals submitted to a vote of the stockholders of the Company that have not been authorized and approved, or recommended for
approval, by the Board of Directors, or become a “participant” in any contested “solicitation” (as such terms are defined or used under the
Exchange Act) for the election of directors with respect to the Company, other than a “solicitation” or acting as a “participant” in support of all
of the nominees of the Board of the Directors at any stockholder meeting, or make or be the proponent of any stockholder proposal (pursuant to
Rule 14a-8 under the Exchange Act or otherwise);
(ii)
form, join, encourage, influence, advise or in any way participate in any “group” (as such term is defined in Section 13(d)
(3) of the Exchange Act) with any persons who are not its Affiliates with respect to any securities of the Company or otherwise in any manner
agree, attempt, seek or propose to deposit any securities of the Company or any securities convertible or exchangeable into or exercisable for any
such securities in any voting trust or similar arrangement, or subject any securities of the Company to any arrangement or agreement with
respect to the voting thereof, except as expressly permitted by this Agreement;
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(iii)
acquire, offer or propose to acquire, or agree to acquire, directly or indirectly, whether by purchase, tender or exchange
offer, through the acquisition of control of another person, by joining a partnership, limited partnership, syndicate or other group (including any
group of persons that would be treated as a single “person” under Section 13(d) of the Exchange Act), through swap or hedging transactions or
otherwise, any securities of the Company or any rights decoupled from the underlying securities that would result in the Purchaser (together with
its Affiliates), having Beneficial Ownership of more than 19.9% in the aggregate of the shares of the Company Common Stock outstanding at
such time (assuming all the Notes are converted), excluding any issuance by the Company of shares of Company Common Stock or options,
warrants or other rights to acquire Company Common Stock (or the exercise thereof) to any SL Director as compensation for their membership
on the Board of Directors; provided that nothing herein will require any Notes or shares of Company Common Stock to be sold to the extent the
Purchaser and its Affiliates, collectively, exceeds the ownership limit under this paragraph as the result of a share repurchase or any other
Company actions that reduces the number of outstanding shares of Company Common Stock. For purposes of this Section 4.18(a)(iii), no
securities Beneficially Owned by a portfolio company of the Purchaser or its Affiliates will be deemed to be Beneficially Owned by Purchaser or
any of its Affiliates only so long as (x) such portfolio company is not an Affiliate of the Purchaser for purposes of this Agreement, (y) neither the
Purchaser nor any of its Affiliates has encouraged, instructed, directed, supported, assisted or advised, or coordinated with, such portfolio
company with respect to the acquisition, voting or disposition of securities of the Company by the portfolio company and (z) neither the
Purchaser or any of its Affiliates is a member of a group (as such term is defined in Section 13(d)(3) of the Exchange Act) with that portfolio
company with respect to any securities of the Company;
(iv)
effect or seek to effect, offer or propose to effect, cause or participate in, or in any way assist or facilitate any other person
to effect or seek, offer or propose to effect or participate in, any tender or exchange offer, merger, consolidation, acquisition, scheme of
arrangement, business combination, recapitalization, reorganization, sale or acquisition of all or substantially all assets, liquidation, dissolution
or other extraordinary transaction involving the Company or any of its Subsidiaries or joint ventures or any of their respective securities (each,
an “ Extraordinary Transaction ”), or make any public statement with respect to an Extraordinary Transaction; provided , however , that this
clause shall not preclude the tender by the Purchaser or any of its Affiliates of any securities of the Company into any Third Party
Tender/Exchange Offer (and any related conversion of Notes to the extent required to effect such tender) or the vote by the Purchaser or any of
its Affiliates of any voting securities of the Company with respect to any Extraordinary Transaction in accordance with the recommendation of
the Board of Directors;
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(v)
(A) call or seek to call any meeting of stockholders of the Company, including by written consent, (B) seek representation
on the Board of Directors, except as expressly set forth herein, (C) seek the removal of any member of the Board of Directors (other than a
Purchaser Designee in accordance with Section 4.07), (D) solicit consents from stockholders or otherwise act or seek to act by written consent
with respect to the Company, (E) conduct a referendum of stockholders of the Company or (F) make a request for any stockholder list or other
Company books and records, whether pursuant to Section 220 of the DGCL or otherwise;
(vi)
take any action in support of or make any proposal or request that constitutes: (A) controlling or changing the Board of
Directors or management of the Company, including any plans or proposals to change the number or term of directors or to fill any vacancies on
the Board of Directors, (B) any material change in the capitalization or dividend policy of the Company, or (C) any other material change in the
Company’s management, business or corporate structure (except pursuant to any action or transaction permitted by Section 4.18(a)(iv));
(vii)
(A) seeking to have the Company waive or make amendments or modifications to the Company’s certificate of
incorporation or bylaws, or other actions that may impede or facilitate the acquisition of control of the Company by any person, (B) causing a
class of securities of the Company to be delisted from, or to cease to be authorized to be quoted on, any securities exchange; or (C) causing a
class of equity securities of the Company to become eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act;
(viii)
make any public disclosure, announcement or statement regarding any intent, purpose, plan or proposal with respect to
the Board of Directors, the Company, its management, policies or affairs, any of its securities or assets or this Agreement that is inconsistent
with the provisions of this Agreement; or
(ix)
enter into any discussions, negotiations, agreements or understandings with any Third Party with respect to any of the
foregoing, or advise, assist, knowingly encourage or seek to persuade any Third Party to take any action or make any statement with respect to
any of the foregoing.
(b)
The foregoing provisions of Section 4.18(a) shall not be deemed to prohibit (i) any action that may be taken by any Purchaser
Designee acting solely as a director of the Company consistent with his fiduciary duties as a director of the Company if such action does not include or
result in any public announcement or disclosure by such Purchaser Designee, the Purchaser or any of its Affiliates, (ii) the Purchaser or any of its
Affiliates or their respective directors, executive officers, partners, employees, managing members, advisors or agents (acting in such capacity) from
communicating on a confidential basis with the Company’s directors, officers or advisors or (iii) the Purchaser or any of its Affiliates from (A) making a
confidential proposal to the Company or the Board of Directors for a negotiated transaction with the Company involving a Change in Control, (B)
pursuing and entering into any such transaction with the Company and (C) taking any actions in furtherance of the foregoing.
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(c)
Notwithstanding the foregoing provisions of Section 4.18(a) or anything in this Agreement to the contrary, the Purchaser and its
Affiliates shall not be restricted from (i) acquiring securities with the prior written consent of the Company, (ii) acquiring securities pursuant to Section
4.16, (iii) participating in rights or securities offerings conducted by the Company, (iv) receiving stock dividends or similar distributions made by the
Company, (v) tendering Company Common Stock as permitted by Section 4.02 or in a Third Party Tender/Exchange Offer after the Restricted Period (or
effecting any Permitted Loan or Permitted Debt Financing Transaction under Section 4.02), (vi) disposing of Company Common Stock by operation of a
statutory amalgamation, statutory arrangement or other statutory procedure involving the Company or (vii) any conversion of the Notes or other securities
acquired not in contravention of this Section 4.18.
Section 4.19. Indenture Amendments and Supplements; Cooperation . For so long as the Silver Lake Group collectively
Beneficially Owns at least 50% of the Notes Beneficially Owned by the Silver Lake Group immediately following the Closing, the Company shall not make any
amendment or supplement to, or consent to a waiver of any provision of, the Indenture or the Securities (as defined in the Indenture) of a type to which the first or
second sentence of Section 9.02 of the Indenture applies, without the written consent of the Purchaser. The Company shall keep the Purchaser reasonably informed
with respect to the Transactions.
Section 4.20. Anti-Takeover Provisions . The Company shall, and shall cause each of its Subsidiaries to, (a) take all action
necessary within their control (other than waiving any of the Company’s rights) so that no “fair price,” “moratorium,” “control share acquisition” or other form of
antitakeover statute or regulation is applicable to the Silver Lake Group Beneficially Owning the Notes and the Company Common Stock to be issued upon
conversion of the Notes, acquiring additional Company Common Stock pursuant to Section 4.16 and transferring the Notes and the Company Common Stock to be
issued upon conversion of the Notes consistent with the terms of this Article IV, (b) not adopt or repeal, as the case may be, any anti-takeover provision in the
certificate of incorporation, bylaws or other similar organizational documents of the Company’s Subsidiaries that is applicable to any of the foregoing, and (c) not
adopt or repeal, as the case may be, any shareholder rights plan, “poison pill” or similar measure that is applicable to any of the foregoing.
Section 4.21. Tax Treatment . The Company and the Purchaser agree to (i) treat the Notes as indebtedness of the Company for
U.S. federal and state income tax purposes, (ii) not treat the Notes as “contingent payment debt instruments” under U.S. Treasury Regulation section 1.1275-4 and
(iii) treat the Notes as being issued with “original issue discount” and, in each case, neither party shall take any inconsistent tax position in a tax return, tax filing,
tax audit or other submission to a tax authority unless otherwise required by a final “determination” as defined under section 1313 of the Internal Revenue Code of
1986, as amended.
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Section 4.22. Indemnification .
(a)
The Purchaser, its Affiliates and their respective officers, directors, members, shareholders, employees, managers, partners,
accountants, attorneys, advisors and agents, including any SL Person or Purchaser Designee (each an “Indemnitee”) shall be indemnified by the Company
for any and all Losses to which such Indemnitees may become subject as a result of, arising in connection with, or relating to any actual or threatened
claim, suit, action, arbitration, cause of action, complaint, allegation, criminal prosecution, investigation, demand letter, or proceeding, whether at law or
at equity and whether public or private, before or by any Governmental Entity, any arbitrator or other tribunal (each, an “Action”) by any Person
(including, without limitation, any stockholder of the Company and regardless of whether such Action is against an Indemnitee) arising out of or relating
to the Transactions; provided, that the Company will not be liable to indemnify any Indemnitee for any such Losses to the extent that such Losses (w)
have resulted from an Action by the Company against the Purchaser in connection with the Purchaser’s breach of this Agreement or an Indemnitee’s
breach of the Prior Confidentiality Agreement or the New Confidentiality Agreement, (x) are as a result of an Action brought against an Indemnitee by
any Person who is a limited partner of, or other investor in, such Indemnitee in such Person’s capacity as a limited partner of, or other investor in, such
Indemnitee, (y) as a result of any Action brought against the Purchaser or its Affiliates by any Person providing a Permitted Loan, a Permitted Debt
Financing Transaction or other financing or hedging arrangement to the Purchaser or its Affiliates in connection with the Purchaser’s or its Affiliates’
investment in the Notes or (z) have resulted from an Indemnitee’s fraud or violation of applicable law in connection with the Transactions. The parties
agree, for the avoidance of doubt, that this Section 4.18 shall not apply to any matter for which indemnification is otherwise provided in Section 5.05.
Each Indemnitee shall give the Company prompt written notice (an “ Indemnification Notice ”) of any third party Action it has
(b)
actual knowledge of that might give rise to Losses, which notice shall set forth a description of those elements of such Action of which such Indemnitee
has knowledge; provided, that any delay or failure to give such Indemnification Notice shall not affect the indemnification obligations of the Company
hereunder except to the extent the Company is materially prejudiced by such delay or failure.
(c)
The Company shall have the right, exercisable by written notice to the applicable Indemnitee(s) within thirty (30) days of receipt of
the applicable Indemnification Notice, to select counsel to defend and control the defense of any third party claim set forth in such Indemnification
Notice; provided, that the Company shall not be entitled to so select counsel or control the defense of any claim if (i) such claim seeks primarily non-
monetary or injunctive relief against the Indemnitee or alleges any violation of criminal law, (ii) the Company does not, subsequent to its assumption of
such defense in accordance with this clause (c), conduct the defense of such claim actively and diligently, (iii) such claim includes as the named parties
both the Company and the applicable Indemnitee(s) and such Indemnitees reasonably determine upon the advice of counsel that representation of all such
Indemnitees by the same counsel would be prohibited by applicable codes of professional conduct, or (iv) in the event that, based on the reasonable
advice of counsel for the applicable Indemnitee(s), there are one or more material defenses available to the applicable Indemnitee(s) that are not available
to the Company. If the Company does not assume the defense of any third party claim in accordance with this clause (c), the applicable Indemnitee(s)
may continue to defend such claim at the sole cost of the Company and the Company may still participate in, but not control, the defense of such third
party claim at the Company’s sole cost and expense. In no event shall the Company, in connection with any Action or separate but substantially similar
Actions arising out of the same general allegations, be liable for the fees and expenses of more than one separate firm of attorneys at any time for all
Indemnitees chosen by the Silver Lake Group, except to the extent that local counsel, in addition to regular counsel, is required in order to effectively
defend the Action.
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(d)
No Indemnitee shall consent to a settlement of, or the entry of any judgment arising from, any claim for which such Indemnitee is
indemnified pursuant to this Section 4.22, without the prior written consent of the Company (such consent not to be unreasonably withheld, conditioned
or delayed). Except with the prior written consent of the applicable Indemnitee(s), the Company, in the defense of any such claim, shall not consent to the
entry of any judgment or enter into any settlement that (i) provides for injunctive or other nonmonetary relief affecting any Indemnitee or (ii) does not
include as an unconditional term thereof the giving by each claimant or plaintiff to each such Indemnitee(s) of an unconditional release of such
Indemnitee(s) from all liability with respect to such Action. In any such third party claim where the Company has assumed control of the defense thereof
pursuant to clause (c), the Company shall keep the applicable Indemnitee(s) reasonably informed as to the status of such claim at all stages thereof
(including all settlement negotiations and offers), promptly submit to such Indemnitee(s) copies of all pleadings, responsive pleadings, motions and other
similar legal documents and paper received or filed in connection therewith, permit such Indemnitee(s) and their respective counsels to confer with the
Company and its counsel with respect to the conduct of the defense thereof, and permit such Indemnitee(s) and their respective counsel(s) a reasonable
opportunity to review all legal papers to be submitted prior to their submission.
Agreement or any provisions thereof without the prior written consent of the Purchaser (not to be unreasonably withheld, conditioned or delayed, except with
respect to any amendments, restatements, modifications, waivers or supplements of or to Sections 1 or 2 (and Schedule A to the extent referenced in such sections)
or Schedule B thereof, which may be consented to or not in the sole discretion of the Purchaser).
Section 4.23. Certain Amendments . The Company shall not amend, restate, modify, waive or supplement the Note Purchase
Section 4.24. Guaranteed Obligations .
(a)
The Guarantor hereby, irrevocably and unconditionally and as a primary obligation, guarantees, subject to the terms and conditions
set forth in this Agreement, the payment by the Purchaser of its obligations for payment under this Agreement if, when and as due by the Purchaser at the
Closing under Sections 2.01 and 2.02 (the “Guaranteed Obligations”). If the Purchaser fails to pay any such Guaranteed Obligations if, when and as due
under Sections 2.01 and Section 2.02, the Guarantor shall, upon the written request of the Company, promptly pay, such Guaranteed Obligations. The
guarantee made by the Guarantor pursuant to this Section 4.24 (the “Guarantee”) is a guarantee of payment and not of collection. The Guarantor’s
maximum aggregate liability under this Section 4.24 shall not exceed the Purchase Price. The Company hereby agrees that in no event shall the Guarantor
be required to pay any amount to the Company or any other Person under this Agreement other than as expressly set forth in this Section 4.24.
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(b)
This Guarantee and all of the Guarantor’s obligations under this Section 4.24 shall terminate and expire on the earlier of (i) the date
this Agreement is validly terminated in accordance with Section 2.03 and (ii) upon the Closing. No claims may be made under this Guarantee (x) after the
Closing or the date on which the Company (y) brings any Action against the Guarantor for any amounts in excess of the Guaranteed Obligations or (z)
commences any Action against the Guarantor other than for enforcement of this Guarantee pursuant and subject to the terms of to this Section 4.24
(c)
This Guarantee may not be amended or modified except by an instrument in writing signed by the Company and the Guarantor. This
Guarantee constitutes the entire agreement and understanding of the Guarantor and the Company relating to the subject matter hereof. Any waiver of any
term or condition of this Guarantee must be in writing and signed by the Party against whom such waiver is sought to be enforced. Any waiver of any
term or condition of this Guarantee shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a
waiver of any other term or condition of this Guarantee.
(d)
under this Section 4.24.
This Guarantee may only be enforced against the Guarantor and no Specified Person shall have any liability for any obligation
ARTICLE V
REGISTRATION RIGHTS
Section 5.01. Registration Statement .
(a)
The Company will use reasonable efforts to prepare and file and use reasonable efforts to cause to be declared effective or otherwise
become effective pursuant to the Securities Act (x) for the registration of resales of Company Common Stock, as soon as reasonably practicable following
the Closing Date (and, in any event, no later than three (3) months following the Closing Date) and (y) for all other registration requests, as soon as
reasonably practicable following a written request of holders of a majority in aggregate principal amount of Notes that are Registrable Securities and, in
any event, no later than the date that is the later of (A) six (6) months following the Closing Date and (B) three (3) months following the date of such
request (such later date, the “Target Registration Date”), a Registration Statement (the “Initial Registration Statement”) in order to provide for resales of
Registrable Securities to be made on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, which Registration Statement will
(except to the extent the SEC objects in written comments upon the SEC’s review of such Registration Statement) include the Plan of Distribution. In
addition, the Company will from time to time after the Initial Registration Statement has been declared effective use reasonable efforts to file such
additional Registration Statements to cover resales of any Registrable Securities requested to be registered by the Silver Lake Group that are not
registered for resale pursuant to a pre-existing Registration Statement and will use its reasonable efforts to cause such Registration Statement to be
declared effective or otherwise to become effective under the Securities Act and, subject to Section 5.02, will use its reasonable efforts to keep the
Registration Statement continuously effective under the Securities Act at all times until the Registration Termination Date. Any Registration Statement
filed pursuant to this Article V shall cover only Registrable Securities, shall be on Form S-3 (or a successor form) if the Company is eligible to use such
form and shall be an automatically effective Registration Statement if the Company is a WKSI (in which case, the Registration Statement may request
registration of an unspecified amount of Registrable Securities to be sold by unspecified holders).
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(b)
Subject to the provisions of Section 5.02 and further subject to the availability of a Registration Statement on Form S-3 (or any
successor form thereto) to the Company pursuant to the Securities Act and the rules and interpretations of the SEC, the Company will use its reasonable
efforts to keep the Registration Statement (or any replacement Registration Statement) continuously effective until the earlier of (such earlier date, the “
Registration Termination Date ”): (i) the date on which all Registrable Securities covered by the Registration Statement have been sold thereunder in
accordance with the plan of distribution disclosed in the prospectus included in the Registration Statement and (ii) there otherwise cease to be any
Registrable Securities.
(c)
Notwithstanding anything herein to the contrary, during such period of time from and after the Target Registration Date that the
Company ceases to be eligible to file or use a Registration Statement on Form S-3 (or any successor form thereto), upon the written request of any holder
of Registrable Securities, the Company shall use its reasonable efforts to file a Registration Statement on Form S-1 (or any successor form) under the
Securities Act covering the Registrable Securities of the requesting party and use reasonable efforts to cause such Registration Statement to be declared
effective pursuant to the Securities Act as soon as reasonably practicable after filing thereof and file and cause to become effective such amendments
thereto as are necessary in order to keep such Registration Statement continuously available. Each such written request must specify the amount and
intended manner of disposition of such Registrable Securities; provided , that the minimum amount of such Registrable Securities shall be $50,000,000.
When the Company regains the ability to file a Registration Statement on Form S-3 covering the Registrable Securities it shall as promptly as practicably
do so in accordance with Section 5.01(a).
Section 5.02. Registration Limitations and Obligations .
(a)
Subject to Section 5.01, the Company will use reasonable efforts to prepare such supplements or amendments (including a post-
effective amendment), if required by applicable law, to each applicable Registration Statement and file any other required document so that such
Registration Statement will be Available at all times during the period for which such Registration Statement is, or is required pursuant to this Agreement
to be, effective; provided , that no such supplement, amendment or filing will be required during a Blackout Period. In order to facilitate the Company’s
determination of whether to initiate a Blackout Period, the Purchaser shall give the Company notice of a proposed sale of Registrable Securities pursuant
to the Registration Statement at least two (2) Business Days (or, if two Business Days is not practicable, one (1) Business Day) prior to the proposed date
of sale (which notice shall not bind the Purchaser to make any sale).
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(b)
Notwithstanding anything to the contrary contained in this Agreement, the Company shall be entitled, from time to time, by
providing written notice to the holders of Registrable Securities, to require such holders of Registrable Securities to suspend the use of the prospectus for
sales of Registrable Securities under the Registration Statement during any Blackout Period; provided , for purposes of this Section 5.02, the Company
shall only be obligated to provide written notice to any holder or Beneficial Owner of Registrable Securities of any such Blackout Period, or the certificate
described in the following sentence, if such holder or Beneficial Owner has specified in writing (including electronic mail) to the Company for purposes
of receiving such notice such holder’s or Beneficial Owner’s address (including electronic mail), contact and fax number information. No sales may be
made under the applicable Registration Statement during any Blackout Period. In the event of a Blackout Period, the Company shall (x) deliver to the
holders of Registrable Securities a certificate signed by the chief executive officer, chief financial officer or general counsel of the Company confirming
that the conditions described in the definition of Blackout Period are met (but which certificate need not specify the nature of the event causing such
conditions to have been met), which certificate shall contain an approximation of the anticipated delay, and (y) notify each holder of Registrable
Securities promptly upon each of the commencement and the termination of each Blackout Period, which notice of termination shall be delivered to each
holder of Registrable Securities no later than the close of business of the last day of the Blackout Period. In connection with the expiration of any
Blackout Period and without any further request from a holder of Registrable Securities, the Company to the extent necessary and as required by
applicable law shall as promptly as reasonably practicable prepare supplements or amendments, including a post-effective amendment, to the Registration
Statement or the prospectus, or any document incorporated therein by reference, or file any other required document so that the Registration Statement
will be Available. A Blackout Period shall be deemed to have expired when the Company has notified the holders of Registrable Securities that the
Blackout Period is over and the Registration Statement is Available. Notwithstanding anything in this Agreement to the contrary, the absence of an
Available Registration Statement at any time from and after the Target Registration Date shall be considered a Blackout Period and subject to the
limitations therein.
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(c)
At any time that a Registration Statement is effective and prior to the Registration Termination Date, if a holder of Registrable
Securities (an “ Initiating Holder ”) delivers a notice to the Company (a “ Take-Down Notice ”) stating that it intends to sell at least $25,000,000 of
Registrable Securities held by such holder ( provided that, if a Purchaser and its Affiliates do not own at least $25,000,000 of Registrable Securities, they
shall be permitted to deliver a Take-Down Notice to sell all of the Registrable Securities held by them), in each case, pursuant to the Registration
Statement, then, the Company shall (i) amend or supplement the Registration Statement as may be necessary and to the extent required by law so that the
Registration Statement remains Available in order to enable such Registrable Securities to be distributed in an Underwritten Offering (subject to Section
5.02(b)) and (ii) (x) within one (1) Business Day of receipt of the Take-Down Notice and confirmation of such receipt by the treasurer or chief financial
officer of the Company and by counsel to the Company, deliver a written notice (a “ Take-Down Participation Notice ”) of any such request to all other
holders of Registrable Securities (the “ Eligible Participation Holders ”), which Take-Down Participation Notice shall offer each such holder the
opportunity to include in such registration that number of Registrable Securities of the same type (i.e., Notes or Company Common Stock) to be offered
by the Initiating Holder as each such holder (a “ Participating Holder ”) may request. The Company shall include in such registration all such Registrable
Securities with respect to which the Company has received from a holder entitled to receive a Take-Down Participation Notice pursuant to the preceding
sentence written requests for inclusion therein within (i) in the case of an Underwritten Offering that is not a Marketed Underwritten Offering, one (1)
Business Day after the date the Take-Down Participation Notice was delivered and confirmed received by the treasurer or chief financial officer of the
Company and by counsel to the Company and (ii) in the case of a Marketed Underwritten Offering, three (3) Business Days after the date the Take-Down
Participation Notice was delivered; provided , that each Selling Holder will retain the right to withdraw their Registrable Securities from such registration
in writing to the underwriters prior to the pricing of the applicable offering. In connection with any Underwritten Offering of Registrable Securities for
which a holder delivers a Take-Down Notice and satisfies the dollar thresholds set forth in the first sentence of this Section 5.02(c) and the Take-Down
Notice contemplates a Marketed Underwritten Offering, the Company will use reasonable efforts to cooperate and make its senior officers available for
participation in such marketing efforts (which marketing efforts will not, for the avoidance of doubt, include a “road show” requiring such officers to
travel outside of the city in which they are primarily located). A Majority in Interest of Selling Holders shall have the right hereunder to, in their sole
discretion: (i) select the underwriter(s) for each Underwritten Offering, (ii) determine the pricing of the Registrable Securities offered pursuant to any
such Registration Statement, including the underwriting discount and fees payable by the Selling Holders to the underwriters in such Underwritten
Offering, as well as any other financial terms, (iii) determine the timing of any such registration and sale and (iv) determine the total number of
Registrable Securities that can be included in such Underwritten Offering in consultation with the managing underwriters (collectively, the “ Offering
Terms ”); provided , that the Initiating Holder shall consult with each other Participating Holder (other than any Participating Holder that is not a member
of the Silver Lake Group) in respect of the Offering Terms. Each Selling Holder shall be solely responsible for all such discounts and fees payable to such
underwriters in such Underwritten Offering for the Registrable Securities sold by such Selling Holder. Without the consent of a Majority in Interest of
Selling Holders, no Underwritten Offering pursuant to this Agreement shall include any securities other than Registrable Securities of the type (i.e., Notes
or Company Common Stock) offered by the Initiating Holder in such Underwritten Offering.
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(d)
If the managing underwriter or underwriters of any firm commitment Underwritten Offering advise the Selling Holders in writing
that, in their view, the total amount of Registrable Securities proposed to be sold in such Underwritten Offering (including, without limitation, Registrable
Securities proposed to be included by any Participating Holder) exceeds the largest amount (the “ Orderly Sale Amount ”) that can be sold in an orderly
manner in such Underwritten Offering within a price range acceptable to the Majority in Interest of Selling Holders, then there shall be included in such
firm commitment Underwritten Offering an amount of Registrable Securities not exceeding the Orderly Sale Amount, and such included amount of
Registrable Securities shall be allocated pro rata among the Selling Holders on the basis of the number and type of Subject Securities then proposed to be
sold by the respective Selling Holders (e.g., if Notes are being offered and sold, the pro rata amounts will be calculated based on the aggregate principal
amount of Notes proposed to be sold without regard to shares of Company Common Stock Beneficially Owned by the respecting Selling Holders).
(e)
If requested by the managing underwriter of an Underwritten Offering for which a member of the Silver Lake Group is the Initiating
Holder, unless such Initiating Holder otherwise agrees, no Eligible Participation Holder or Initiating Holder shall offer for sale (including by short sale),
grant any option for the purchase of, or otherwise transfer (whether by actual disposition or effective economic disposition due to cash settlement,
derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of the Registrable Securities or
otherwise), any Notes or Company Common Stock (or interests therein) or securities convertible into or exchangeable for Notes or Company Common
Stock without the prior written consent of such managing underwriter for a period designated by such managing underwriter in writing to the Eligible
Participation Holders and the Initiating Holder, which shall begin the earlier of the date of the underwriting agreement and the commencement of
marketing efforts, and shall not in any event last longer than sixty (60) days following such effective date. If requested by the managing underwriter of
any such Underwritten Offering, each Eligible Participation Holder shall execute a separate agreement to the foregoing effect; provided , that each
Eligible Participation Holder shall negotiate its respective lock-up agreement; provided , further , that if any such lock-up agreement (i) provides for
exceptions from any restrictions contained therein, such exceptions shall automatically apply equally to each Selling Holder or (ii) is terminated or waived
in whole or in part for any Selling Holder, such termination or waiver shall automatically apply to each other Selling Holder. Each lock-up agreement
shall permit, and this Section 5.02(e) shall be deemed to permit, transfers pursuant to the terms of Permitted Loans, Permitted Debt Financing
Transactions and other customary lock-up exceptions, including for gifts, distributions and other transfers not for value (and including in respect of
customary charitable donations substantially contemporaneously with distribution to the donor, free of further lock-up agreement transfer restrictions by
the donee, by a Selling Holder or its direct or indirect distributees). The obligations of any person under this Section 5.02(e) are not in limitation of lock-
up or transfer restrictions that may otherwise apply to any Registrable Securities.
(f)
In addition to the registration rights provided in Section 5.02(c), holders of the Notes shall have analogous rights to sell such
securities in a marketed offering under Rule 144A under the Securities Act through one or more initial purchasers on a firm-commitment basis, using
procedures that are substantially equivalent to those specified in Section 5.02 and Section 5.03. The Company agrees to use its reasonable efforts to
cooperate to effect any such sales under such Rule 144A. Nothing in this Section 5.02(f) shall impose any additional or more burdensome obligations on
the Company than would apply under Section 5.02 and Section 5.03, in each case, mutatis mutandis in respect of a registered Underwritten Offering, or
require that the Company take any actions that it would not be required to take in an Underwritten Offering of such Notes.
(g)
Notwithstanding anything herein to the contrary, (i) if holders of Registrable Securities engage or propose to engage in a
“distribution” (as defined in Regulation M under the Exchange Act) of Registrable Securities, such holders shall discuss the timing of such distribution
with the Company reasonably prior to commencing such distribution, and (ii) such distribution must not be for less than $25,000,000 of Registrable
Securities held by such holders ( provided that, if collectively Purchaser and its Affiliates do not own at least $25,000,000 of Registrable Securities, they
shall be permitted to engage in such distribution with respect to all of the Registrable Securities held by them).
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(h)
In connection with a distribution of Registrable Securities in which a holder of Registrable Securities is selling at least $50,000,000
of Registrable Securities, the Company shall, to be extent requested by the managing underwriter(s) of such a distribution, be subject to a restricted period
of the same length of time as such holder agrees with the managing underwriter(s) (but not to exceed 60 days) during which the Company may not offer,
sell or grant any option to purchase Company Common Stock (in the case of an offering of Company Common Stock or securities convertible or
exchangeable for Company Common Stock) and any debt securities (in the case of an offering of debt securities) of the Company, subject to customary
carve-outs that include, but are not limited to, (i) issuances pursuant to the Company’s employee or director stock plans and issuances of shares upon the
exercise of options or other equity awards under such stock plans and (ii) in connection with acquisitions, joint ventures and other strategic transactions.
S ection 5.03. Registration Procedures .
(a)
In connection with the registration of any Registrable Securities under the Securities Act and in connection with any distribution of
registered securities pursuant thereto as contemplated by this Agreement, or any analogous Rule 144A offering pursuant to Section 5.02(f), the Company
shall as promptly as reasonably practicable, subject to the other provisions of this Agreement:
(i)
subject to the provisions of Section 5.01(a), use reasonable efforts to prepare and file with the SEC a Registration
Statement to effect such registration in accordance with the intended method or methods of distribution of such securities and thereafter use
reasonable efforts to cause such Registration Statement to become and remain effective pursuant to the terms of this Article V; provided ,
however, that the Company may discontinue any registration of its securities which are not Registrable Securities at any time prior to the
effective date of the Registration Statement relating thereto; provided , further , that before filing such Registration Statement or any
amendments or supplements thereto, including any prospectus supplements in connection with a sale referred to in a Take-Down Notice (but
excluding amendments and supplements that do nothing more than name Selling Holders (as defined below) and provide information with
respect thereto), the Company will furnish to the holders which are including Registrable Securities in such registration (“ Selling Holders ”) and
the lead managing underwriter(s), if any, copies of all such documents proposed to be filed, which documents will be subject to the review and
reasonable comment (which comments will be considered in good faith by the Company) of the counsel (if any) to such holders and counsel (if
any) to such underwriter(s), and other documents reasonably requested by any such counsel, including any comment letters from the SEC, and, if
requested by any such counsel, provide such counsel and the lead managing underwriter(s), if any, reasonable opportunity to participate in the
preparation of such Registration Statement and each prospectus (including any prospectus supplement) included or deemed included therein and
such other opportunities to conduct a customary and reasonable due diligence investigation (in the context of a registered underwritten offering)
of the Company, including reasonable access to (including responses to any reasonable inquiries by the lead managing underwriter(s) and their
counsel) the Company’s books and records, officers, accountants and other advisors; provided that such persons shall first agree in writing with
the Company that any information that is reasonably designated by the Company as confidential at the time of delivery shall be kept confidential
by such persons subject to customary exceptions;
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(ii)
at or before any Registration Statement covering the Notes is declared or otherwise becomes effective, qualify the
Indenture under the Trust Indenture Act of 1939, as amended, and appoint a new trustee under the Indenture to the extent such qualification
requires the appointment of a new trustee thereunder;
(iii)
subject to Section 5.02, prepare and file with the SEC such amendments and supplements to such Registration Statement
and the prospectus used in connection therewith as may be necessary and to the extent required by applicable law to keep such Registration
Statement effective and Available pursuant to the terms of this Article V;
(iv)
if requested by the lead managing underwriter(s), promptly include in a prospectus supplement or post-effective
(v)
amendment such information as the lead managing underwriter(s), if any, and such holders may reasonably request in order to permit the
intended method of distribution of such securities and make all required filings of such prospectus supplement or such post-effective amendment
as soon as reasonably practicable after the Company has received such request; provided, however, that the Company shall not be required to
take any actions under this Section 5.03(a)(iv) that are not, in the opinion of counsel for the Company, in compliance with applicable law;
furnish to the Selling Holders and each underwriter, if any, of the securities being sold by such Selling Holders such
number of conformed copies of such Registration Statement and of each amendment and supplement thereto, such number of copies of the
prospectus and any prospectus supplement contained in or deemed part of such Registration Statement (including each preliminary prospectus
supplement) and each free writing prospectus (as defined in Rule 405 of the Securities Act) (a “ Free Writing Prospectus ”) utilized in
connection therewith and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the
Securities Act, and such other documents as such Selling Holders and underwriter(s), if any, may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities owned by such Selling Holders;
52
use reasonable efforts to cause such Registrable Securities to be listed on each securities exchange on which similar
securities issued by the Company are then listed, and to apply for any necessary “CUSIPs” or analogous codes to identify such securities;
(vi)
(vii)
use reasonable efforts to provide and cause to be maintained a transfer agent and registrar for all Registrable Securities
covered by such Registration Statement from and after a date not later than the effective date of such Registration Statement;
(viii)
as promptly as practicable notify in writing the holders of Registrable Securities and the underwriters, if any, of the
following events: (A) the filing of the Registration Statement, any amendment thereto, the prospectus or any prospectus supplement related
thereto or post-effective amendment to such Registration Statement or any Free Writing Prospectus utilized in connection therewith, and, with
respect to such Registration Statement or any post-effective amendment thereto, when the same has become effective; (B) any request by the
SEC or any other U.S. or state governmental authority for amendments or supplements to such Registration Statement or the prospectus; (C) the
issuance by the SEC of any stop order suspending the effectiveness of such Registration Statement or the initiation of any proceedings by any
person for that purpose; (D) the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable
Securities for sale under the securities or “blue sky” laws of any jurisdiction or the initiation or threat of any proceeding for such purpose; (E) if
at any time the representations and warranties of the Company contained in any agreement (including any underwriting agreement) related to
such registration cease to be true and correct in any material respect; and (F) upon the happening of any event that makes any statement made in
such Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires the making of any changes in such registration statement, prospectus or documents so that, in the case of such
Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and that in the case of the prospectus, it will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they
were made, not misleading; provided , in the case of clause (F), that such notice need not include the nature or details concerning such event;
(ix)
use reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of such Registration Statement,
or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any
jurisdiction at the earliest reasonable practicable date, except that the Company shall not for any such purpose be required to (A) qualify
generally to do business as a foreign corporation or as a dealer in securities in any jurisdiction wherein it would not but for the requirements of
this clause (ix) be obligated to be so qualified, (B) subject itself to taxation in any such jurisdiction or (C) file a general consent to service of
process in any such jurisdiction;
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(x)
cooperate with each seller of Registrable Securities and each underwriter or agent participating in the disposition of such
Registrable Securities and their respective counsel in connection with any filings required to be made with the Financial Industry Regulatory
Authority, Inc.;
(xi)
prior to any public offering of Registrable Securities, use reasonable efforts to register or qualify or cooperate with the
Selling Holders in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the applicable state securities or “blue sky” laws of those jurisdictions within the United States as any holder
reasonably requests in writing to keep each such registration or qualification (or exemption therefrom) effective until the Registration
Termination Date; provided, that the Company will not be required to (A) qualify generally to do business as a foreign corporation or as a dealer
in securities in any jurisdiction wherein it would not but for the requirements of this clause (xi) be obligated to be so qualified, (B) subject itself
to taxation in any such jurisdiction or (C) file a general consent to service of process in any such jurisdiction;
(xii)
use reasonable efforts to cooperate with the holders to facilitate the timely preparation and delivery of certificates or
book-entry securities representing Registrable Securities to be delivered to a transferee pursuant to the Registration Statements, which
certificates or book-entry securities shall be free, to the extent permitted by the Indenture and applicable law, of all restrictive legends, and to
enable such Registrable Securities to be in such denominations and registered in such names as any such holders may request in writing; and in
connection therewith, if required by the Company’s transfer agent, the Company will promptly after the effectiveness of the Registration
Statement cause to be delivered to its transfer agent when and as required by such transfer agent from time to time, any authorizations,
certificates, directions and other evidence required by the transfer agent which authorize and direct the transfer agent to issue such Registrable
Securities without legend upon sale by the holder of such shares of Registrable Securities under the Registration Statement; and
(xiii)
agrees with each holder of Registrable Securities that, in connection with any Underwritten Offering or other resale
pursuant to the Registration Statement in accordance with the terms hereof, it will use reasonable efforts to negotiate in good faith and execute
all customary indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting
arrangements (in each case on terms reasonably acceptable to the Company), including using reasonable efforts to procure customary legal
opinions and auditor “comfort” letters.
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(b)
The Company may require each Selling Holder and each underwriter, if any, to (i) furnish the Company in writing such information
regarding each Selling Holder or underwriter and the distribution of such Registrable Securities as the Company may from time to time reasonably
request in writing to complete or amend the information required by such Registration Statement and/or any other documents relating to such registered
offering, and (ii) execute and deliver, or cause the execution or delivery of, and to perform under, or cause the performance under, any agreements and
instruments reasonably requested by the Company to effectuate such registered offering, including, without limitation, opinions of counsel and
questionnaires. If the Company requests that the holders of Registrable Securities take any of the actions referred to in this Section 5.03(b), such holders
shall take such action promptly and as soon as reasonably practicable following the date of such request.
(c)
Each Selling Holder agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in
clauses (B), (C), (D), (E) and (F) of Section 5.03(a)(viii), such Selling Holder shall forthwith discontinue such Selling Holder’s disposition of Registrable
Securities pursuant to the applicable Registration Statement and prospectus relating thereto until such Selling Holder is advised in writing by the
Company that the use of the applicable prospectus may be resumed, and has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such prospectus. The Company shall use reasonable efforts to cure the events described in
clauses (B), (C), (D), (E) and (F) of Section 5.03(a)(viii) so that the use of the applicable prospectus may be resumed at the earliest reasonably practicable
moment.
Article V, provided that each holder of Registrable Securities participating in an offering shall pay all applicable underwriting discounts and commissions, agency
fees, brokers’ commissions and transfer taxes, if any, on the Registrable Securities sold by such holder, and similar charges.
Section 5.04. Expenses . The Company shall pay all Registration Expenses in connection with a registration pursuant to this
Section 5.05. Registration Indemnification .
(a)
The Company agrees, without limitation as to time, to indemnify and hold harmless, to the fullest extent permitted by law, each
Selling Holder and its Affiliates and their respective officers, directors, members, shareholders, employees, managers, partners, accountants, attorneys,
advisors and agents and each Person who controls (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act) such
Selling Holder or such other Indemnified Person (as defined below) and the officers, directors, members, shareholders, employees, managers, partners,
accountants, attorneys, advisors and agents of each such controlling Person, each underwriter, if any, and each Person who controls (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act) such underwriter (collectively, the “Indemnified Persons”), from and against all
Losses, as incurred, arising out of, caused by, resulting from or relating to any untrue statement (or alleged untrue statement) of a material fact contained
in any Registration Statement, prospectus or preliminary prospectus or Free Writing Prospectus, in each case related to such Registration Statement, or
any amendment or supplement thereto or any omission (or alleged omission) of a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made, not misleading and (without limitation of the preceding portions of this
Section 5.05(a)) will reimburse each such Selling Holder, each of its Affiliates, and each of their respective officers, directors, members, shareholders,
employees, managers, partners, accountants, attorneys, advisors and agents and each such Person who controls each such Selling Holder and the officers,
directors, members, shareholders, employees, managers, partners, accountants, attorneys, advisors and agents of each such controlling Person, each such
underwriter and each such Person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with
investigating and defending or settling any such claim, Loss, damage, liability or action, except insofar as the same are caused by any information
regarding a holder of Registrable Securities or underwriter furnished in writing to the Company by any such person or any selling holder or underwriter
expressly for use therein.
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(b)
In connection with any Registration Statement in which a Selling Holder is participating, without limitation as to time, each such
Selling Holder shall, severally and not jointly, indemnify the Company, its directors and officers, and each Person who controls (within the meaning of
Section 15 of the Securities Act and Section 20 of the Exchange Act) the Company, from and against all Losses, as incurred, arising out of, caused by,
resulting from or relating to any untrue statement (or alleged untrue statement) of material fact contained in the Registration Statement, prospectus or
preliminary prospectus or Free Writing Prospectus or any amendment or supplement thereto or any omission (or alleged omission) of a material fact
required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and
(without limitation of the preceding portions of this Section 5.05(b)) will reimburse the Company, its directors and officers and each Person who controls
the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act) for any legal and any other expenses
reasonably incurred in connection with investigating and defending or settling any such claim, Loss, damage, liability or action, in each case solely to the
extent, but only to the extent, that such untrue statement or omission is made in such Registration Statement, prospectus or preliminary prospectus or Free
Writing Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information regarding the Selling Holder
furnished to the Company by such Selling Holder for inclusion in such Registration Statement, prospectus or preliminary prospectus or Free Writing
Prospectus or any amendment or supplement thereto.
(c)
Any Person entitled to indemnification hereunder shall give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification; provided, however, the failure to give such notice shall not release the indemnifying party from its obligation,
except to the extent that the indemnifying party has been actually and materially prejudiced by such failure to provide such notice on a timely basis.
In any case in which any such action is brought against any indemnified party, the indemnified party shall promptly notify in
(d)
writing the indemnifying party of the commencement thereof, and the indemnifying party will be entitled to participate therein, and, to the extent that it
may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof and acknowledging the obligations of the indemnifying party with respect to such
proceeding, the indemnifying party will not (so long as it shall continue to have the right to defend, contest, litigate and settle the matter in question in
accordance with this paragraph) be liable to such indemnified party hereunder for any legal or other expense subsequently incurred by such indemnified
party in connection with the defense thereof other than reasonable costs of investigation, supervision and monitoring (unless (i) such indemnified party
reasonably objects to such assumption on the grounds that there may be defenses available to it which are different from or in addition to the defenses
available to such indemnifying party or a conflict of interest otherwise exists or (ii) the indemnifying party shall have failed within a reasonable period of
time to assume such defense and the indemnified party is or would reasonably be expected to be materially prejudiced by such delay, in either event the
indemnified party shall be promptly reimbursed by the indemnifying party for the expenses incurred in connection with retaining one separate legal
counsel (for the avoidance of doubt, for all indemnified parties in connection therewith)). For the avoidance of doubt, notwithstanding any such
assumption by an indemnifying party, the indemnified party shall have the right to employ separate counsel in any such matter and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the expense of such indemnified party except as provided in the previous sentence.
An indemnifying party shall not be liable for any settlement of an action or claim effected without its consent (which consent shall not be unreasonably
withheld, conditioned or delayed). No matter shall be settled by an indemnifying party without the consent of the indemnified party (which consent shall
not be unreasonably withheld, conditioned or delayed), unless such settlement (x) includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such claim or proceeding, (y) does not include any statement as to or any admission of fault, culpability or
a failure to act by or on behalf of any indemnified party and (z) is settled solely for cash for which the indemnified party would be entitled to
indemnification hereunder. The failure of an indemnified party to give notice to an indemnifying party of any action brought against such indemnified
party shall not relieve the indemnifying party of its obligations or liabilities pursuant to this Agreement, except to the extent such failure adversely
prejudices the indemnifying party.
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(e)
The indemnification provided for under this Agreement shall survive the sale or other transfer of the Registrable Securities and the
termination of this Agreement.
(f)
If recovery is not available under the foregoing indemnification provisions for any reason or reasons other than as specified therein,
any Person who would otherwise be entitled to indemnification by the terms thereof shall nevertheless be entitled to contribution with respect to any
Losses with respect to which such Person would be entitled to such indemnification but for such reason or reasons, in such proportion as is appropriate to
reflect the relative fault of the indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the actions,
statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party, the Persons’ relative knowledge
and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or
omission, and other equitable considerations appropriate under the circumstances. It is hereby agreed that it would not necessarily be equitable if the
amount of such contribution were determined by pro rata or per capita allocation that does not take into account the equitable considerations referred to in
the immediately preceding sentence. Notwithstanding any other provision of this Agreement, no holder of Registrable Securities shall be required to
indemnify or contribute, in the aggregate, any amount in excess of its net proceeds from the sale of the Registrable Securities subject to any actions or
proceedings over the amount of any damages, indemnity or contribution that such holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not found guilty of such fraudulent misrepresentation.
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(g)
The indemnification and contribution agreements contained in this Section 5.05 are in addition to any liability that the indemnifying
party may have to the indemnified party and do not limit other provisions of this Agreement that provide for indemnification.
Section 5.06. Facilitation of Sales Pursuant to Rule 144 . For as long as the Purchaser or its Affiliates, or any financial
institution pursuant to a Permitted Debt Financing Transaction or any Lender under any Permitted Loan Beneficially Owns Notes or any Company Common Stock
issued or issuable upon conversion thereof, to the extent it shall be required to do so under the Exchange Act, the Company shall use reasonable efforts to timely
file the reports required to be filed by it under the Exchange Act or the Securities Act (including the reports under Sections 13 and 15(d) of the Exchange Act
referred to in subparagraph (c)(1) of Rule 144) and submit all required Interactive Data Files (as defined in Rule 11 of Regulation S-T of the SEC), and shall use
reasonable efforts to take such further necessary action as any holder of Subject Securities may reasonably request in connection with the removal of any restrictive
legend on the Subject Securities being sold, all to the extent required from time to time to enable such holder to sell the Subject Securities without registration
under the Securities Act within the limitations of the exemption provided by Rule 144.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Survival of Representations and Warranties . All covenants and agreements contained herein, other than those
which by their terms apply in whole or in part after the Closing (which shall survive the Closing), shall terminate as of the Closing, provided nothing herein shall
relieve any party of liability for any breach of such covenant or agreement before it terminated. Except for the warranties and representations contained in clauses
(a)(i), (b), (c), (d), (e), (f)(i), (l) and (o) of Section 3.01 and the representations and warranties contained in Section 3.02, which shall survive the Closing until
expiration of the applicable statute of limitations, the warranties and representations made herein shall survive for one (1) year following the Closing Date and shall
then expire; provided that nothing herein shall relieve any party of liability for any inaccuracy or breach of such representation or warranty to the extent that any
good faith allegation of such inaccuracy or breach is made in writing prior to such expiration.
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duly given if delivered personally, by facsimile, sent by overnight courier or sent via email (with receipt confirmed) as follows:
Section 6.02. Notices . All notices and other communications hereunder shall be in writing and shall be deemed to have been
(a)
If to Purchaser, to:
c/o Silver Lake
2775 Sand Hill Road, Suite 100
Menlo Park, CA 94025
Attention: Karen King
Fax: +1 (650) 233-8125
Email: Karen.King@SilverLake.com
and:
c/o Silver Lake
9 West 57th Street, 32nd Floor
New York, NY 10019
Attention: Andrew J. Schader
Fax: +1 (212) 981-3535
Email: Andy.Schader@SilverLake.com
With a copy (which shall not constitute actual or constructive notice) to:
Simpson Thacher & Bartlett LLP
2475 Hanover Street
Palo Alto, CA 94304
Attention: Robert Langdon
Daniel N. Webb
Fax: +1 (650) 251-5002
Email: Robert.Langdon@stblaw.com
DWebb@stblaw.com
(b)
If to the Company, to:
Cornerstone OnDemand, Inc.
1601 Cloverfield Blvd., Suite 620S
Santa Monica, CA 90404
Attention: Adam Weiss
Fax: +1 (650) 429-9137
Email: aweiss@csod.com
59
With a copy (which shall not constitute actual or constructive notice) to:
Goodwin Procter LLP
100 Northern Avenue
Boston, MA 02210
Attention: Stuart M. Cable
Lisa R. Haddad
Fax: +1 (617) 523-1231
Email: scable@goodwinlaw.com; lhaddad@goodwinlaw.com
or to such other address or addresses as shall be designated in writing. All notices shall be deemed effective (a) when delivered personally (with written
confirmation of receipt, by other than automatic means, whether electronic or otherwise), (b) when sent by facsimile (with written confirmation of receipt,
by other than automatic means, whether electronic or otherwise) or (c) one (1) Business Day following the day sent by overnight courier.
Section 6.03. Entire Agreement; Third Party Beneficiaries; Amendment . This Agreement, together with the New
Confidentiality Agreement (when executed) and the Prior Confidentiality Agreement, sets forth the entire agreement between the parties hereto with respect to the
Transactions, and is not intended to and shall not confer upon any person other than the parties hereto, their successors and permitted assigns any rights or remedies
hereunder, provided that (i) Section 4.07(h) shall be the benefit of and fully enforceable by each of the Covered Persons, (ii) Section 4.12 shall be for the benefit of
and fully enforceable by each of the Section 4.12 Persons and the Silver Lake Indemnitors, (iv) Section 4.22 shall be for the benefit of and fully enforceable by
each of the Indemnitees, (iv) Section 5.05 shall be for the benefit of and fully enforceable by each of the Indemnified Persons and (v) Section 6.12 shall be for the
benefit of and fully enforceable by each of the Specified Persons. Any provision of this Agreement may be amended or modified in whole or in part at any time by
an agreement in writing between the parties hereto executed in the same manner as this Agreement. No failure on the part of any party to exercise, and no delay in
exercising, any right shall operate as a waiver thereof nor shall any single or partial exercise by any party of any right preclude any other or future exercise thereof
or the exercise of any other right. The Company agrees that the Prior Confidentiality Agreement will automatically terminate in all respects concurrent with the
Closing; provided that no such termination shall relieve any party thereto of liability for any breach of the Prior Confidentiality Agreement that occurred prior to
such termination.
Section 6.04. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to
constitute any original, but all of which together shall constitute one and the same document. Signatures to this Agreement transmitted by facsimile transmission,
by electronic mail in “portable document format” (“.pdf”) form, or by any other electronic means intended to preserve the original graphic and pictorial appearance
of a document will have the same effect as physical delivery of the paper document bearing the original signature.
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Section 6.05. Public Announcements . No press release or public announcement related to this Agreement or the transactions
contemplated herein shall be issued or made by the Purchaser or its Affiliates without the prior written approval of the Company, unless required by law (based on
the advice of counsel) in which case the Company shall have the right to review and reasonably comment on such press release, announcement or communication
prior to issuance, distribution or publication. Notwithstanding the foregoing (but subject to the terms of the Prior Confidentiality Agreement or New
Confidentiality Agreement, as applicable), the Purchaser and its Affiliates shall not be restricted from communicating with their respective investors and potential
investors in connection with marketing, informational or reporting activities; provided that the recipient of such information is subject to a customary obligation to
keep such information confidential. The Company may issue or make one or more press releases or public announcements (in which case the Purchaser shall have
the right to review and reasonably comment on such press release, announcement or communication prior to issuance, distribution or publication) and may file this
Agreement with the SEC and may provide information about the subject matter of this Agreement in connection with equity or debt issuances, share repurchases,
or marketing, informational or reporting activities.
Section 6.06. Expenses . From and after the date of this Agreement, at any time and from time to time, the Purchaser shall
have the right to request that the Company reimburse all documented out-of-pocket expenses (including attorneys’ fees) incurred by the Purchaser or its Affiliates
in connection with their evaluation of the Company and the transactions contemplated pursuant to this Agreement, including all expenses related to the due
diligence review and the structuring, drafting, negotiating and entry into this Agreement and the other Transaction Agreements, up to one million two hundred
thousand dollars ($1,200,000) in the aggregate, which the Company shall do promptly and in any event within three (3) Business Days of such request. As of the
Closing (and without duplication with the deduction for expenses contemplated in the definition of Purchase Price), the Company shall reimburse all such fees
incurred by the Purchaser and its Affiliates in connection with the foregoing to the extent not previously paid pursuant to the first sentence of this Section 6.06.
Section 6.07. Successors and Assigns . Except as otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the Company’s successors and assigns and Purchaser’s successors and assigns, and no other person; provided , that neither the
Company nor the Purchaser may assign its respective rights or delegate its respective obligations under this Agreement, whether by operation of law or otherwise,
and any assignment by the Company or the Purchaser in contravention hereof shall be null and void; provided , that (i) prior to the Closing the Purchaser may
assign all of its rights and obligations under this Agreement or any portion thereof to one or more Affiliates who execute and deliver a Joinder, and such Affiliate
shall be deemed a Purchaser hereunder and shall have all rights and obligations of a Purchaser or any portion thereof (as set forth in the Joinder); provided that no
such assignment will relieve the Purchaser of its obligations hereunder, (ii) any Affiliate of the Purchaser who after the Closing Date executes and delivers a
Joinder and is a permitted transferee of any Notes or shares of Company Common Stock shall be deemed a Purchaser hereunder and have all the rights and
obligations of a Purchaser or any portion thereof (as set forth in the Joinder); provided that no such assignment will relieve the Purchaser of its obligations
hereunder, (iii) if the Company consolidates or merges with or into any Person and the Company Common Stock is, in whole or in part, converted into or
exchanged for securities of a different issuer, then as a condition to such transaction the Company will cause such issuer to assume all of the Company’s rights and
obligations under this Agreement in a written instrument delivered to the Purchaser, and (iv) the rights of a holder of Registrable Securities under Article V may be
transferred but only together with Subject Securities (w) in a transfer of (1) Notes in an aggregate principal amount of at least $25,000,000 and (2) Company
Common Stock or other Subject Securities issued or issuable upon conversion of at least $25,000,000 in aggregate principal amount of Notes, (x) to an Affiliate of
the transferor that executes and delivers to the Company a Joinder (subject to 4.02(a)), or (y) to a lender in connection with a Permitted Loan or (z) to a financial
institution in connection with a Permitted Debt Financing Transaction. For the avoidance of doubt, no Third Party to whom any of the Notes or shares of Company
Common Stock are transferred shall have any rights or obligations under this Agreement except (and then only to the extent of) any rights and obligations under
Article V to the extent transferable in accordance with this Section 6.07. Notwithstanding anything to the contrary set forth herein, the Purchaser may without the
consent of any other party grant powers of attorney, operative only upon an event of default of the Company in respect of its obligation under Article II to issue the
Notes upon payment of the Purchase Price in accordance with the terms of this Agreement (including satisfaction of the conditions set forth in Section 2.02(d)), to
any lender, administrative agent or collateral agent under any Permitted Loan or to any financial institution in connection with a Permitted Debt Financing
Transaction, in each case to act on behalf of the Purchaser to enforce such obligation.
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Section 6.08. Governing Law; Jurisdiction; Waiver of Jury Trial .
(a)
This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to
any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of
any jurisdiction other than the State of Delaware. In addition, each of the parties hereto irrevocably agrees that any legal action or proceeding with respect
to this Agreement and the rights and obligations arising hereunder, or for recognition and enforcement of any judgment in respect of this Agreement and
the rights and obligations arising hereunder brought by the other party hereto or its successors or assigns, shall be brought and determined exclusively in
the Delaware Court of Chancery and any state appellate court therefrom within the State of Delaware (or, solely if the Delaware Court of Chancery
declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware). Each of the parties hereto hereby
irrevocably submits with regard to any such action or proceeding for itself and in respect of its property, generally and unconditionally, to the personal
jurisdiction of the aforesaid courts and agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this
Agreement in any court other than the aforesaid courts. Each of the parties hereto hereby irrevocably waives, and agrees not to assert as a defense,
counterclaim or otherwise, in any action or proceeding with respect to this Agreement, (i) any claim that it is not personally subject to the jurisdiction of
the above named courts for any reason other than the failure to serve in accordance with this Section 6.08(a), (ii) any claim that it or its property is exempt
or immune from the jurisdiction of any such court or from any legal process commenced in such courts (whether through service of notice, attachment
prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise) and (iii) to the fullest extent permitted by the
applicable law, any claim that (A) the suit, action or proceeding in such court is brought in an inconvenient forum, (B) the venue of such suit, action or
proceeding is improper or (C) this Agreement, or the subject matter hereof, may not be enforced in or by such courts. Each of the parties hereby agrees
that service of any process, summons, notice or document by U.S. registered mail to the respective addresses set forth in Section 6.02 shall be effective
service of process for any suit or proceeding in connection with this Agreement or the transactions contemplated hereby.
(b)
EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO A TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS CONTAINED IN THIS SECTION
6.08.
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Section 6.09. Severability . If any provision of this Agreement is determined to be invalid, illegal or unenforceable, the
remaining provisions of this Agreement shall remain in full force and effect provided that the economic and legal substance of, any of the Transactions is not
affected in any manner materially adverse to any party. In the event of any such determination, the parties agree to negotiate in good faith to modify this
Agreement to fulfill as closely as possible the original intent and purpose hereof. To the extent permitted by law, the parties hereby to the same extent waive any
provision of law that renders any provision hereof prohibited or unenforceable in any respect.
Section 6.10. Specific Performance . The parties agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. Accordingly, each party agrees that in the
event of any breach or threatened breach by any other party of any covenant or obligation contained in this Agreement, the non-breaching party shall be entitled (in
addition to any other remedy that may be available to it, whether in law or equity) to obtain (i) a decree or order of specific performance to enforce the observance
and performance of such covenant or obligation, and (ii) an injunction restraining such breach or threatened breach. Each of the parties agrees that it will not
oppose the granting of an injunction, specific performance and other equitable relief on the basis that any other party has an adequate remedy at law or that any
award of specific performance is not an appropriate remedy for any reason at law or in equity. Any party seeking an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions of this Agreement shall not be required to provide any bond or other security in connection
with any such order or injunction.
and are not part of this Agreement.
Section 6.11. Headings . The headings of Articles and Sections contained in this Agreement are for reference purposes only
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Section 6.12. Non-Recourse .
(a)
Notwithstanding anything to the contrary in this Agreement, the Purchaser’s liability for any liability, loss, damage or recovery of
any kind (including special, exemplary, consequential, indirect or punitive damages or damages arising from loss of profits, business opportunities or
goodwill, diminution in value or any other losses or damages, whether at law, in equity, in contract, in tort or otherwise) arising under or in connection
with any breach of this Agreement or any other Transaction Agreement (whether willfully, intentionally, unintentionally or otherwise) or in respect of any
oral representations made or alleged to have been made in connection herewith shall be no greater than an amount equal to the Purchase Price and the
Purchaser shall have no further liability or obligation relating to or arising out of this Agreement, any other Transaction Agreement or the Transactions in
excess of such amount. For the avoidance of doubt, the foregoing shall not limit the Company’s rights under Section 6.10.
(b)
This Agreement may only be enforced against, and any claim or cause of action based upon, arising out of, or related to this
Agreement or the transactions contemplated hereby may only be brought against the entities that are expressly named as parties hereto and their
respective successors and assigns (including any Person that executes and delivers a Joinder). Except as set forth in the immediately preceding sentence,
no past, present or future director, officer, employee, incorporator, member, partners, stockholder, Affiliate, agent, attorney, advisor or representative of
any party hereto (collectively, the “Specified Persons”) shall have any liability for any obligations or liabilities of any party hereto under this Agreement
or for any claim based on, in respect of, or by reason of, the transactions contemplated hereby (other than the Guarantor with respect to the obligations set
forth in Section 4.24).
[ Remainder of page intentionally left blank. ]
64
date first above written.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto or by their respective duly authorized officers, all as of the
CORNERSTONE ONDEMAND, INC.
By: /s/ Adam Miller ________________________
Name:Adam Miller
Title:Chief Executive Officer
[Signature Page to Investment Agreement]
SILVER LAKE CREDIT PARTNERS, L.P.
By: Silver Lake Credit Associates, L.P., its general partner
By: SLCA (GP), L.L.C., its general partner
By: Silver Lake Group, L.L.C., its managing member
By: /s/ Joseph Osnoss _______________________
Name:Joseph Osnoss
Title:Managing Director
[Signature Page to Investment Agreement]
Solely for purposes of Section 4.24
SILVER LAKE GROUP, L.L.C.
By: /s/ Joseph Osnoss _______________________
Name:Joseph Osnoss
Title:Managing Director
[Signature Page to Investment Agreement]
EXHIBIT A
FORM OF INDENTURE
CORNERSTONE ONDEMAND, INC.
and
[U.S. BANK NATIONAL ASSOCIATION] 1
as Trustee
INDENTURE
Dated as of [•] , 2017
5.75% CONVERTIBLE SENIOR NOTES DUE 2021
1
Company to confirm trustee.
TABLE OF CONTENTS
ARTICLE 1
DEFINITIONS
PAGE
Section 1.01.
Definitions
Section 1.02.
Other Definitions
Section 1.03.
Rules of Construction
Section 1.04.
Incorporation by Reference of Trust Indenture Act
Section 1.05.
References to Interest
ARTICLE 2
THE SECURITIES
Section 2.01.
Form and Dating
Section 2.02.
Execution and Authentication
Section 2.03.
Registrar, Paying Agent and Conversion Agent
Section 2.04.
Paying Agent to Hold Money in Trust
Section 2.05.
Holder Lists
Section 2.06.
Transfer and Exchange
Section 2.07.
Replacement Securities
Section 2.08.
Outstanding Securities
Section 2.09.
Securities Held by the Company or an Affiliate
Section 2.10.
Temporary Securities
Section 2.11.
Cancellation
Section 2.12.
Defaulted Interest
Section 2.13.
CUSIP Numbers
Section 2.14.
Deposit of Moneys
Section 2.15.
Book-Entry Provisions for Global Securities
Section 2.16.
Special Transfer Provisions
Section 2.17.
Restrictive Legends
ARTICLE 3
REPURCHASE UPON A FUNDAMENTAL CHANGE
Section 3.01.
Repurchase at Option of Holder Upon a Fundamental Change
Section 4.01.
Payment of Securities
Section 4.02.
Maintenance of Office or Agency
Section 4.03.
Annual Reports
Section 4.04.
Compliance Certificate
Section 4.05.
Stay, Extension and Usury Laws
Section 4.06.
Notice of Default
Section 4.07.
Limitation on the Incurrence of Indebtedness
ARTICLE 4
COVENANTS
i
2
13
14
14
15
15
16
17
17
17
18
19
19
20
20
21
21
21
21
22
26
27
28
33
33
34
36
36
36
36
Section 5.01.
When Company May Merge, Etc.
Section 5.02.
Successor Substituted
ARTICLE 5
SUCCESSORS
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.01.
Events of Default
Section 6.02.
Acceleration
Section 6.03.
Other Remedies
Section 6.04.
Waiver of Past Defaults
Section 6.05.
Control by Majority
Section 6.06.
Limitation on Suits
Section 6.07.
Rights of Holders to Receive Payment and to Convert Securities
Section 6.08.
Collection Suit by Trustee
Section 6.09.
Trustee May File Proofs of Claim
Section 6.10.
Priorities
Section 6.11.
Undertaking for Costs
ARTICLE 7
TRUSTEE
Section 7.01.
Duties of Trustee
Section 7.02.
Rights of Trustee
Section 7.03.
Individual Rights of Trustee
Section 7.04.
Trustee’s Disclaimer
Section 7.05.
Notice of Defaults
Section 7.06.
Compensation and Indemnity
Section 7.07.
Replacement of Trustee
Section 7.08.
Successor Trustee by Merger, Etc.
Section 7.09.
Eligibility; Disqualification
Section 7.10.
Preferential Collection of Claims Against Company
Section 7.11.
Reports by Trustee to Holders
ARTICLE 8
DISCHARGE OF INDENTURE
Section 8.01.
Termination of the Obligations of the Company
Section 8.02.
Application of Trust Money
Section 8.03.
Repayment to Company
Section 8.04.
Reinstatement
Section 9.01.
Without Consent of Holders
ARTICLE 9
AMENDMENTS
ii
36
37
38
40
41
41
42
42
43
43
43
43
44
44
45
46
47
47
47
48
49
49
49
49
49
50
50
50
50
Section 9.02.
With Consent of Holders
Section 9.03.
Revocation and Effect of Consents
Section 9.04.
Notation on or Exchange of Securities
Section 9.05.
Trustee Protected
Section 9.06.
Effect of Supplemental Indentures
ARTICLE 10
CONVERSION
Section 10.01.
Conversion Privilege
Section 10.02.
Conversion Procedure and Payment Upon Conversion
Section 10.03.
Cash in Lieu of Fractional Shares
Section 10.04.
Taxes on Conversion
Section 10.05.
Company to Provide Common Stock
Section 10.06.
Adjustment of Conversion Rate
Section 10.07.
No Adjustment
Section 10.08.
Other Adjustments
Section 10.09.
Adjustments for Tax Purposes
Section 10.10.
Notice of Adjustment and Certain Events
Section 10.11.
Effect of Reclassifications, Consolidations, Mergers, Binding Share Exchanges or Sales on Conversion Privilege
Section 10.12.
Trustee’s Disclaimer
Section 10.13.
Rights Distributions Pursuant to Shareholders’ Rights Plans
Section 10.14.
Increased Conversion Rate Applicable to Certain Securities Surrendered in Connection with Make-Whole Fundamental
Changes
Section 10.15.
Applicable Stock Exchange Restrictions
Section 11.01.
Action by Holders
Section 11.02.
Proof of Execution by Holders
Section 11.03.
Persons Deemed Absolute Owners
Section 12.01.
Purpose of Meetings
Section 12.02.
Call of Meetings by Trustee
Section 12.03.
Call of Meetings by Company or Holders
Section 12.04.
Qualifications for Voting
Section 12.05.
Regulations
Section 12.06.
Voting
Section 12.07.
No Delay of Rights by Meeting
Section 13.01.
Notices
ARTICLE 11
CONCERNING THE HOLDERS
ARTICLE 12
HOLDERS’ MEETINGS
ARTICLE 13
MISCELLANEOUS
iii
51
53
53
53
53
54
54
56
56
56
57
66
67
67
67
68
69
70
70
72
73
73
73
74
74
74
74
75
75
76
76
Section 13.02.
Communication by Holders with Other Holders
Section 13.03.
Certificate and Opinion as to Conditions Precedent
Section 13.04.
Statements Required in Certificate or Opinion
Section 13.05.
Rules by Trustee and Agents
Section 13.06.
Legal Holidays
Section 13.07.
Duplicate Originals
Section 13.08.
Facsimile and PDF Delivery of Signature Pages
Section 13.09.
Governing Law
Section 13.10.
No Adverse Interpretation of Other Agreements
Section 13.11.
Successors
Section 13.12.
Separability
Section 13.13.
Table of Contents, Headings, Etc.
Section 13.14.
Calculations in Respect of the Securities
Section 13.15.
No Personal Liability of Directors, Officers, Employees or Shareholders
Section 13.16.
Force Majeure
Section 13.17.
Trust Indenture Act Controls
Section 13.18.
No Security Interest Created
Section 13.19.
Benefits of Indenture
Section 13.20.
Withholding
Section 13.21.
U.S.A. Patriot Act
EXHIBITS
Exhibit A
Form of Security
Exhibit B-1A
Form of Security Private Placement Legend
Exhibit B-1B
Form of Common Stock Private Placement Legend
Exhibit B-2
Exhibit B-3
Exhibit C
Exhibit D
Exhibit E
Form of Legend for Global Security
Form of Original Issue Discount Legend
Form of Notice of Transfer Pursuant to Registration Statement
Form of Certificate of Transfer
Form of Certificate of Exchange
iv
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78
78
79
79
79
79
79
80
80
80
80
80
81
81
81
81
81
81
82
CORNERSTONE ONDEMAND, INC.
Reconciliation and tie between Trust Indenture Act of 1939 and
Indenture, dated as of [•], 2017
§ 310(a)(1)
(a)(2)
(a)(3)
(a)(4)
(a)(5)
(b)
§ 311(a)
(b)
(c)
§ 312(a)
(b)
(c)
§ 313(a)
(b)(1)
(b)(2)
(c)
(d)
§ 314(a)
(b)
(c)(1)
(c)(2)
(c)(3)
(d)
(e)
(f)
§ 315(a)
(b)
(c)
(d)
(e)
§ 316(a)(last sentence)
(a)(1)(A)
(a)(1)(B)
(a)(2)
(b)
(c)
§ 317(a)(1)
(a)(2)
(b)
§ 318(a)
Note: This reconciliation and tie shall not, for any purpose, be deemed to be part of the Indenture.
1
7.09
7.09
Not Applicable
Not Applicable
7.09
7.09
7.1
7.1
Not Applicable
2.05
13.02
13.02
7.11
7.11
7.11
7.11
7.11
4.03, 13.01, 13.04
Not Applicable
13.03
13.03
Not Applicable
Not Applicable
13.04
Not Applicable
7.01
7.05
7.01
7.01
6.11
2.09
6.05
6.04
Not Applicable
6.07
2.12
6.08
6.09
2.04
13.17
INDENTURE , dated as of [•], 2017, between Cornerstone OnDemand, Inc., a Delaware corporation (the “ Company ,” as more fully set forth in
Section 1.01), and [U.S. Bank National Association], as trustee (the “ Trustee ,” as more fully set forth in Section 1.01).
Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders (as defined below) of the Company’s
5.75% Convertible Senior Notes due 2021 (the “ Securities ”).
ARTICLE 1
DEFINITIONS
Section 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires)
for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01.
“ Affiliate ” means, with respect to a specified Person, any Person directly or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For this purpose, “ control ” shall mean the power to direct the management and policies of a Person through the ownership of
securities, by contract or otherwise.
“ Applicable Calculation Date ” means the applicable date of calculation for (i) the Consolidated Total Debt Ratio or (ii) the Consolidated Net Debt
Ratio.
“ Applicable Measurement Period ” means the most recently completed four consecutive fiscal quarters of the Company ending on or immediately
preceding the Applicable Calculation Date for which internal financial statements are available; provided that prior to the first date financial statements have been
furnished pursuant to Section 4.03, the Applicable Measurement Period in effect will be the period of four consecutive fiscal quarters of the Company ended [•],
2017.
“ Applicable Procedures ” means, with respect to any transfer or exchange of or for the beneficial interests in any Global Security, the rules and
procedures of the Depository that apply to such transfer or exchange.
“ Bankruptcy Custodian ” means any receiver, trustee, liquidator or similar official under any Bankruptcy Law.
“ Bankruptcy Law ” means Title 11, U.S. Code or any similar U.S. Federal or State law for the relief of debtors, or any analogous foreign law applicable
to the Company or its Subsidiaries, as the case may be.
“ Board of Directors ” means the board of directors of the Company or any committee thereof authorized to act for it.
2
“ Board Resolution ” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the
Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee.
“ Business Day ” means any day other than a Saturday, a Sunday or a day on which the Federal Reserve Bank of New York is authorized or required by
law or executive order to close or be closed.
“ Capital Stock ” of any Person means any and all shares, interests, participations or other equivalents (however designated) of capital stock of such
Person and all warrants or options to acquire such capital stock.
“ Cash and Cash Equivalents ” means (i) unrestricted cash and cash equivalents, as defined in accordance with GAAP, and (ii) unrestricted securities of
the following types: commercial paper, certificates of deposit, guaranteed investment contracts and repurchase agreements where the obligor to the Company is
rated A (or equivalent rating) or above by Fitch, S&P or Moody’s (or in the case of commercial paper, rated P-1 or higher by Moody’s or A-1 or higher by S&P).
“ Change in Control ” shall be deemed to have occurred at such time as:
(a) any “person” or “group” (as those terms are used in Sections 13(d) and 14(d) of the Exchange Act), files a Schedule TO or any schedule, form or
report under the Exchange Act disclosing that such person or group has become the direct or indirect “beneficial owner” (as that term is used in Rule 13d-3 under
the Exchange Act) of more than fifty percent (50%) of the total outstanding voting power of all classes of the Company’s Capital Stock entitled to vote generally in
the election of directors (“ Voting Stock ”);
(b) the consummation of a sale, transfer, lease, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the
consolidated property or assets of the Company and its Subsidiaries, taken as a whole, to any “person” or “group” (as those terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than the Company and/or one or more of the Company’s direct or indirect Subsidiaries (for the avoidance of doubt a merger or
consolidation of the Company with or into another Person is not subject to this clause (b));
(c) any transaction or series of related transactions is consummated in connection with which (whether by means of merger, exchange, liquidation, tender
offer, consolidation, combination, reclassification, recapitalization, acquisition or otherwise) all or substantially all of the Common Stock are exchanged for,
converted into, acquired for or constitutes solely the right to receive other securities, other property, assets or cash, but excluding the consummation of any merger,
exchange, tender offer, consolidation or acquisition of the Company with or by another Person pursuant to which the Persons that “beneficially owned,” directly or
indirectly, the shares of the Company’s Voting Stock immediately prior to such transaction “beneficially own,” directly or indirectly, immediately after such
transaction, shares of the surviving, continuing or acquiring corporation’s Voting Stock representing at least a majority of the total outstanding voting power of all
outstanding classes of Voting Stock of the surviving, continuing or acquiring corporation in substantially the same proportion relative to each other as such
ownership immediately prior to such transaction, other than changes in proportionality as a result of any cash/stock election provided under the terms of the
definitive agreement regarding such transaction; or
3
(d) the adoption of a plan relating to the Company’s liquidation or dissolution.
Notwithstanding the foregoing, (x) any transaction that constitutes a Change in Control pursuant to both clause (a) and clause (c) shall be deemed a
Change in Control solely under clause (c) above and (y) a transaction or transactions described in any of clause (a) through (c) above (including any merger of the
Company solely for the purpose of changing the Company’s jurisdiction of incorporation) shall not constitute a “ Change in Control ” if (i) at least ninety percent
(90%) of the consideration received or to be received by holders of the Common Stock or Reference Property into which the Securities have become convertible
pursuant to Section 10.11 (other than cash payments for fractional shares or pursuant to statutory appraisal rights) in connection with such transaction or
transactions consists of common equity listed or quoted on The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market
(or any of their respective successors) (or which will be so traded when issued or exchanged in connection with such consolidation or merger) and (ii) as a result of
such transaction or transactions, the Securities become convertible or exchangeable for such consideration pursuant to Section 10.11.
“ Close of Business ” means 5:00 p.m., New York City time.
“ Closing Sale Price ” on any date means the per share price of the Common Stock on such date, determined (i) on the basis of the closing sale price per
share (or if no closing sale price per share is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and
the average ask prices) on that date as reported in the composite transactions for the Relevant Stock Exchange; or (ii) if the Common Stock is not listed on a U.S.
national securities exchange on the relevant date, the last quoted bid price for the Common Stock on the relevant date, as reported by OTC Markets Group, Inc. or a
similar organization; provided , however , that in the absence of any such report or quotation, the “ Closing Sale Price ” shall be the price determined by a
nationally recognized independent investment banking firm retained by the Company for such purpose as most accurately reflecting the per share price that a fully
informed buyer, acting on his own accord, would pay to a fully informed seller, acting on his own accord in an arm’s-length transaction, for one share of Common
Stock. The Closing Sale Price shall be determined without reference to after-hours or extended market trading.
“ Common Stock ” means the common stock, par value $0.0001 per share, of the Company at the date of this Indenture, subject to Section 10.11.
“ Company ” means the party named as such above until a successor replaces it pursuant to the applicable provision hereof and thereafter means the
successor. The foregoing sentence shall likewise apply to any such successor or subsequent successor.
4
“ Company Order ” means a written request or order signed on behalf of the Company by an Officer and delivered to the Trustee.
“ Consolidated Adjusted EBITDA ” means with reference to any period, Consolidated Net Income for such period plus:
(i) to the extent deducted in determining Consolidated Net Income, depreciation, amortization, interest expense, income taxes, and stock-based
compensation expense;
(ii) any items (regardless of whether any such item is positive or negative), to the extent such items are included as “Adjustments to Net Income
(Loss)” in bridging from “GAAP Net Income (Loss)” to “non-GAAP Net Income (Loss)” in the Company’s press release announcing the Company’s
financial results for such period; and
(iii) to the extent included in determining Consolidated Net Income, unrealized and realized non-cash gains or losses resulting from the impact of
foreign currency changes on the valuation of assets and liabilities on the Company’s balance sheet; and
minus, to the extent included as income in determining Consolidated Net Income, interest income and any extraordinary and other non-
recurring gains of the Company and its Subsidiaries on a consolidated basis.
Consolidated Net Income will further be adjusted as follows to account for Accounting Standards Codification (“ASC”) 842 and ASC 606:
(a) ASC 842: Consolidated Net Income will be determined on the basis of the accounting for lease obligations in place prior to the adoption of
ASC 842.
(b) ASC 606: (A) for fiscal year 2018 and prior periods, Consolidated Net Income and the related adjustment above shall be the amount
pertaining to the standards in place prior to the adoption of ASC 606 included in the footnotes to the consolidated financial statements of the Company
included in the Company’s most recent periodic report that the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange
Act, and (B) beginning with the first quarter of fiscal year 2019 and all subsequent periods, the amount of Net Income and related adjustments above shall
be the amount included on the income statement included in the Company’s most recent periodic report that the Company is required to file with the SEC
pursuant to Section 13 or 15(d) of the Exchange Act.
All the foregoing adjustments shall be made without duplication.
“ Consolidated Net Debt Ratio ” means, as of any date of determination, the ratio of (i) Consolidated Total Indebtedness of the Company and its
Subsidiaries as of the Applicable Calculation Date minus the aggregate amount of Securities outstanding as of the Applicable Calculation Date minus all Cash
and Cash Equivalents of the Company and its Subsidiaries determined on a consolidated basis to (ii) the Consolidated Adjusted EBITDA of the Company and its
Subsidiaries for the Applicable Measurement Period.
5
“ Consolidated Net Income ” means, with reference to any period, the net income (or loss) of the Company and its Subsidiaries for such period, on a
consolidated basis, provided that there shall be excluded any net income, gain or losses during such period from (i) any change in accounting principles in
accordance with GAAP, (ii) any prior period adjustment resulting from any change in accounting principles in accordance with GAAP and (iii) any discontinued
operations.
“ Consolidated Total Debt Ratio ” means, as of any date of determination, the ratio of (i) Consolidated Total Indebtedness of the Company and its
Subsidiaries as of the Applicable Calculation Date minus the aggregate amount of Securities outstanding as of the Applicable Calculation Date to (ii) the
Consolidated Adjusted EBITDA of the Company and its Subsidiaries for the Applicable Measurement Period.
“ Consolidated Total Indebtedness ” means, as at any date of determination, an amount equal to the aggregate principal amount of all outstanding
Indebtedness of the Company and its Subsidiaries on a consolidated basis consisting of Indebtedness for borrowed money, unreimbursed drawings under letters of
credit, Obligations in respect of Financing Lease Obligations and third-party debt obligations evidenced by promissory notes and similar instruments (and
excluding, for the avoidance of doubt, (i) all undrawn amounts under revolving credit facilities, (ii) performance bonds or any similar instruments and (iii) lease
obligations that are not Financing Lease Obligations), in each case determined on a consolidated basis in accordance with GAAP.
“ Conversion Date ” with respect to a Security means the date on which a Holder satisfies all the requirements for such conversion specified under
Section 10.01(b).
“ Conversion Notice ” means a “Conversion Notice” in the form attached as Attachment 2 to the Form of Security attached hereto as Exhibit A.
“ Conversion Price ” means as of any date, $1,000 divided by the Conversion Rate as of such date.
“ Conversion Rate ” shall initially be [23.8095] 2 , subject to adjustment as provided in Article 10.
“ Corporate Trust Office of the Trustee ” means the principal office of the Trustee at which at any time this Indenture shall be administered, which
office as of the date hereof is located at [633 West 5th Street, 24th Floor, Los Angeles, California 90071], Attention: [Corporate Trust Services (Cornerstone
OnDemand, Inc.’s 5.75% Convertible Senior Notes due 2021)]. With respect to presentation for transfer or exchange, conversions or principal payment, such
address shall be [633 West 5th Street, 24th Floor, Los Angeles, California 90071], Attention: [Corporate Trust Services (Cornerstone OnDemand, Inc.’s 5.75%
Convertible Senior Notes due 2021)], or such other address as the Trustee may designate from time to time by written notice to the Holders and the Company, or
the principal corporate trust office of any successor Trustee (or such other address as such successor Trustee may designate from time to time by written notice to
the Holders and the Company).
2
To be adjusted in the final indenture pursuant to Section 4.13 of the Investment Agreement, if applicable.
6
“ Daily VWAP ” means, for each Trading Day during the relevant period, the per share volume-weighted average price as displayed under the heading
“Bloomberg VWAP” on Bloomberg page “[CSOD.Q
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