| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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. Certain prior period balances have been reclassified to conform to the current year presentation. Use of Estimates The preparation of the 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management evaluates its estimates, including but not limited to 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 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, (iv) fair values of investments in marketable securities and strategic investments carried at fair value, (v) the fair values of acquired assets and assumed liabilities in business combinations, (vi) the useful lives of property and equipment, capitalized software, and intangible assets, (vii) impairment of long-lived assets, (viii) the estimated period benefit used for amortization of the commission payments to record to expense, and (ix) determination of the number of shares that are probable of vesting for performance-based restricted stock unit awards (“PRSUs”). These estimates are based on historical data and experience, expectations of future operating performance, and various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Business Combinations The results of businesses acquired in a business combination are included in the consolidated financial statements from the date of the acquisition. Assets and liabilities of an acquired business are recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions. Although the Company believes the assumptions and estimates it has made are reasonable, they are inherently uncertain and based in part on experience, market conditions, projections of future performance, and information obtained from legacy management of acquired companies. Critical estimates include but are not limited to: • future subscription revenue (including customer retention rates); and, operating profit margins associated with such subscription revenues; • costs anticipated to fulfill remaining acquired performance obligations and estimated profit margin for such obligations; • technology migration curves and royalty rates; • discount rates; • useful lives assigned to acquired intangibles assets; and • uncertain tax positions and tax-related valuation allowances assumed. The identifiable intangible assets are amortized on a straight-line basis over their respective estimated useful lives to sales and marketing for customer-related intangible assets, cost of revenue for developed technology intangible assets, and general and administrative expense for all other intangible assets . Revenue Recognition Effective January 1, 2018, the Company adopted the guidance under Topic 606 using a modified retrospective approach. The Company derives its revenue from the following sources: Subscriptions to the Company’s Products and Other Offerings on a Recurring Basis Customers pay subscription fees for access to the Company’s enterprise people development solutions, other products, and support on a recurring basis. Fees are based on a number of factors, including the number of products purchased and the number of users having access to a product. The Company generally recognizes revenue from subscriptions ratably over the term of the agreements beginning on the date the subscription service is made available to the customer. Subscription agreements are typically three years, billed annually in advance, and non-cancelable, with payment due within 30 days of the invoice date. Professional Services and Other The Company offers its customers and implementation partners 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 either upfront on a fixed rate basis, on a time and materials basis, or are included as part of the subscription fee. These services are generally purchased as part of a subscription arrangement and are typically performed within the first several months of the arrangement. Customers may also purchase professional services at any other time. The Company generally recognizes revenue from fixed fee professional services contracts as services are performed based on the proportion performed to date relative to the total expected services to be performed. Revenue associated with time-and-material contracts are recorded as such time-and-materials are incurred. Out-of-pocket travel costs related to the delivery of professional services are typically reimbursed by the customer and are accounted for as revenue in the period in which the cost is incurred. The Company recognizes revenue from contracts with customers based on the five steps below. The application of these steps may require the use of certain significant estimates and judgments, particularly in identifying and evaluating complex or unusual contract terms and conditions that may impact revenue recognition. 1) Identification of the contract, or contracts, with a customer 2) Identification of all performance obligations in the contract 3) Determination of the transaction price 4) Allocation of the transaction price to the performance obligations in the contract 5) Recognition of revenue as the Company satisfies a performance obligation The Company identifies enforceable contracts with a customer when the agreement is signed. Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the products sold, customer demographics, geographic locations, and the number and types of users within the Company’s contracts. For arrangements in which the Company resells third-party e-learning training content to customers, revenue is recognized at the gross amount invoiced to customers as (i) the Company is primarily responsible for hosting the content on the Company’s solutions for the term of the agreement, (ii) the Company controls the content before access is provided to the customer, and (iii) the Company typically has discretion to establish the price charged. Deferred Revenue The Company records amounts that have been invoiced to its customers in accounts receivable and deferred revenue. The Company records revenue once 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 non-current. Sales Commissions The Company defers commissions paid to its sales force and related payroll taxes as these amounts are incremental costs of obtaining a contract with a customer and are recoverable from future revenue due to the non-cancelable customer agreements that gave rise to the commissions. Separate periods of benefit are determined for commissions related to initial contracts and commissions related to renewal contracts. Commissions for initial contracts are deferred in the consolidated balance sheets and amortized on a straight-line basis over a six-year benefit period. The Company takes into consideration technology and other factors in estimating the benefit period. Commissions for renewal contracts are deferred and amortized on a straight-line basis over the related contract renewal period. Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of operations. Cost of Revenue Cost of revenue consists primarily of costs related to hosting the Company’s products and delivery of professional services, and includes the following: • personnel and related expenses, including stock-based compensation; • expenses for network-related infrastructure and IT support; • delivery of contracted professional services and ongoing customer support and customer success initiatives; • payments to external service providers contracted to perform implementation services; • depreciation of data centers, and amortization of: capitalized software costs, developed technology software license rights, and technology-related intangible assets from acquisitions; and • 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. The 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 customer and are accounted for as cost of revenue in the period in which the cost is incurred. 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 are expensed as incurred except for certain software development costs which are capitalized when the following criteria are met: 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. Advertising Advertising expenses for 2020, 2019, and 2018 were $13.0 million, $10.8 million, and $7.1 million, respectively, and are expensed as incurred and recorded within sales and marketing in the accompanying consolidated statements of operations. Stock-Based Compensation The Company measures and recognizes compensation expense for stock-based awards granted to employees and directors using a fair value method, including restricted stock units (“RSUs”), PRSUs, stock options, and shares purchased under the 2010 Employee Stock Purchase Plan (“ESPP”). For RSUs, and PRSUs with service and performance conditions, fair value is based on the closing price of the Company’s common stock on the date of grant. For PRSUs with service and market conditions, fair value is estimated using a Monte-Carlo simulation. The Company recognizes compensation expense for PRSUs only if it is probable the performance or market conditions will be met, which is dependent upon its expectations of whether future specified financial targets will be achieved. The likelihood of achievement of these targets is assessed at each balance sheet date. Previously recognized compensation expense may be prospectively adjusted if current expectations differ from assessments made in previous periods. Compensation expense, net of estimated forfeitures, is recognized over the requisite service period (which is generally the vesting period) on a straight-line basis for awards with only service conditions and using the accelerated attribution method for awards with both performance or market and service conditions. The Company estimates forfeitures based on its historical experience and regularly reviews the estimated forfeiture rate and makes changes as factors affecting the forfeiture rate calculations and assumptions change. For stock options and shares purchased under the ESPP, fair value is estimated using the Black-Scholes option pricing model. The risk-free interest rate is based on the US Treasury yield in effect during the period the award was granted. The expected term for stock options is determined using a simplified approach in which the expected term of an option is presumed to be the mid-point between the vesting date and the expiration date of the option. The expected term for shares purchased under the ESPP approximates the term of the offering period. The computation of the expected volatility assumption is based on the historical volatility of the Company’s common stock. The dividend yield is assumed to be zero as the Company has not paid and does not expect to pay dividends for the foreseeable future. Compensation expense is recognized on a straight-line basis over the requisite service period. Due to the valuation allowances provided on a portion of the Company’s net deferred tax assets, the Company has not recorded any significant tax benefit attributable to stock-based compensation expense as of December 31, 2020, 2019, and 2018. 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 internal-use software projects. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Costs incurred for upgrades to 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 the 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 customers. 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 basis of assets and liabilities, using tax rates expected to be in effect during the years in which the basis 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 future reversals of existing taxable temporary differences. The Company has recorded a full valuation allowance to reduce its US, UK, and other net deferred tax assets to zero, as it has determined that it is not more likely than not that any of these net deferred tax assets will be realized based on a history of losses in these jurisdictions. If in the future the company determines that it will be able to realize any of its US, UK, and other net deferred tax assets, it will make an adjustment to the allowance, which would increase income in the period that the determination is made. 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. The Company recognizes the US tax effects of global intangible low-taxed income (“GILTI”) as a component of income tax expense in the period the tax arises (the “period cost method”). Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents. Restricted Cash Restricted cash represents escrow accounts established in connection with lease agreements for the Company’s facilities. Investments in Marketable Securities The cost of marketable securities is determined based on historical cost through the specific identification method and any realized or unrealized gains or losses on investments are reflected as a component of other income (expense). In addition, the Company classifies marketable securities as current or non-current based upon the maturity dates of the securities. Strategic Investments The Company invests in equity securities of various privately-held companies. When the fair value of an investment is not readily determinable, the Company accounts for the investment using the measurement alternative, which is defined as cost, plus or minus changes resulting from observable price changes. If the Company has significant influence or a controlling financial interest over the entity, the investment is accounted for using the equity method. Under the equity method, the Company records its proportionate share of the equity method investee’s income or loss, net of the effects of any basis differences, to other income (expense) on a one-quarter lag in the accompanying consolidated statements of operations. These investments are included in long-term investments in the consolidated balance sheets. Strategic investments are subject to periodic impairment reviews; impairment losses are recorded in other income (expense) in the accompanying consolidated statements of operations. Allowance for Credit Losses Effective January 1, 2020, the Company adopted guidance under Topic 326 using a modified retrospective approach. The Company bases its expected loss allowance methodology on its historical collection experience, current receivables aging, consideration of current conditions, and other relevant data. A reconciliation of the beginning and ending amount of allowance for credit losses is as follows (in thousands): 2020 2019 2018 Beginning balance, January 1 $ 1,375 $ 2,429 $ 7,478 Additions and adjustments 7,935 1,074 1,691 Write-offs (4,334) (2,128) (6,740) Ending balance, December 31 $ 4,976 $ 1,375 $ 2,429 The Company recognized bad debt expense of $3.1 million, $0.5 million, and $0.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. Bad debt expense is recorded in general and administrative expense in the accompanying consolidated statements of operations. Property and Equipment 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 one Note 9 – Other Balance Sheet Amounts). Leasehold improvements are depreciated on a straight-line basis over their estimated useful lives or the term of the lease. 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. Intangible Assets Identifiable intangible assets primarily consist of acquisition-related intangibles. 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 Goodwill Goodwill is not amortized; it is tested for impairment annually, and more frequently upon the occurrence of certain events. 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. Debt In 2017, the Company issued $300.0 million principal amount of 5.75% senior convertible notes (the “Convertible Notes”) for a purchase price equal to 98% of the principal amount. On April 22, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent (“Agent”), which provided for a seven-year senior secured term loan B facility (the “Term Loan Facility”) in an aggregate principal amount of $1.0047 billion for a purchase price equal to 97.5% of the aggregate principal amount after original issue discount. The debt discount for each instrument is accreted to interest expense over the respective terms of each loan using the effective interest method. Similarly, debt issuance costs incurred as part of each loan initiation are amortized to interest expense using the effective interest method. Refer to Note 4 – Debt for additional information about the Company’s debt agreements. Fair Value of Financial Instruments Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on the following three levels of inputs, of which the first two are considered observable and the last one is considered unobservable: • Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that management has the ability to access at the measurement date. • Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. • Level 3 – Unobservable inputs. Observable inputs are based on market data obtained from independent sources. Derivative Instruments and Hedging Activities Derivatives Designated as Hedging Instruments As part of the Company’s overall risk management practices, the Company may enter into financial derivatives, such as interest rate swaps which may be designated as cash flow hedges, to hedge the floating interest rate on variable interest rate debt. The Company records all derivatives in the consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and to apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The gain or loss on derivative instruments designated and qualifying for cash flow hedge accounting is deferred in other comprehensive income. The changes in fair value for all trades that are not designated for hedge accounting are recognized in current period earnings. Deferred gains or losses from designated cash flow hedges are reclassified into earnings in the period that the hedged interest expense impacts earnings, as applicable. The effectiveness of cash flow hedges is assessed at inception and quarterly thereafter. The Company does not offset fair value amounts recognized for derivative instruments in its balance sheet for presentation purposes. Credit risk related to derivative transactions reflects the risk that a party to the transaction could fail to meet its obligation under the derivative contracts. Therefore, the Company’s exposure to the counterparty’s credit risk is generally limited to the amounts, if any, by which the counterparty’s obligations to the Company exceed the Company’s obligations to the counterparty. The Company’s policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings to help mitigate counterparty credit risk. Foreign Currency Forward Contracts As part of the Company’s overall risk management practices, the Company may enter into foreign currency forward contracts to mitigate these risks. The Company has not used, nor does it intend to use, these contracts for trading or speculative purposes. The contracts are re-measured to fair value at the end of each reporting period and are not designated as hedging instruments under applicable accounting guidance; therefore, changes in fair value of these contracts are recorded in other, net in the consolidated statements of operations. Concentration of Risk The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, debt securities, and accounts receivable. The Company’s deposits exceed federally insured limits. The Company performs ongoing credit evaluations of its customers. For the years ended December 31, 2020, 2019, and 2018, no single customer comprised more than 10% of the Company’s revenue. No single customer had an accounts receivable balance greater than 10% of total accounts receivable at December 31, 2020 or 2019. Foreign Currency Transactions and Translation Transactions in foreign currencies are translated into US dollars at the rates of exchange in effect at the date of the transaction. Unrealized transaction gains were approximately $10.7 million, $1.2 million, and $0.4 million for the years ended December 31, 2020, 2019, and 2018, respectively, and are included in other, net within other income (expense), 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 non-monetary accounts, with exchange differences on remeasurement included in other, net. To the extent that the functional currency of the Company’s subsidiaries is different than the US dollar, the financial statements have then been translated into US 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 in the consolidated balance sheets. Leases Effective January 1, 2019, the Company adopted guidance under Topic 842 using a modified retrospective approach. The Company has various non-cancelable arrangements to lease office and dedicated data center facility space. These arrangements include services and other incremental costs to maintain or operate the space and do not contain any significant residual value guarantees, significant variable payments, or restrictive covenants. The Company determines at contract inception whether the arrangement 1) contains a lease based on its ability to control a physically distinct asset for more than 12 months, and 2) should be classified as an operating or finance lease. For both its office and data center facility leases, the Company combines all components of the lease including related services as a single component. Operating leases are reflected as operating right-of-use (“ROU”) assets and operating lease liabilities in the accompanying consolidated balance sheets. Operating ROU assets represent the Company’s right to use the underlying asset for the lease term. Operating lease liabilities represent the Company’s obligation to make payments arising from the lease. The operating ROU asset also includes any lease payments made and excludes lease incentives. The liabilities are measured at the commencement date based on the present value of lease payments over the lease term utilizing an estimated incremental borrowing rate. Lease payments are typically discounted at an estimated incremental borrowing rate as the interest rate implicit in the lease cannot be readily determined in the absence of key inputs which are typically not reported by the Company’s lessors. Judgment was used to estimate the incremental borrowing rate associated with these leases based on relevant market data and Company inputs applied to accepted valuation methodologies. The Company recognizes lease expense relating to its operating leases on a straight-line basis over the lease term, which commences when the Company controls the leased asset. The lease term includes optional periods to extend or terminate the leases when it is reasonably certain that the option will be exercised. Lease incentives are recognized as a reduction to lease expense on a straight-line basis over the underlying lease term. In the normal course of operations, the Company enters into subleases for unoccupied leased office space. Any sublease payments received are recognized as a reduction to the related lease expense. Restructuring The Company records personnel-related restructuring charges with one-time employee termination benefits when the plan has been communicated to the affected employees and significant changes to the plan are unlikely. The Company records facilities-related restructuring charges ratably over the period of the affected facilities’ remaining expected use, as an incremental increase to the remaining right-of-use asset amortization for the lease(s) exited. Recently Adopted Accounting Pronouncements Effective January 1, 2020, the Company adopted th |
