What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-01 compared with 2020-02-27 · 441 added, 293 removed, 916 unchanged (44% of the section changed)

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We have audited the accompanying consolidated balance sheets of Five9, Inc.

and subsidiaries (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019 and the related notes (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements).

We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria, established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers and sales commissions as of January 1, 2018, due to the adoption of Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers , and Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers .

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of FASB ASC Topic 842, Leases .

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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.

audits also included performing such other procedures as we considered necessary in the circumstances.

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.

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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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of the sufficiency of audit evidence over revenues from subscription services and related usage

As described in Note 1 to the consolidated financial statements, the Company charges clients subscription fees, usually billed on a monthly basis, for access to the Company’s Virtual Contract Center (“VCC”) cloud platform.

As discussed in Note 1 to the consolidated financial statements, the Company charges its clients subscription fees, usually billed on a monthly basis, for access to the Company’s Virtual Contact Center (“VCC”) cloud platform.

The subscription fees are primarily based on the number of agent seats as well as the specific VCC functionalities and applications deployed by the client.

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Substantially all of the Company’s clients purchase both subscriptions and related telephony usage.

The related telephony usage fees are based primarily on the volume of minutes used for inbound and outbound client interactions.

The related telephony usage fees are generally based on the volume of minutes used for inbound and outbound client interactions.

There are high volumes of subscription and related usage transactions processed across multiple information technology (“IT”) systems.

We identified the evaluation of the sufficiency of audit evidence over subscription services and related usage as a critical audit matter.

The high volume of transactions and nature of the audit evidence obtained to demonstrate the occurrence and classification of these transactions is highly dependent on these IT systems.

Therefore, auditor judgment was required to determine the nature and extent of audit evidence obtained, the need to involve IT professionals to assist with the performance of certain procedures and to evaluate the results of the procedures.

The primary procedures we performed to address this critical audit matter included the following:

We involved IT professionals with specialized skill and knowledge to assist in testing certain internal controls over the Company’s revenue process, including controls over the capture and flow of subscription and related usage transactional information through the Company’s IT systems.

Revenues from subscription services and related usage involve a high volume of automated transactions dependent on the Company’s IT systems.

Therefore, our audit procedures required the involvement of IT professionals and auditor judgment was required to determine the nature and extent of audit evidence obtained and evaluate the results of the procedures.

The following are the primary procedures we performed to address this critical audit matter.

We involved IT professionals with specialized skills and knowledge, who assisted in evaluating the design and testing the operating effectiveness of certain internal controls over the Company’s revenue process.

This included controls over the capture and flow of subscription and related usage transactional information through the Company’s IT systems.

We placed test calls and observed that call attributes such as duration and type of service were captured in the relevant IT systems.

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For each billing sample tested, we also compared the agent seats, service types and rates for consistency with underlying documentation, including client contracts.

We evaluated the overall sufficiency of audit evidence obtained over revenue for subscription services and related usage.

We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of such evidence over revenue for subscription services and related usage.

Valuation of acquired technology intangible assets acquired through business combinations

As discussed in Note 14 to the consolidated financial statements, during the year ended December 31, 2020, the Company consummated two business combinations for total consideration of $188.9 million.

The preliminary fair values allocated to the acquired technology assets totaled $40.8 million.

We identified the valuation of the preliminary fair values allocated to acquired technology intangible assets as a critical audit matter.

We performed sensitivity analyses to determine the significant assumptions used to value the acquired technology intangible assets, individually and in the aggregate.

The fair value of these acquired technology intangible assets were sensitive to variation in the key assumptions including forecasted revenue growth rates and technology obsolescence, requiring a high degree of auditor judgment and the use of valuation professionals with specialized skills and knowledge.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s acquisition-date valuation processes, including controls related to the development of the key assumptions related to forecasted revenue growth rates and technology obsolescence.

We evaluated the reasonableness of the Company’s forecasted revenue growth rates and technology obsolescence by comparing them to historical actual results of the acquired entities and certain peer and market participant data.

We involved valuation professionals with specialized skills and knowledge, who assisted in:

• evaluating certain peer group and market participant data used in the assessment of forecasted revenue growth rates, by assessing the appropriateness of the guideline comparable companies identified by management’s specialist and recalculating certain peer group and market participant data

• assessing the reasonableness of the technology obsolescence by comparing to certain public companies.

We have served as the Company’s auditor since 2012.

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Goodwill 165,420 11,798

Marketable investments 42,127 —

Other assets 3,236 1,184

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Additional paid-in capital 474,678 351,870

Accumulated other comprehensive income (loss) 576 ( 93 )

Treasury stock, at cost;

16 shares held as of December 31, 2020 and no shares held as of December 31, 2019

Accumulated other comprehensive income 335 576

Accumulated deficit ( 198,179 ) ( 156,049 )

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Interest expense ( 28,348 ) ( 13,794 ) ( 10,245 )

Loss on early extinguishment of debt ( 6,964 ) — —

Interest income and other 3,034 6,079 3,315

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Income (loss) before income taxes ( 44,583 ) ( 4,448 ) 79

Provision for income taxes 104 300 268

Provision for (benefit from) income taxes ( 2,453 ) 104 300

Net loss $ ( 42,130 ) $ ( 4,552 ) $ ( 221 )

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(In thousands)

Common Stock Additional Paid-In Capital Accumulated

Common Stock Additional Paid-In Capital Treasury Stock Accumulated

Other Comprehensive Income (Loss) Accumulated

Deficit Total Stockholders’ Equity

Shares Amount

Balance as of December 31, 2016 53,363 $ 53 $ 196,555 $ — $ ( 166,280 ) $ 30,328

Issuance of common stock upon exercise of stock options and warrants 2,033 2 6,033 — — 6,035

Issuance of common stock upon vesting of restricted stock units 971 1 ( 1 ) — — —

Issuance of common stock under ESPP 265 1 4,100 — — 4,101

Stock-based compensation — — 15,343 — — 15,343

— — 172 — ( 172 ) —

Net loss — — — — ( 8,969 ) ( 8,969 )

Shares Amount Shares Amount

Balance as of December 31, 2017 56,632 $ 57 $ 222,202 — $ — $ — $ ( 175,421 ) $ 46,838

Net reduction to opening accumulated deficit due to adoption of ASC 606(1) — — — — — — 24,145 24,145

— — — — 24,145 24,145

Equity component of issuance of convertible senior notes — — 30,346 — — — — 30,346

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Balance as of December 31, 2019 61,544 61 351,870 — — 576 ( 156,049 ) 196,458

(1) Effective January 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09 - Improvements to Employee Share-Based Payment Accounting.

Accordingly, the Company accounted for forfeitures as they occurred rather than by estimating expected forfeitures.

This amount represents the net effect of this change.

See Note 1 for more information.

Equity component of issuance of the 2025 convertible senior notes, net of issuance costs — — 154,363 — — — — 154,363

Purchase of capped calls related to the 2025 convertible senior notes — — ( 90,448 ) — — — — ( 90,448 )

Equity component from conversion of the 2023 convertible senior notes — — ( 338,855 ) — — — — ( 338,855 )

Issuance of common stock upon partial conversion of the 2023 convertible senior notes 3,015 3 309,686 — — — — 309,689

Partial unwind of capped calls related to the 2023 convertible senior notes — — — 16 2,263 2,263

Fair value of Inference assumed unvested stock options for services completed prior to the acquisition — — 192 — — — — 192

Issuance of common stock upon exercise of stock options 558 1 11,655 — — — — 11,656

Issuance of common stock upon vesting of restricted stock units 1,210 1 ( 1 ) — — — — —

Issuance of common stock under ESPP 169 1 11,469 — — — — 11,470

Stock-based compensation — — 64,747 — — — — 64,747

Other comprehensive loss — — — — — ( 241 ) — ( 241 )

Net loss — — — — — — ( 42,130 ) ( 42,130 )

Balance as of December 31, 2020 66,496 $ 67 $ 474,678 16 $ 2,263 $ 335 $ ( 198,179 ) $ 279,164

(1) Effective January 2018, the Company adopted ASU 2014-09 - Revenue from Contracts with Customers:

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Year Ended December 31,

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Amortization of discount and issuance costs on convertible senior notes 25,738 12,788 7,881

Reversal of interest and penalties on accrued federal fees — — ( 2,133 )

Gain on sale of convertible note held for investment — ( 217 ) ( 312 )

Others 448 160 ( 313 )

Loss on early extinguishment of debt 6,964 — —

Deferred taxes ( 178 ) — —

Tax benefit of valuation allowance associated with an acquisition ( 2,910 ) — —

Other ( 147 ) 448 160

Changes in operating assets and liabilities:

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Purchases of property and equipment ( 30,422 ) ( 19,228 ) ( 9,261 )

Cash paid to acquire substantially all of the assets of Whendu, LLC ( 13,890 ) — —

Cash paid to acquire Inference and Virtual Observer ( 165,338 ) — —

Cash paid to acquire substantially all of the assets of Whendu ( 100 ) ( 13,890 ) —

Proceeds from sale of convertible note held for investment — 217 1,923

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Cash flows from financing activities:

Proceeds from issuance of convertible senior notes, net of issuance costs paid $ 8,039

Proceeds from issuance of convertible senior notes 728,812 — 250,711

Payments for capped call transactions ( 90,448 ) — ( 31,412 )

Repurchase of a portion of 2023 convertible senior notes, net of costs ( 200,350 ) — —

Proceeds from exercise of common stock options 11,656 7,705 7,779

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The Company was incorporated in Delaware in 2001 and is headquartered in San Ramon, California.

The Company has offices in Europe and Asia, which primarily provide research, development, sales, marketing, and client support services.

The Company has offices in Europe, Asia and Australia, which primarily provide research, development, sales, marketing, and client support services.

Basis of Presentation

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All intercompany transactions and balances have been eliminated in consolidation.

Certain prior period amounts included in the consolidated financial statements have been reclassified to conform to the current period presentation.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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.

The significant estimates made by management affect revenue and related reserves.

The significant estimates made by management affect revenue and related reserves, as well as the fair value of assets acquired and liabilities assumed through business combinations.

Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.

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A significant portion of the Company’s cash and cash equivalents is held at three large reputable financial institutions.

and cash equivalents in excess of insured limits were $ 77.6 million and $ 81.0 million as of December 31, 2019 and 2018, respectively.

Total cash and cash equivalents in excess of insured limits were $ 218.3 million and $ 77.6 million as of December 31, 2020 and 2019, respectively.

The Company has not experienced any losses in such accounts.

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Allowance for Doubtful Accounts

The Company records a provision for doubtful accounts based on historical experience and a detailed assessment of the collectability of its accounts receivable.

In estimating the allowance for doubtful accounts, management considers, among other factors, the aging of the accounts receivable, historical write-offs and the creditworthiness of each client.

If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major client’s ability to meet its financial obligations, the Company’s estimate of the recoverability of the amounts due could be reduced by a material amount.

The Company's adoption of ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), on January 1, 2020 required it to shift from an incurred loss impairment model to an expected credit loss model, which requires it to consider historical loss rates and expectations of forward-looking losses to estimate its allowance for doubtful accounts on its trade accounts receivables, unbilled accounts receivables and contract assets.

The adoption of this new standard did not have a material impact on the Company’s financial position, operating results or cash flows.

The following table presents the changes in the allowance for doubtful accounts (in thousands):

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No impairment losses have been recognized in any of the periods presented.

Business Combinations

The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed as of the acquisition date.

The Company’s estimates are inherently uncertain and subject to refinement.

During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value to these tangible and intangible assets and liabilities assumed, with the corresponding offset to goodwill.

In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date.

Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to its consolidated statement of operations.

Goodwill and Intangible Assets

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The Company performs testing for impairment of goodwill in its fourth quarter, or as events occur or circumstances change that would more likely than not reduce the fair value of the Company’s single reporting unit below its carrying amount.

A qualitative assessment is first made to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.

This initial qualitative assessment includes, among other things,

consideration of:

A qualitative assessment is first made to determine whether it is necessary to perform the quantitative goodwill impairment test.

This initial qualitative assessment includes, among other things, consideration of:

(i) market capitalization of the Company;

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and (iv) valuation metrics involving similar companies that are publicly-traded and acquisitions of similar companies, if available.

If this initial qualitative assessment indicates that it is more likely than not that impairment exists, a second analysis will be performed, involving a comparison between the estimated fair values of the Company’s single reporting unit with its respective carrying amount including goodwill.

If the carrying value exceeds estimated fair value, there is an indication of potential impairment, and a third analysis is performed to measure the amount of impairment.

The third analysis involves calculating an implied fair value of goodwill by measuring the excess of the estimated fair value of the single reporting unit over the aggregate estimated fair values of the individual assets less liabilities.

If the carrying value of goodwill exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess.

If this initial qualitative assessment indicates that it is more likely than not that impairment exists, a second quantitative assessment will be performed, involving a comparison between the estimated fair values of the Company’s single reporting unit with its respective carrying amount including goodwill.

If the carrying value exceeds estimated fair value, an impairment charge is recorded for the excess.

Intangible assets, consisting of acquired developed technology, domain names and customer relationships, are carried at cost less accumulated amortization.

All intangible assets have been determined to have definite lives and are amortized on a straight-line basis over their estimated remaining economic lives, ranging from three to seven years.

All intangible assets have been determined to have definite lives and are amortized on a straight-line basis over their estimated remaining economic lives, ranging from three to six years .

Amortization expense related to developed technology is included in cost of revenue.

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Revenue Recognition

Revenue is recognized when control of the promised services are transferred to customers in an amount that reflects the consideration that the Company expects to receive in exchange for those services.

Revenue is recognized when control of the promised services is transferred to customers in an amount that reflects the consideration that the Company expects to receive in exchange for those services.

The Company generates all of its revenue from contracts with customers.

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The related usage fees are generally based on the volume of minutes used for inbound and outbound client interactions.

Revenue generated from telephony usage is presented in revenue and cost of sales on a gross basis, as the Company is the party that controls the service and is responsible for fulfilling the promise to provide the call service by diverting the calls to selected carriers.

Revenue generated

from telephony usage is presented in revenue and cost of sales on a gross basis, as the Company is the party that controls the service and is responsible for fulfilling the promise to provide the call service by diverting the calls to selected carriers.

The Company also offers bundled plans, generally for smaller deployments, whereby the client is charged a single monthly fixed fee per agent seat that includes both subscription and unlimited usage in the contiguous 48 states and, in some cases, Canada.

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Cost of Revenue

Cost of revenue consists primarily of personnel costs, including stock-based compensation, fees that the Company pays to telecommunications providers for usage, Universal Service Fund and related funds, or USF, contributions and other regulatory costs, depreciation and related expenses of the servers and equipment, costs to build out and maintain co-location data centers, and allocated office and facility costs and amortization of acquired technology.

Personnel costs include those associated with support of the Company’s solution, clients and data center operations, as well as with providing professional services.

Cost of revenue consists primarily of personnel costs, including stock-based compensation, fees that the Company pays to telecommunications providers for usage, USF contributions and other regulatory costs, depreciation and related expenses of the servers and equipment, costs to build out and maintain co-location data centers, costs of public cloud-based data centers, allocated office and facility costs and amortization of acquired technology.

Personnel costs include those associated with support of the Company’s solution, clients and data center

operations, as well as with providing professional services.

Data center costs include costs to build out and setup, as well as co-location fees for the right to place the Company’s servers in data centers owned by third parties.

Research and Development

Research and development expenses consist primarily of salary and related expenses, including stock-based compensation, for personnel related to the development of improvements and expanded features for our services, as well as quality assurance, testing, product management and allocated overhead.

Research and development expenses consist primarily of salary and related expenses, including stock-based compensation, for personnel related to the development of improvements and expanded features for the Company’s services, as well as quality assurance, testing, product management and allocated overhead.

Research and development costs are expensed as incurred except for internal use software development costs that qualify for capitalization.

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Commissions consist of variable compensation earned by sales personnel and referral fees the Company pays to third parties.

Under Accounting Standard Codification 605 - Revenue Recognition (“ASC 605”), all sales commissions associated with the acquisition or renewal of a client contract were recognized as sales and marketing expense as incurred.

On January 1, 2018, the Company adopted Accounting Standard Codification 606 - Revenue from Contracts with Customers (“ASC 606”).

In connection with the adoption of ASC 606, the Company also adopted ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers (“ASC 340-40”), which requires the deferral of incremental costs of obtaining a contract with a customer.

Collectively, the Company refers to ASC 606 and ASC 340-40 as the “new standard.” Under the new standard, the Company defers all incremental commission costs to obtain the contract, and amortizes these costs over a period of benefit determined to be five years.

The Company defers all incremental commission costs to obtain the contract, and amortizes these costs over a period of benefit determined to be five years.

Commission expense was $ 21.9 million, $ 15.0 million and $ 10.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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All stock-based compensation granted to employees and non-employee directors is measured at the grant date fair value of the award.

The Company estimates the fair value of stock options and purchase rights under the Company’s Equity Incentive Plans and the 2014 Employee Stock Purchase Plan, or ESPP, respectively, using the Black-Scholes option-pricing model.

The Company estimates the fair value of stock options and purchase rights under the Company’s Equity Incentive Plans and the 2014 Employee Stock Purchase Plan (“2014 ESPP Plan”), respectively, using the Black-Scholes option-pricing model.

The fair value of restricted stock awards is equal to the fair value of the Company’s common stock on the date of grant.

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The Company records a valuation allowance to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.

As of December 31, 2019 and 2018, the Company recorded a full valuation allowance against the net deferred tax assets because of its history of operating losses in the United States.

As of December 31, 2020 and 2019, the Company recorded a full valuation allowance against the U.S.

net deferred tax assets because of its history of operating losses in the United States.

However, starting in 2020, the Company recorded net foreign deferred tax liabilities associated with its U.K.

and Australia operations totaling $ 4.4 million, which cannot reduce its U.S.

valuation allowance.

The Company classifies interest and penalties on unrecognized tax benefits as income tax expense.

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Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period, and excludes any dilutive effects of employee stock-based awards and warrants.

Diluted net income (loss) per share is computed giving effect to all potentially dilutive common shares, including common stock issuable upon exercise of stock options and warrants, vesting of restricted stock units and purchases under the ESPP.

Diluted net income (loss) per share is computed giving effect to all potentially dilutive

common shares, including common stock issuable upon exercise of stock options and warrants, vesting of restricted stock units and purchases under the 2014 ESPP Plan.

In periods of net loss, all potentially issuable shares of common stock are excluded from the diluted net loss per share computation because they are anti-dilutive.

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Indemnification

The Company, in the ordinary course of business, enters into agreements of varying scope and terms pursuant to which it agrees to indemnify clients, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, including breach of security,

services to be provided by the Company or from intellectual property infringement claims made by third parties.

To date, the Company has not incurred any material costs as a result of such indemnification provisions and the Company has not accrued any liabilities related to such obligations in the consolidated financial statements as of December 31, 2020 and 2019.

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Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Update (“ASU”) No.

2016-09, Compensation-Stock Compensation (Topic 718):

Improvements to Employee Share-Based Payment Accounting .

This ASU simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.

The guidance was effective for the Company beginning in the first quarter of 2017.

Accordingly, commencing in January 2017, the Company accounted for forfeitures as they occurred, rather than by estimating expected forfeitures.

The net effect of this change was recognized as a $ 0.2 million reduction to accumulated deficit in the consolidated financial statements.

Upon adoption of the new standard, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit in the income statement.

The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.

The Company also recognizes excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.

The Company applied the modified retrospective adoption approach beginning January 1, 2017 and prior periods have not been adjusted.

As a result, the Company established a net operating loss deferred tax asset of $ 5.3 million to account for prior period excess tax benefits through retained earnings, however an offsetting valuation allowance of $ 5.3 million was also established through retained earnings because it is not more likely than not that the deferred tax asset will be realized due to historical and expected future losses, such that there is no impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No.

2014-09, Revenue from Contracts with Customers:

Topic 606 (“ASU 2014-09”), amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

ASU 2014-09 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers , which requires the deferral of incremental costs of obtaining a contract with a customer.

The Company adopted ASU 2014-09 and its related amendments (collectively “ASC 606”) effective on January 1, 2018 using the modified retrospective method.

The Company recorded a net reduction to opening accumulated deficit of $ 24.1 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606.

The primary impact of adopting this new standard related to the deferral of $ 23.1 million in incremental commission costs of obtaining subscription contracts.

The remaining $ 1.0 million impact of adopting this new standard related to revenue being recognized earlier than it would have been under ASC 605.

In February 2016, the FASB issued ASU No.

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The Company elected the available practical expedients, implemented internal controls, and a lease accounting system to enable the preparation of financial information upon adoption.

The adoption of ASC 842 resulted in the recognition of operating lease liabilities of $ 8.4 million and operating lease right-of-use, or ROU, assets of the same amount.

The adoption of ASC 842 resulted in the recognition of operating lease liabilities of $ 8.4 million and operating lease right-of-use (“ROU”) assets of the same amount.

Existing deferred rent of $ 0.6 million was recorded as an offset to ROU assets, resulting in net ROU assets of $ 7.8 million.

Company’s accounting for finance leases remained substantially unchanged.

The Company’s accounting for finance leases remained substantially unchanged.

The adoption of ASC 842 did not have any impact on the Company's operating results or cash flows.

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The adoption of ASU 2018-15 did not have a material impact on the Company’s financial position and results of operations.

Recent Accounting Pronouncements Not Yet Effective

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held at amortized cost, include trade receivables.

ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the forward-looking information to calculate credit loss estimates.

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These changes will result in more timely recognition of credit losses.

The Company will adopt ASU 2016-13 using the modified retrospective method on January 1, 2020.

The Company does not expect the adoption of this standard to have a material impact on the Company’s financial position and results of operations.

The Company adopted ASU 2016-13 using the modified retrospective method on January 1, 2020.

The adoption of ASU 2016-13 did not have a material impact on the

Company’s consolidated financial position, operating results or cash flows.

See Notes 1 for further information on the impact of this adoption.

Recent Accounting Pronouncements Not Yet Effective

In August 2020, the FASB issued ASU No.

2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature.

As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost.

These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules.

ASU 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available.

This standard will be effective for the Company’s fiscal years beginning in the first quarter of 2022, with early adoption permitted.

The Company is currently evaluating the impact that the adoption of ASU 2020-06 will have on its consolidated financial statements.

In December 2019, the FASB issued ASU No.

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Contract liabilities (deferred revenue) 31,983 24,681

Contract liabilities (deferred revenue) (included in other long term liabilities) 3,373 1,550

Net contract assets (liabilities) $ ( 34,059 ) $ ( 25,406 )

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As of December 31, 2020, the aggregate amount of the total transaction price allocated in contracts with original duration of greater than one year to the remaining performance obligations was $ 330.0 million.

The Company expects to recognize revenue on approximately four-fifths of the remaining performance obligation over the next 24 months, with the balance recognized thereafter.

The Company expects to recognize revenue on approximately three-fourths of the remaining performance obligation over the next 24 months, with the balance recognized thereafter.

The Company has elected the optional exemption, which allows for the exclusion of the amounts for remaining performance obligations that are part of contracts with an original expected duration of one year or less.

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December 31, 2020

Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Short-Term Marketable Investments Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Certificates of deposit $ 3,479 $ 1 $ — $ 3,480

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December 31, 2020

Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Long-term Marketable Investments Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

treasury $ 10,189 $ — $ — $ 10,189

agency securities 31,469 9 ( 1 ) 31,477

Municipal bonds 461 — — 461

Total $ 42,119 $ 9 $ ( 1 ) $ 42,127

December 31, 2019

Short-Term Marketable Investments Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value

Certificates of deposit $ 161 $ 1 $ — $ 162

treasury 31,933 8 ( 1 ) 31,940

agency and government sponsored securities 154,314 1 ( 111 ) 154,204

agency securities 177,629 110 ( 9 ) 177,730

Commercial paper 15,240 — — 15,240

6 unchanged sentences

treasury $ ( 4 ) $ 78,549 $ ( 1 ) $ 12,926

agency and government sponsored securities ( 9 ) 36,322 ( 111 ) 153,212

agency securities ( 7 ) 39,443 ( 9 ) 36,322

Municipal bonds ( 1 ) 1,201 — —

1 unchanged sentence

Total $ ( 13 ) $ 120,540 $ ( 10 ) $ 49,499

The contractual maturities of the Company’s marketable investments as of December 31, 2019 and 2018 were less than one year.

Although the Company had certain available-for-sale debt securities in an unrealized loss position as of December 31, 2020, no impairment loss was recorded since it did not intend to sell them, did not anticipate a need to sell them, and the decline in fair value was not due to any credit-related factors, which it is now required to assess upon adoption of ASU 2016-13.

The amortized cost and fair value of the Company’s marketable investments by contractual maturity as of December 31, 2020 were as follows:

Cost Fair Value

Due within one year $ 383,121 $ 383,171

Due after one year through two years 42,119 42,127

Total $ 425,240 $ 425,298

Fair Value Measurements

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Fair value is based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value is estimated by applying the following hierarchy, which

prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 — Observable inputs, which include unadjusted quoted prices in active markets for identical assets or liabilities.

12 unchanged sentences

Money market funds $ 89,888 $ — $ — $ 89,888

Commercial paper — 2,697 — 2,697

treasury 39,997 — — 39,997

Total cash equivalents $ 129,885 $ — $ — $ 129,885

Marketable investments

Marketable investments (Short and Long-term)

Certificates of deposit $ — $ 3,480 $ — $ 3,480

5 unchanged sentences

Total marketable investments $ 297,540 $ 127,758 $ — $ 425,298

Contingent consideration $ — $ 18,100 $ 18,100

December 31, 2019

2 unchanged sentences

Money market funds $ 2,179 $ — $ — $ 2,179

Treasury 638 — — 638

agency securities — 50 — 50

Commercial paper — 2,697 — 2,697

3 unchanged sentences

Treasury 31,940 — — 31,940

agency securities and government sponsored securities — 154,204 — 154,204

agency securities — 177,730 — 177,730

Commercial paper — 15,240 — 15,240

2 unchanged sentences

Total marketable investments $ 31,940 $ 210,033 $ — $ 241,973

As of December 31, 2019 and 2018, the estimated fair value of the Company’s outstanding 0.125 % convertible senior notes due 2023 was $ 437.0 million and $ 316.1 million, respectively.

The fair value was determined based on the quoted price of the convertible senior notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 in the fair value hierarchy.

See Note 6 for further information on the Company’s 0.125 % convertible senior notes due 2023.

As of December 31, 2020 and 2019, the estimated fair value of the Company’s outstanding 0.125 % convertible senior notes due 2023 (the “2023 convertible senior notes”) was $ 253.1 million and $ 437.0 million, respectively.

As of December 31, 2020, the estimated fair value of the Company's outstanding 0.500 % convertible senior notes due 2025 (the "2025 convertible senior notes" and, together with the 2023 convertible senior notes, the "convertible senior notes") was $ 1,098.5 million.

The fair values were determined based on the quoted price of the convertible senior notes in an inactive market on the last trading day of the reporting period and have been classified as Level 2 in the fair value hierarchy.

See Note 6 for further information on the Company’s convertible senior notes.

As part of the agreement to acquire Inference in November 2020, the Company may be obligated to pay contingent earn out consideration of up to $ 24.0 million based upon achievement of certain milestones and relative thresholds during the earn out measurement period which ends on December 31, 2021.

The fair value of the contingent consideration arrangement, estimated to be $ 18.1 million as of December 31, 2020, is classified within

Level 3 and is determined using a probability-based scenario analysis approach.

The resulting probability-weighted contingent consideration amounts were discounted based on the Company’s estimated cost of debt.

Future changes in the achievement of certain milestones and relative thresholds could result in a material change to the amount of contingent consideration accrued, and such changes will be recorded in the Company's consolidated statements of operations.

There were no assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2020 and 2019.

The Company’s other financial instruments’ fair value, including accounts receivable, accounts payable and other current liabilities, approximate its carrying value due to the relatively short maturity of those instruments.

The carrying amounts of the Company’s finance leases approximate their fair value, which is the present value of

expected future cash payments based on assumptions about current interest rates and the creditworthiness of the Company.

The carrying amounts of the Company’s finance leases approximate their fair value, which is the present value of expected future cash payments based on assumptions about current interest rates and the creditworthiness of the Company.

Financial Statement Components

4 unchanged sentences

Treasury 39,997 —

agency securities — 50

Commercial paper — 2,697

19 unchanged sentences

Property and equipment, net $ 51,213 $ 33,190

In accordance with the Company’s property and equipment policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis.

The Company’s review of its existing estimates indicated that the actual lives of certain data center assets were longer than the previously estimated useful lives used for depreciation purposes in the Company’s financial statements.

As a result, effective July 1, 2017, the Company changed the

estimated useful lives of certain data center assets to better reflect the estimated periods during which these assets will remain in service.

The estimated useful lives of these assets, which the Company previously depreciated for three years, was increased to a range of three to five years.

For the year ended December 31, 2017, this change in accounting estimate decreased depreciation expense by $ 1.6 million and decreased both basic and diluted net loss per share by $ 0.03 .

Depreciation and amortization expense associated with property and equipment was $ 18.2 million, $ 13.5 million and $ 9.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

7 unchanged sentences

Accrued and other current liabilities $ 44,450 $ 18,385

Other long-term liabilities consisted of the following (in thousands):

Deferred revenue $ 3,373 $ 1,550

Deferred tax liabilities 4,438 —

Other long-term liabilities 5,554 2,800

Contingent consideration 18,100 —

Other long-term liabilities $ 31,465 $ 4,350

Goodwill and Intangible Assets

Goodwill was recorded as a result of the Company’s acquisition in October 2013 of Face It, Corp., which the Company also refers to as SoCoCare.

Goodwill was recorded as a result of the Company’s acquisition of Face It, Corp., which the Company also refers to as SoCoCare, in October 2013, Virtual Observer in April 2020, and Inference in November 2020.

See Note 14 for further details of the Virtual Observer and Inference acquisitions.

The following table summarizes the activity in the Company's goodwill balances during the years ended December 31, 2019 and 2020 (in thousands):

Beginning of the period, January 1, 2019 $ 11,798

End of the period, December 31, 2019 11,798

Addition (Inference) 130,976

Addition (Virtual Observer) 22,646

End of the period, December 31, 2020 $ 165,420

During the fourth quarter of 2020, the Company completed its annual goodwill impairment test.

Based on its assessment of the qualitative factors, the Company’s management concluded that the fair value of the Company’s goodwill was more likely than not greater than its carrying amount as of December 31, 2020.

As such, it was not necessary to perform the two-step quantitative goodwill impairment test.

As such, it was not necessary to perform the quantitative goodwill impairment test.

Subsequent to the 2020 annual impairment test, the Company believes there have been no significant events or circumstances negatively affecting the valuation of goodwill.

1 unchanged sentence

Intangible Assets

Intangible assets were acquired in connection with the Company’s acquisition of SoCoCare and Whendu in October 2013 and November 2019, respectively.

Intangible assets were acquired in connection with the Company’s acquisitions of SoCoCare in October 2013, Whendu in November 2019, Virtual Observer in April 2020, and Inference in November 2020.

See Note 14 for further details of the Whendu, Virtual Observer, and Inference acquisitions.

The following table summarizes the activity in the Company's intangible asset balances during the years ended December 31, 2019 and 2020 (in thousands):

Intangible Assets

Beginning of the period, January 1, 2019 $ 631

Addition (Whendu) 15,784

Amortization ( 882 )

End of the period, December 31, 2019 15,533

Addition (Inference) 30,100

Addition (Virtual Observer) 12,800

Addition (Whendu) 100

Amortization ( 6,849 )

End of the period, December 31, 2020 $ 51,684

The components of intangible assets were as follows (in thousands):

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Amortization Net

Amount Weighted Average Remaining Amortization Period (Years)

Developed technology $ 56,214 $ ( 6,761 ) $ 49,453 4.9 $ 17,777 $ ( 2,690 ) $ 15,087 3.9

Acquired workforce 470 ( 177 ) 293 1.9 467 ( 21 ) 446 2.9

Customer relationships 1,600 ( 101 ) 1,499 4.7 — — —

Trademarks 500 ( 61 ) 439 1.8 — — —

Total $ 58,784 $ ( 7,100 ) $ 51,684 4.9 $ 18,244 $ ( 2,711 ) $ 15,533 3.8

Amortization expense related to intangible assets was $ 0.9 million, $ 0.4 million and $ 0.5 million for the years ended December 31, 2019, 2018 and 2017.

Amortization expense related to intangible assets was $ 6.8 million, $ 0.9 million and $ 0.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The increase in amortization expense during the year ended

December 31, 2020 was due to the acquisition of intangible assets from Inference in November 2020, Virtual Observer in April 2020 and Whendu in November 2019.

As of December 31, 2020, the expected future amortization expense for intangible assets was as follows (in thousands):

1 unchanged sentence

Amortization Expense

2021 $ 11,787

Thereafter 4,200

Total $ 51,684

1 unchanged sentence

The Company concluded that there was no impairment to the carrying value of its intangible assets as of December 31, 2020 and 2019.

0.125% Convertible Senior Notes and Capped Call

In May 2018, the Company issued $ 258.8 million aggregate principal amount of 0.125 % convertible senior notes (“Notes”) due May 1, 2023 in a private offering.

The Notes are the Company’s senior unsecured obligations and bear interest at a fixed rate of 0.125 % per annum, payable semiannually in arrears on May 1 and November 1 of each year, beginning on November 1, 2018.

The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $ 250.8 million.

Each $1,000 principal amount of the Notes is initially convertible into 24.4978 shares of the Company’s common stock (the “Conversion Option”), which is equivalent to an initial conversion price of approximately $ 40.82 per share of common stock, subject to adjustment upon the occurrence of specified events.

The Notes are convertible, in multiples of $1,000 principal amount, at the option of the holders at any time prior to the close of business on the business day immediately preceding November 1, 2022, only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ended on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, 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;

(2) during the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the trading price (as defined in the indenture governing the Notes) per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day;

(3) if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date;

0.500 % Convertible Senior Notes and Related Capped Call Transactions

In May and June 2020, the Company issued $ 747.5 million aggregate principal amount of 2025 convertible senior notes in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $ 97.5 million principal amount of the 2025 convertible senior notes.

The 2025 convertible senior notes mature on June 1, 2025 and bear interest at a fixed rate of 0.500 % per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020.

The total net proceeds from the issuance of the 2025 convertible senior notes, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs, were approximately $ 728.8 million.

Each $ 1,000 principal amount of the 2025 convertible senior notes is initially convertible into 7.4437 shares of the Company’s common stock (the “2025 Conversion Option”), which is equivalent to an initial conversion price of approximately $ 134.34 per share of common stock, subject to adjustment upon the occurrence of specified events.

The initial conversion price represents a premium of approximately 30 % to the $ 103.34 per share closing price of the Company’s common stock on The Nasdaq Global Market on May 21, 2020.

The 2025 convertible senior notes are convertible, in multiples of $ 1,000 principal amount, at the option of the holders prior to the close of business on the business day immediately preceding March 1, 2025, only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, 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;

(2) during the five business day period after any five consecutive trading day period (the “2025 Measurement Period”) in which the trading price (as defined in the 2025 Indenture governing the 2025 convertible senior notes) per $ 1,000 principal amount of the 2025 convertible senior notes for each trading day of the 2025 Measurement Period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day;

(3) if the Company calls any or all of the 2025 convertible senior notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date;

or (4) upon the occurrence of specified corporate events.

On or after November 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

On or after March 1, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 convertible senior notes, in multiples of $ 1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election.

If the Company undergoes a fundamental change (as defined in the indenture governing the Notes), subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their Notes, in principal amounts of $1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.

In addition, following certain corporate events that occur prior to the maturity date or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their Notes in connection with such corporate event or during the relevant redemption period.

During each of the third and fourth quarters of 2019, one of the conversion features of the Notes was triggered as the last reported sale price of the Company’s common stock was greater than $ 53.07 per share, which

represents 130 % of the initial conversion price of $ 40.82 per share, for at least 20 days in the period of 30 consecutive trading days ended on the last trading day of each of the third and fourth quarter of 2019, respectively, and therefore, the Notes were convertible, in multiples of $1,000 principal amount, at the option of the Note holders between October 1, 2019 and December 31, 2019, and are currently convertible between January 1, 2020 and March 31, 2020.

The Company received elections to convert a limited number of Notes in the fourth quarter of 2019.

The Company elected to satisfy the conversion obligation through the payment of cash to such Note holders.

The Company will continue to classify its Notes as long-term debt.

The Company may not redeem the Notes prior to May 5, 2021.

The Company may redeem for cash all or any portion of the Notes, at its option, on or after May 5, 2021 if the last reported sale price of its common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than two trading days immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

No sinking fund is provided for the Notes.

The Notes are the Company’s senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes;

equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated;

If the Company undergoes a fundamental change (as defined in the indenture governing the 2025 convertible senior notes), subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of

their 2025 convertible senior notes, in principal amounts of $ 1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100 % of the principal amount of the 2025 convertible senior notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.

In addition, following certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their notes in connection with such corporate event or during the relevant redemption period.

The closing market price of the Company's common stock of $ 174.40 per share as of December 31, 2020, the last trading day during the three months ended December 31, 2020, was below $ 174.64 per share, which represents 130 % of the initial conversion price of $ 134.34 per share.

Additionally, the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day, December 31, 2020, was not greater than or equal to 130 % of the initial conversion price.

As such, during the three months ended December 31, 2020, the conditions allowing holders of the 2025 convertible senior notes to convert were not met.

The 2025 convertible senior notes are therefore not convertible during the three months ended March 31, 2021.

The Company may not redeem the 2025 convertible senior notes prior to June 6, 2023.

The Company may redeem for cash all or any portion of the 2025 convertible senior notes, at its option, on or after June 6, 2023 and prior to March 1, 2025 if the last reported sale price of its common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than two trading days immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2025 convertible senior notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

No sinking fund is provided for the 2025 convertible senior notes.

The 2025 convertible senior notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2025 convertible senior notes;

equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated (including the 2023 convertible senior notes);

effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness;

and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

In accounting for the transaction, the Notes were separated into liability and equity components.

In accounting for the issuance of the 2025 convertible senior notes, the 2025 convertible senior notes were separated into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature.

The carrying amount of the equity component representing the conversion option was $ 63.8 million and was determined by deducting the fair value of the liability component from the par value of the Notes.

The equity component was recorded in additional paid-in-capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The carrying amount of the equity component representing the 2025 Conversion Option was $ 158.3 million and was determined by deducting the fair value of the liability component from the par value of the 2025 convertible senior notes.

The equity component was recorded in additional paid-in-capital and is not re-measured as long as it continues to meet the conditions for equity classification.

The excess of the principal amount of the liability component over its carrying amount (the “Debt Discount”) is being amortized to interest expense over the contractual term of the notes at an effective interest rate of 5.76 %.

In accounting for the debt issuance cost of $ 8.0 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values.

Issuance costs attributable to the liability component were $ 6.0 million and are being amortized to interest expense using the effective interest method over the contractual term of the Notes.

The debt component was classified as long term liabilities during the three months ended December 31, 2020.

In accounting for the debt issuance costs of $ 18.7 million related to the 2025 convertible senior notes, the Company allocated the total amount incurred to the liability and equity components of the 2025 convertible senior notes based on their relative values.

Issuance costs attributable to the liability component were $ 14.7 million and are being amortized to interest expense using the effective interest method over the contractual term of the 2025 convertible senior notes.

Issuance costs attributable to the equity component were netted with the equity component in additional paid-in-capital.

The net carrying amount of the liability component of the Notes was as follows (in thousands):

The net carrying amount of the liability component of the 2025 convertible senior notes was as follows (in thousands):

December 31, 2020

Principal $ 747,500

Unamortized debt discount ( 141,792 )

Unamortized issuance costs ( 13,192 )

Net carrying amount $ 592,516

The net carrying amount of the equity component of the 2025 convertible senior notes was as follows (in thousands):

December 31, 2020

Equity component $ 158,321

Issuance costs ( 3,958 )

Net carrying amount $ 154,363

Interest expense related to the 2025 convertible senior notes was as follows (in thousands):

December 31, 2020

Contractual interest expense $ 2,230

Amortization of debt discount 16,528

Amortization of issuance costs 1,538

Total interest expense $ 20,296

In connection with the issuance of the 2025 convertible senior notes, the Company entered into privately negotiated capped call transactions (the “2025 Capped Call Transactions”) with certain financial institutions.

The 2025 Capped Call Transactions are expected generally to reduce the potential dilution to the Company’s common stock in connection with any conversion of the 2025 convertible senior notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2025 convertible senior notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price.

The initial cap price of the 2025 Capped Call Transactions was $ 206.68 per share, and is subject to certain adjustments under the terms of the 2025 Capped Call Transactions.

The 2025 Capped Call Transactions cover, subject to anti-dilution adjustments, approximately 5.6 million shares of the Company’s common stock.

For accounting purposes, the 2025 Capped Call Transactions are separate transactions, and not integrated with the issuance of the 2025 convertible senior notes.

As these transactions meet certain accounting criteria, the 2025 Capped Call Transactions are recorded in stockholders’ equity and are not accounted for as derivatives.

The cost to the Company of the 2025 Capped Call Transactions was $ 90.5 million, which was recorded as a reduction to additional paid-in capital.

The net impact to the Company's stockholders' equity as of December 31, 2020, included in additional paid-in capital, relating to the issuance of the 2025 convertible senior notes was as follows (in thousands):

December 31, 2020

Conversion option $ 158,321

Payments for capped call transactions ( 90,448 )

Issuance costs ( 3,958 )

Total $ 63,915

Maturity of the Company’s 2025 convertible senior notes as of December 31, 2020 was as follows (in thousands):

Period Amount to Mature

2025 (Maturity date of June 1, 2025) $ 747,500

Total $ 747,500

0.125 % Convertible Senior Notes and Related Capped Call Transactions

In May 2018, the Company issued $ 258.8 million aggregate principal amount of 2023 convertible senior notes in a private offering.

The 2023 convertible senior notes mature on May 1, 2023 and bear interest at a fixed rate of 0.125 % per annum, payable semiannually in arrears on May 1 and November 1 of each year.

The total net proceeds from the offering, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs, was approximately $ 250.8 million.

In May 2020, the Company used part of the net proceeds from the issuance of the 2025 convertible senior notes to repurchase, exchange or otherwise retire approximately $ 181.0 million aggregate principal amount of the 2023 convertible senior notes in privately-negotiated transactions for aggregate consideration of $ 449.6 million, consisting of $ 181.0 million in cash and 2,723,581 shares of the Company’s common stock (the "2023 Note Repurchase Transactions").

As of December 31, 2020, after giving effect to the 2023 Note Repurchase Transactions and other settlements upon conversion requests, approximately $ 58.9 million aggregate principal amount of 2023 convertible senior notes remained outstanding.

The 2023 Note Repurchase Transactions were accounted for as a debt extinguishment.

Pursuant to ASC Subtopic 470-20, total consideration for the 2023 Note Repurchase Transactions was separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component.

The gain or loss on extinguishment of the debt was subsequently determined by comparing the repurchase consideration allocated to the liability component to the sum of the carrying value of the liability component, net of the proportionate amounts of unamortized debt discount and the remaining unamortized debt issuance costs.

Of the $ 449.6 million in aggregate consideration paid by the Company in connection with the 2023 Note Repurchase Transactions, $ 155.8 million and $ 293.8 million were allocated to the debt and equity components, respectively, using an effective interest rate of 5.32 % to determine the fair value of the liability component.

This interest rate was based on the income and market-based approaches used to determine the effective interest rate of the 2023 convertible senior notes, adjusted for the remaining term of the 2023 convertible senior notes.

As of the settlement of the 2023 Note Repurchase Transactions, the carrying value of the 2023 convertible senior notes subject to the 2023 Note Repurchase Transactions, net of unamortized debt discount and issuance costs, was $ 150.4 million.

The Company also incurred approximately $ 0.5 million in third party transaction costs related to the 2023 Note Repurchase Transactions.

These costs were allocated to the liability and equity components in proportion to the allocation of consideration transferred at settlement and accounted for as debt extinguishment costs and equity reacquisition costs, respectively.

The 2023 Note Repurchase Transactions resulted in a $ 5.8 million loss on early debt extinguishment in the second quarter of fiscal 2020, of which $ 2.7 million consisted of unamortized debt issuance costs.

Each $ 1,000 principal amount of the 2023 convertible senior notes was initially convertible into 24.4978 shares of the Company’s common stock (the “2023 Conversion Option”), which is equivalent to an initial conversion price of approximately $ 40.82 per share of common stock, subject to adjustment upon the occurrence of specified events.

The 2023 convertible senior notes are convertible, in multiples of $ 1,000 principal amount, at the option of the holders at any time prior to the close of business on the business day immediately preceding November 1, 2022, only under the following circumstances:

(2) during the five business day period after any five consecutive trading day period (the “2023 Measurement Period”) in which the trading price (as defined in the indenture governing the 2023 convertible senior notes) per $ 1,000 principal amount of the 2023 convertible senior notes for each trading day of the 2023 Measurement Period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day;

(3) if the Company calls any or all of the 2023 convertible senior notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date;

or (4) upon the occurrence of specified corporate events.

On or after November 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2023 convertible senior notes, in multiples of $ 1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

the Company undergoes a fundamental change (as defined in the indenture governing the 2023 convertible senior notes), subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their 2023 convertible senior notes, in principal amounts of $ 1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100 % of the principal amount of the 2023 convertible senior notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.

In addition, following certain corporate events that occur prior to the maturity date or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their 2023 convertible senior notes in connection with such corporate event or during the relevant redemption period.

During each of the quarters from the third quarter of 2019 through the fourth quarter of 2020, one of the triggers for convertibility of the 2023 convertible senior notes was triggered as the last reported sale price of the Company’s common stock was greater than $ 53.07 per share, which represents 130 % of the initial conversion price of $ 40.82 per share, for at least 20 trading days in the period of 30 consecutive trading days ended on, and including, the last trading day of the quarter for each quarter of 2020.

As a result, the 2023 convertible senior notes were convertible, in multiples of $ 1,000 principal amount, at the option of the 2023 convertible senior note holders between October 1, 2019 to December 31, 2020, and are currently convertible between January 1, 2021 to March 31, 2021.

Whether the 2023 convertible senior notes will be convertible after March 31, 2021 will depend on the continued satisfaction of this condition or other conversion conditions in the future.

To date, the Company has paid $ 18.9 million in cash and issued 307,037 shares of its common stock to settle $ 18.9 million aggregate principal amount of its 2023 convertible senior notes that resulted in a $ 1.2 million loss on early debt extinguishment.

During 2020, the Company also received 15,714 shares from the partial unwind of capped calls resulting from the settlement of its 2023 convertible senior notes.

The receipt of the 15,714 shares reduced the number of shares outstanding, thus was recorded to treasury stock based on an aggregate fair value of $ 2.3 million at the time of the settlements.

In addition, on or prior to December 31, 2020, the Company received elections to convert $ 7.8 million aggregate principal amount of its 2023 convertible senior notes that remained unsettled as of the end of the fourth quarter of 2020.

From January 1, 2021 through the date of this filing, the Company received additional elections to convert aggregate principal amount of $ 5.8 million of the 2023 convertible senior notes.

The Company has settled, or expects to settle, these conversions in cash or a combination of cash and shares during the first half of 2021.

The Company has the option to settle any future election conversion notices in cash, shares, or a combination of cash and shares.

The Company may not redeem the 2023 convertible senior notes prior to May 5, 2021.

The Company may redeem for cash all or any portion of the 2023 convertible senior notes, at its option, on or after May 5, 2021 if the last reported sale price of its common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than two trading days immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2023 convertible senior notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

No sinking fund is provided for the 2023 convertible senior notes.

The 2023 convertible senior notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2023 convertible senior notes;

equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated (including the 2025 convertible senior notes);

effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness;

and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

In accounting for the issuance of the 2023 convertible senior notes, the 2023 convertible senior notes were separated into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature.

The equity component was recorded in additional paid-in-capital and is not re-measured as long as it continues to meet the conditions for equity classification.

The Debt Discount is being amortized to interest expense over the contractual term of the 2023 convertible senior notes at an effective interest rate of 6.39 %.

In accounting for the debt issuance costs of $ 8.0 million related to the 2023 convertible senior notes, the Company allocated the total amount incurred to the liability and equity components of the 2023 convertible senior notes based on their relative values.

Issuance costs attributable to the liability component were $ 6.0 million and are

being amortized to interest expense using the effective interest method over the contractual term of the 2023 convertible senior notes.

Issuance costs attributable to the equity component were netted with the equity component in additional paid-in-capital.

The net carrying amount of the liability component of the 2023 convertible senior notes was as follows (in thousands):

December 31, 2020 December 31, 2019

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Net carrying amount $ 50,800 $ 209,604

The net carrying amount of the equity component of the Notes was as follows (in thousands):

The net carrying amount of the equity component of the 2023 convertible senior notes continued to meet the conditions for equity classification as presented below (in thousands):

December 31, 2020 December 31, 2019

Debt discount for conversion option $ 63,756 $ 63,756

Equity component $ 14,505 $ 63,756

Issuance costs ( 455 ) ( 1,998 )

Net carrying amount $ 14,050 $ 61,758

Interest expense related to the Notes was as follows (in thousands):

December 31, 2019 December 31, 2018

Interest expense related to the 2023 convertible senior notes was as follows (in thousands):

December 31, 2020 December 31, 2019 December 31, 2018

Contractual interest expense $ 184 $ 324 $ 209

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Total interest expense $ 7,856 $ 13,112 $ 8,090

In connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain financial institutions.

The Capped Call Transactions are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price.

In connection with the issuance of the 2023 convertible senior notes, the Company entered into privately negotiated capped call transactions (the “2023 Capped Call Transactions”) with certain financial institutions.

The 2023 Capped Call Transactions are expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of the 2023 convertible senior notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2023 convertible senior notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price.

The initial cap price of the 2023 Capped Call Transactions is $ 62.80 per share, and is subject to certain adjustments under the terms of the 2023 Capped Call Transactions.

The 2023 Capped Call Transactions cover, subject to anti-dilution adjustments, approximately 6.3 million shares of the Company’s common stock.

For accounting purposes, the Capped Call Transactions are separate transactions, and not part of the terms of the Notes.

For accounting purposes, the 2023 Capped Call Transactions are separate transactions, and not integrated with the issuance of the 2023 convertible senior notes.

As these transactions meet certain accounting criteria, the 2023 Capped Call Transactions are recorded in stockholders’ equity and are not accounted for as derivatives.

The cost of $ 31.4 million incurred in connection with the 2023 Capped Call Transactions was recorded as a reduction to additional paid-in capital.

The net impact to the Company’s stockholders’ equity, included in additional paid-in capital, relating to the issuance of the Notes issued in May 2018 was as follows (in thousands):

In connection with the 2023 Note Repurchase Transactions, the Company amended the 2023 Capped Call Transactions such that the portion associated with the 2023 convertible senior notes subject to the 2023 Note Repurchase Transactions would remain outstanding notwithstanding the retirement of $ 181.0 million aggregate principal amount of 2023 convertible senior notes.

Following such amendment, the 2023 Capped Call Transactions continue to meet the accounting criteria to be recorded in stockholders’ equity and are not accounted for as derivatives.

The net impact to the Company’s stockholders’ equity, included in additional paid-in capital, relating to the issuance of the 2023 convertible senior notes issued in May 2018 was as follows (in thousands):

December 31, 2018

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Total $ 30,346

Maturity of the Company’s outstanding debt as of December 31, 2019 was as follows (in thousands):

Maturity of the Company’s 2023 convertible senior notes as of December 31, 2020 was as follows (in thousands):

Period Amount to Mature

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Total $ 58,867

2016 Loan and Security Agreement

In August 2016, the Company entered into a loan and security agreement, or the 2016 Loan and Security Agreement, with the lenders party thereto and City National Bank, as agent for such lenders.

The 2016 Loan and Security Agreement provided for a revolving line of credit, of up to $ 50.0 million and was scheduled to mature on August 1, 2019.

The revolving line of credit bore a variable interest rate equal to the prime rate plus 0.50 %, subject to a 0.25 % increase if the Company’s adjusted EBITDA was negative at the end of any fiscal quarter.

The Company was also required to pay a commitment fee equal to 0.25 % of the unused portion of the revolving line of credit as well as an anniversary fee of $ 31,250 on each of August 1, 2017 and 2018.

The obligations of the Company under the 2016 Loan and Security Agreement were guaranteed by its subsidiary, Five9 Acquisition LLC, and were secured by a first priority lien on substantially all of the assets of the Company and Five9 Acquisition LLC.

In May 2018, the Company paid off the then outstanding principal balance of the revolving line of credit and, in July 2018, the Company terminated the 2016 Loan and Security Agreement.

Stockholders’ Equity

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As of December 31, 2020 and 2019, the Company had 66,496,060 and 61,543,634 shares of common stock issued and outstanding, respectively.

During 2020, the Company issued 3,030,618 shares of common stock in connection with 2023 convertible senior note settlements.

During 2020, the Company also received 15,714 shares from the partial unwind of capped calls resulting from the settlement of its 2023 convertible senior notes.

The receipt of the 15,714 shares reduced the number of shares outstanding, thus was recorded to treasury stock based on an aggregate fair value of $ 2.3 million at the time of the settlements.

See Note 6 for further details.

Holders of the Company’s common stock are entitled to dividends, if and when declared by the board of directors.

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Equity Incentive Plans

Prior to the Company’s initial public offering, or IPO, in April 2014, the Company granted stock options under its Amended and Restated 2004 Equity Incentive Plan, as amended, or the 2004 Plan.

Prior to the Company’s initial public offering (“IPO”) in April 2014, the Company granted stock options under its Amended and Restated 2004 Equity Incentive Plan, as amended (“ 2004 Plan”).

Under the terms of the 2004 Plan, the Company had the ability to grant incentive and nonstatutory stock options.

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Vested options generally expire 90 days after termination of the optionee’s employment or relationship as a consultant or director, unless otherwise extended by the terms of the stock option agreement.

In March 2014, the Company’s board of directors and stockholders approved the 2014 Equity Incentive Plan, or 2014 Plan, and 5,300,000 shares of common stock were authorized for issuance under the 2014 Plan.

In March 2014, the Company’s board of directors and stockholders approved the 2014 Equity Incentive Plan (“2014 Plan”) and 5,300,000 shares of common stock were authorized for issuance under the 2014 Plan.

In addition, on the first day of each year beginning in 2015 and ending in 2024, the 2014 Plan provides for an annual automatic increase to the shares reserved for issuance in an amount equal to 5 % of the total number of shares outstanding on December 31st of the preceding calendar year or a lesser number as determined by the Company’s board of directors.

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Additionally, any forfeited or expired shares that would have otherwise returned to the 2004 Plan instead return to the 2014 Plan.

The 2014 Plan allows the Company to grant stock options, restricted stock units, or RSUs, restricted stock awards, performance stock awards, stock appreciation rights, performance cash awards, and other stock awards.

The 2014 Plan allows the Company to grant stock options, restricted stock units (“RSUs”), restricted stock awards, performance stock awards, stock appreciation rights, performance cash awards, and other stock awards.

To date, the Company has granted stock options and RSUs under the 2014 Plan.

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RSUs generally vest over one to four years .

Vested options generally expire three months after termination of the optionee’s employment or relationship as a consultant or director, unless otherwise extended by the terms of the stock option agreement.

In connection with the Company’s acquisition of Inference, the Company assumed unvested stock options that had been granted under the Inference Technologies Group Inc.

2018 Equity Incentive Plan.

Each of the assumed stock options are subject to substantially the same terms and conditions as applied to the assumed stock options immediately prior to the acquisition date, except that the number of shares of the Company’s common stock subject to each assumed stock option and the exercise price has been adjusted in accordance with the terms of the acquisition agreement.

If these assumed stock options are cancelled, forfeited or expire unexercised, the underlying shares do not become available for future grant.

As of the acquisition date, the estimated fair value of the assumed unvested options was $ 7.6 million, of which $ 0.2 million was recognized as goodwill and the balance of $ 7.4 million is being recognized as stock-based compensation expense over the remaining service period of the assumed unvested stock options.

Stock Options

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Options granted 271 85.68

Options assumed (2)

Options exercised ( 560 ) 20.86

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(1) The aggregate intrinsic value amounts are computed based on the difference between the exercise price of the

stock options and the fair market value of the Company’s common stock of $ 65.58 per share as of December 31,

2019 for all in-the-money stock options outstanding.

stock options and the fair market value of the Company’s common stock of $ 174.40 per share as of December 31, 2020 for all in-the-money stock options outstanding.

(2) The Company assumed stock options outstanding through the Inference acquisition.

Following is additional information pertaining to the Company’s stock option activity (in thousands, except per share data):

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2020 2019 2018

Weighted average grant date fair value per share of options granted $ 24.06 $ 16.33 $ 8.81

Weighted average grant date fair value per share of options granted, excluding assumed stock options $ 38.80 $ 24.06 $ 16.33

Weighted average grant date fair value per share of assumed stock options 125.96 — —

Intrinsic value of options exercised (1)

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Employee Stock Purchase Plan

In March 2014, the Company’s board of directors and stockholders adopted the 2014 Employee Stock Purchase Plan, or ESPP, and the shares authorized for issuance thereunder.

The ESPP became effective on April 3, 2014.

The ESPP permits eligible employees to purchase shares of the Company’s common stock through payroll deductions with up to 15 % of their pre-tax earnings subject to certain Internal Revenue Code limitations.

In March 2014, the Company’s board of directors and stockholders adopted the 2014 ESPP Plan and the shares authorized for issuance thereunder.

The 2014 ESPP Plan became effective on April 3, 2014.

The 2014 ESPP Plan permits eligible employees to purchase shares of the Company’s common stock through payroll deductions with up to 15 % of their pre-tax earnings subject to certain Internal Revenue Code limitations.

The purchase price of the shares is 85 % of the lower of the fair market value of the Company’s common stock on the first day of a six month offering period, except for the initial offering period, or the relevant purchase date.

In addition, no participant may purchase more than 1,500 shares of common stock in each purchase period.

The number of shares of common stock originally reserved for issuance under the ESPP was 880,000 shares, which increases automatically each year, beginning on January 1, 2015 and continuing through January 1, 2024, by the lesser of (i) 1 % of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year;

(ii) 1,000,000 shares of common stock (subject to adjustment to reflect any split or combination of our common stock);

or (iii) such lesser number as determined by the Company’s board of directors.

Pursuant to the automatic annual increase, 615,436 additional shares were reserved under the ESPP on January 1, 2020.

During 2019, 197,962 shares were purchased by employees under the ESPP at a weighted average price of 39.52 per share.

The number of shares of common stock originally reserved for issuance under the 2014 ESPP Plan was 880,000 shares, which increases automatically each year, beginning on January 1, 2015 and continuing through January 1, 2024, by the lesser of (i) 1 % of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year;

(ii) 1,000,000 shares of common stock (subject to adjustment to reflect any split or combination of its common stock);

or (iii) such lesser number as determined by its board of directors.

Pursuant to the automatic annual increase, 664,960 additional shares were reserved under the 2014 ESPP Plan on January 1, 2021.

During 2020, 168,737 shares were purchased by employees under the 2014 ESPP Plan at a weighted average price of $ 67.97 per share.

Stock-Based Compensation

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(1) Includes an incremental stock-based compensation cost due to modification of certain stock-based awards of a former executive of the Company in the third quarter of 2018.

(2) Effective December 2017, the Company’s former Chief Executive Officer and President resigned from his position and became the Executive Chairman of the Board.

Due to this substantive change in status, certain of his stock option and RSU awards were modified which resulted in incremental stock based compensation expense of approximately $ 1.0 million in the fourth quarter of 2017.

As of December 31, 2020, unrecognized stock-based compensation expense by award type and their expected weighted-average recognition periods are summarized in the following table (in thousands, except years).

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The Company values RSUs at the closing market price of its common stock on the date of grant.

The Company estimates the fair value of each stock option and purchase right under the ESPP granted to employees on the date of grant using the Black-Scholes option-pricing model and using the assumptions disclosed in the table below.

Expected volatility is based upon the weighting of the Company’s historical volatility and the historical volatility of a peer group of publicly traded companies.

The Company estimates the fair value of each stock option and purchase right under the 2014 ESPP Plan granted to employees on the date of grant using the Black-Scholes option-pricing model and using the assumptions disclosed in the table below.

Expected volatility is based upon the weighting of the Company’s historical volatility.

2020, expected volatility was based upon the weighting of the Company’s historical volatility and the historical volatility of a peer group of publicly traded companies.

The expected term of options granted is estimated using the simplified method by taking the average of the vesting term and the contractual term of the option.

volatility assumption for purchase rights under the ESPP is based on the historical volatility of the Company’s common stock.

The expected volatility assumption for purchase rights under the 2014 ESPP Plan is based on the historical volatility of the Company’s common stock.

The risk-free rate for the expected term of the awards is based on U.S.

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Accordingly, the expected dividend yield is zero.

The weighted average assumptions used to value stock options and purchase rights under the ESPP granted during the years ended December 31, 2019, 2018 and 2017 were as follows:

The weighted average assumptions used to value stock options and purchase rights under the 2014 ESPP Plan granted during the years ended December 31, 2020, 2019 and 2018 were as follows:

Stock Options

Year Ended December 31,

2019 2018 2017

Expected term (years) 5.7 6.1 6.0

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Dividend yield — — —

(1) The weighted average assumptions for the year ended December 31, 2020 includes assumed stock options.

The weighted average assumptions, excluding the assumed stock options, were an expected term of 6.0 years, volatility of 47 %, risk-free interest rate of 1.0 % and dividend yield of 0 %.

The weighted average assumptions of the assumed stock options were an expected term of 4.3 years, volatility of 47 %, risk-free interest rate of 0.3 % and dividend yield of 0 %.

November 2020 May 2020 November 2019 May 2019 November 2018 May 2018

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Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period, and excludes any dilutive effects of employee stock-based awards and warrants.

Diluted net income per share is computed giving effect to all potentially dilutive shares of common stock, including common stock issuable upon exercise of stock options and warrants and vesting of restricted stock.

Diluted net loss per share is computed giving effect to all potentially dilutive shares of common stock, including common stock issuable upon exercise of stock options, vesting of restricted stock and shares of common stock issuable upon conversion of convertible senior notes.

As the Company had net losses for the years ended December 31, 2020, 2019 and 2018, all potentially issuable shares of common stock were determined to be anti-dilutive.

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2,267 2,372 2,325

Common stock warrants

Convertible senior notes

Total 5,432 6,521 5,447

The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread of its Notes.

The conversion spread will have a dilutive impact when the average market price of the

Company’s common stock for a given period exceeds the initial conversion price of $ 40.82 per share for the Notes.

The potential shares of common stock from Notes were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive.

The following table presents components of income (loss) before income taxes for the periods presented (in thousands):

The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread of its convertible senior notes.

The conversion spread had a dilutive impact for the 2023 convertible senior notes during the year ended December 31, 2020 since the average market price of the Company’s common stock during the period exceeded the initial conversion price of $ 40.82 per share.

However, the potential shares of common stock issuable upon the conversion of the 2023 convertible senior notes were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive.

The conversion spread had an anti-dilutive impact for the 2025 convertible senior notes during the year ended December 31, 2020 since the average market price of the Company’s common stock during the period was less than the initial conversion price of $ 134.34 per share.

The following table presents components of loss before income taxes for the periods presented (in thousands):

Year Ended December 31,

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Income (loss) before income taxes $ ( 44,583 ) $ ( 4,448 ) $ 79

Provision for income taxes for the periods presented consisted of (in thousands):

Provision for (benefit from) income taxes for the periods presented consisted of (in thousands):

Year Ended December 31,

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Foreign 233 43 272

Total provision for income taxes $ 104 $ 300 $ 268

Income tax expense differed from the amount computed by applying the U.S.

Total provision for income taxes - Current 634 104 300

federal ( 2,495 ) — —

state ( 414 ) — —

Foreign ( 178 ) — —

Total provision for (benefit from) income taxes - Deferred ( 3,087 ) — —

Total provision for (benefit from) income taxes $ ( 2,453 ) $ 104 $ 300

The Company recorded a deferred income tax benefit during 2020 principally due to the release of a portion of the previously recorded valuation allowance as a result of the deferred tax liabilities recorded as part of the acquisition of Virtual Observer, and the change in the foreign deferred tax balances during the year.

Income tax expense (benefit) differed from the amount computed by applying the U.S.

federal statutory income tax rate of 21 % to pre-tax income (loss) for the periods presented as a result of the following (in thousands):

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state income taxes ( 345 ) ( 65 ) 2,539

Non-deductible expense (benefit) 5,899 14,485 ( 5,673 )

Section 162(m) 6,472 5,623 2,956

Non-deductible expense 1,944 276 11,529

Research and development credit ( 837 ) ( 860 ) ( 339 )

Stock-based compensation ( 23,800 ) ( 16,619 ) ( 11,360 )

Impact of 2017 Tax Act — — 25,952

Tax benefit from acquisition ( 2,495 ) — —

Other 651 ( 129 ) 106

Change in valuation allowance 25,319 12,812 ( 5,148 )

Total provision for income taxes $ 104 $ 300 $ 268

Total provision for (benefit from) income taxes $ ( 2,453 ) $ 104 $ 300

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019 related to the following (in thousands):

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A valuation allowance is provided for deferred tax assets where the recoverability of the assets is uncertain.

The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely than not that sufficient future taxable income will be generated to utilize the deferred tax assets.

The determination to provide a valuation allowance is dependent upon the assessment of whether it is more likely

than not that sufficient future taxable income will be generated to utilize the deferred tax assets.

Based on the weight of the available evidence, which includes the Company’s historical operating losses, lack of taxable income and the accumulated deficit, for the year ended December 31, 2020, the Company has provided a valuation allowance against its U.S.

net deferred tax assets.

The net change in the valuation allowance for the years ended December 31, 2019 and 2018 was an increase of $ 12.8 million and a decrease of $ 5.1 million, respectively.

As of December 31, 2019, the Company had net operating loss carryforwards for federal and state income tax purposes of $ 274.4 million and $ 154.5 million, respectively, available to reduce future income subject to income taxes.

If not utilized, the federal and state net operating loss carryforwards will begin to expire in 2024 and 2028, respectively.

However, starting in 2020, the Company recorded net foreign deferred tax liabilities associated with its U.K.

and Australia operations totaling $ 4.4 million, which cannot reduce its U.S.

valuation allowance.

The net change in the valuation allowance for the years ended December 31, 2020 and 2019 was a decrease of $ 8.8 million and an increase of $ 12.8 million, respectively.

As of December 31, 2020, the Company had net operating loss carryforwards for federal, state and foreign income tax purposes of $ 356.0 million, $ 201.6 million and $ 14.3 million, respectively, available to reduce future income subject to income taxes.

If not utilized, the federal and state net operating loss carryforwards will begin to expire in 2024 and 2028, respectively, while the foreign net operating loss carryforwards do not expire.

As of December 31, 2020, the Company also had gross research credit carryforwards for federal and California state tax purposes of $ 6.1 million and $ 4.5 million, available to reduce future income subject to income taxes.

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Unrecognized benefit — end of period $ 6,076 $ 4,471 $ 10,723

As of December 31, 2019 and 2018, an immaterial amount of the total unrecognized tax benefits, if recognized, would have an impact on the Company’s effective tax rate.

As of December 31, 2020 and 2019, the Company had $ 0.3 million and an immaterial amount, respectively, of total unrecognized tax benefits, if recognized, would have an impact on the Company’s effective tax rate.

The Company recognizes interest and penalties related to uncertain tax positions as income tax expense.

The Company does not anticipate its total unrecognized tax benefits as of December 31, 2019 will significantly change due to settlement of examination or the expiration of statute of limitations during the next 12 months.

The Company does not anticipate its total unrecognized tax benefits as of December 31, 2020 will significantly change due to settlement of examination or the expiration of statutes of limitation during the next 12 months.

The Company is currently unaware of any uncertain tax positions that could result in significant additional payments, accruals or other material deviation in this estimate over the next 12 months.

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federal and state tax authorities.

The Company’s foreign tax returns are open to audit under the statutes of limitations of the respective foreign countries in which the subsidiaries are located.

The Company’s foreign tax returns are open to audit under the statutes of limitation of the respective foreign countries in which the subsidiaries are located.

The Company considers all undistributed earnings of its foreign subsidiaries indefinitely reinvested.

In December 2017, new legislation (the “2017 Tax Act”) was enacted that significantly revised the Internal Revenue Code of 1986, as amended.

The 2017 Tax Act, 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, limitation of the deduction for newly generated 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 (the “Transition Tax”), future taxation of certain classes of offshore earnings regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits beginning in 2018.

In December 2017, the SEC issued Staff Accounting Bulletin No.

118 which provided a measurement period of up to one year from the enactment of the 2017 Tax Act for companies to complete the accounting for the 2017 Tax Act and its related impacts.

Upon completion of the accounting related to the income tax effect of the 2017 Tax Act, there were no material adjustments made to the previous estimates.

Commitments and Contingencies

As of December 31, 2019, $ 258.8 million of the Notes were outstanding.

The Notes are due May 1, 2023.

See Note 6 for more information.

As of December 31, 2020, $ 806.4 million of aggregate principal of the convertible senior notes were outstanding.

The 2023 convertible senior notes and the 2025 convertible senior notes are due on May 1, 2023 and June 1, 2025, respectively.

See Note 6 for more information concerning the convertible senior notes.

On July 29, 2020, the Company entered into the Bishop Ranch Lease.

The Company expects to use the Bishop Ranch Lease as its new corporate headquarters.

The Lease commenced on February 1, 2021 and will continue for a period of 120 months.

As of December 31, 2020, the Company's commitments under the Bishop Ranch Lease totaled $ 46.4 million.

In September 2020, the Company entered into a cloud services agreement for a term of three years and total commitment of $ 12.5 million.

As of December 31, 2020, total remaining commitment was approximately $ 11.4 million, of which approximately $ 7.0 million and $ 4.4 million is expected to be paid in 2021 and 2022, respectively.

Hosting, Telecommunication Usage and Maintenance Services

The Company has agreements with third parties to provide co-location hosting and telecommunication usage services.

The Company has agreements with third parties to provide co-location hosting, telecommunication usage, and equipment maintenance services.

The agreements require payments per month for a fixed period of time in exchange for certain guarantees of network and telecommunication availability.

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2023 186 444 —

Thereafter $ — $ — $ —

Total future minimum payment $ 1,975 $ 5,372 $ 25

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The Company is classified as a telecommunications service provider for regulatory purposes and is required to make contributions to the USF based on the revenue the Company receives from the resale of interstate and international telecommunications services.

In order to comply with the obligation to make direct contributions, the Company is registered with the Universal Service Administrative Company, or USAC, which is charged by the FCC with administering the USF, and has been remitting the required contributions to USAC since its registration with the USAC in April 2013.

In order to comply with the obligation to make direct contributions, the Company is registered with the USAC, which is charged by the FCC with administering the USF, and has been remitting the required contributions to USAC since its registration with the USAC in April 2013.

In June 2015, in connection with the Company’s late registration with the USAC and past failure to make USF contributions prior to 2013, the Company entered into a consent decree with the FCC Enforcement Bureau.

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The Company continues to analyze its activities to determine if it is subject to these taxes in additional jurisdictions and based on the Company’s ongoing assessment of its U.S.

state and local tax collection and remittance obligations, the Company registers for tax and regulatory purposes in such jurisdictions and commences collecting and remitting applicable state and local taxes and surcharges to these jurisdictions.

and local tax collection and remittance obligations, the Company registers for tax and regulatory purposes in such jurisdictions and commences collecting and remitting applicable state and local taxes and surcharges to these jurisdictions.

As of December 31, 2020 and 2019, the Company had total accrued liabilities of $ 1.1 million and $ 1.2 million, respectively, for such contingent sales taxes and surcharges that were not being collected from its clients but may be imposed by various taxing authorities, of which $ 0.2 million and $ 0.4 million, respectively, were included in current “Sales tax liability” on the consolidated balance sheets, and the remaining were included in non-current “Sales tax liability” on the consolidated balance sheets.

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The Company expenses legal fees as incurred.

The Company is currently involved in the following lawsuits as a defendant.

Melcher Litigation

On September 28, 2016, a complaint was filed in the United States District Court for the Southern District of California against Five9, Inc., or Five9, as the successor in interest to Face It, Corp., or Face It, and Lance Fried, a former Five9 employee who was the former Chief Executive Officer of Face It.

The action, captioned Melcher, et al.

Five9, Inc., et al.

16-cv-02440, or the Melcher Litigation, was filed as a direct action by Carl Melcher, or Melcher, a purported former stockholder of Face It, and his related investment entity Melcher Family Limited Partnership, or MFLP.

In the complaint, the plaintiffs alleged that Face It repurchased the plaintiffs’ stock in September 2013 before Five9 acquired Face It, and that in connection with the repurchase, Fried made material misstatements or omissions to Melcher by failing to disclose that Face It allegedly was in concurrent discussions about a potential sale of its company to Five9.

The complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as various claims under state law and common law.

The complaint sought to set aside Face It’s September 2013 stock repurchase from the plaintiffs, as well as an unspecified amount of damages and an award of attorney’s fees and costs, in addition to other relief.

On November 8, 2016, the court entered an order staying the lawsuit and ordered the parties to proceed to arbitration of the dispute before the American Arbitration Association, or AAA.

On November 16, 2016, Melcher and MFLP submitted a Demand for Arbitration to AAA against Five9, asserting claims identical to those alleged in the lawsuit.

On March 31, 2017, Five9 reached a settlement with the plaintiffs that fully resolved the plaintiffs’ claims against Five9 and provided for mutual releases between the plaintiffs and Five9 in exchange for a one-time payment by Five9 to the plaintiffs of $ 1.7 million.

As a result of the settlement, the AAA arbitration was concluded, and on July 10, 2017 the plaintiffs filed an amended complaint in the Melcher Litigation solely against Fried, removing Five9 as a defendant.

For a discussion of the indemnification claims arising out of this matter, see “—Indemnification Agreements.”

Indemnification Agreements

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In addition, the Company has entered into indemnification agreements with its directors, officers and certain employees that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.

Other than as described below, there are no claims that it is aware of that could have a material effect on the consolidated balance sheet, consolidated statement of operations and comprehensive loss, or consolidated statements of cash flows.

On October 27, 2016, the Company received notice from Lance Fried, a former officer and director of Face It, Corp.

of his claim for indemnification by the Company (as successor in interest to Face It), and for advancement of all legal fees and expenses he incurs in connection with the defense of the lawsuit captioned Melcher, et al.

Five9, Inc., et al.

16-cv-02440, in the U.S.

District Court for the Southern District of California.

In the lawsuit, plaintiff Carl Melcher, a purported former stockholder of Face It, and his related investment entity, Melcher Family Limited Partnership, alleged that Face It repurchased the plaintiffs’ stock in September 2013 before the Company acquired Face It, and that in connection with the repurchase, Fried made material misstatements or omissions to Melcher by failing to disclose that Face It allegedly was in concurrent discussions about a potential sale of its company to the Company.

The lawsuit alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well as various claims under state law and common law.

On January 9, 2018, Mr.

Fried initiated an arbitration proceeding against the Company in which he alleged that the Company breached advancement obligations to him.

The Company asserted counterclaims in the arbitration proceeding against both Mr.

Fried and the representative of the former Face It stockholders, seeking to recoup all losses incurred by the Company in connection with the Melcher Litigation, including any amounts incurred to indemnify or advance the legal fees and expenses of Mr.

Fried pursuant to his indemnification claim.

On June 11, 2018, the arbitrator ordered the Company to advance the fees Mr.

Fried incurred in connection with the defense of the Melcher Litigation, and ordered the Company’s counterclaims stayed pending the resolution of the Melcher litigation.

In June 2019, Mr.

Fried reached a settlement in the Melcher Litigation.

Pursuant to a separate June 2019 settlement agreement between the Company, Mr.

Fried, and the representative of the former Face It stockholders, the Company agreed to contribute a portion of the amount Mr.

Fried agreed to pay the Melcher parties.

Specifically, the Company agreed to pay $ 0.4 million to the Melcher parties on Mr.

Fried’s behalf in light of Mr.

Fried’s asserted indemnity obligations against the Company.

As a result of the settlements, all claims against the Company, including claims for indemnification, have been released by Mr.

Fried and the former Face It stockholders.

The Company also released claims it asserted against Mr.

Fried and the former Face It stockholders.

The Melcher Litigation and the arbitration proceeding have been dismissed.

The Company incurred a total of approximately $ 1.4 million in fees and expenses including legal fees advanced on Mr.

Fried’s behalf and settlement contributions for the Melcher Litigation.

These amounts were included in general and administrative expenses.

There are no claims that it is aware of that could have a material effect on the consolidated balance sheet, consolidated statement of operations and comprehensive loss, or consolidated statements of cash flows.

Geographical Information

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The Company began matching employee contributions in cash in the fourth quarter of 2019.

The contribution expense for the year ended December 31, 2019 was $ 0.3 million.

The contribution expense for the year ended December 31, 2020 and 2019 was $ 1.4 million and $ 0.3 million, respectively.

The Company complies with the requirement of maintaining a retirement plan for employees in the Philippines.

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Total retirement expense for this plan was $ 0.1 million, $ 0.1 million, and $ 0.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.

ASC 842 Adoption Impact

The Company has leases for offices, data centers and other computer and networking equipment that expire at various dates through 2024.

The Company’s leases have remaining terms of one to five years , some of the leases include a Company option to extend the leases for up to three to five years , and some of the leases include the option to terminate the leases upon 30-days’ notice.

The Company has leases for offices, data centers and computer and networking equipment that expire at various dates through 2031.

The Company’s leases have remaining terms of one to ten years , some of the leases include a Company option to extend the leases for up to three to five years , and some of the leases include the option to terminate the leases upon 30-days’ notice.

The Company adopted ASC 842 using the modified retrospective method on January 1, 2019.

The Company elected the available practical expedients, implemented internal controls, and a lease accounting system to enable the preparation of financial information upon adoption.

The adoption of ASC 842 resulted in the recognition of operating lease liabilities of $ 8.4 million and operating lease right-of-use, or ROU, assets of the same amount.

The adoption of ASC 842 resulted in the recognition of operating lease liabilities of $ 8.4 million and operating lease ROU assets of the same amount.

Existing deferred rent of $ 0.6 million was recorded as an offset to ROU assets, resulting in net ROU assets of $ 7.8 million.

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Operating lease liabilities:

$ 3,912 $ 5,064

Operating lease liabilities — less current portion 5,379 4,329

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2021 $ 4,138 $ 628

2021 2,070 825

Total future minimum lease payment 9,800 628

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Total $ 9,291 $ 612

As of December 31, 2019, the Company had one additional operating lease for office space that had not yet commenced, representing a total commitment over its term of $ 1.6 million.

This operating lease commenced in January 2020 with a lease term of 3.5 years.

Impact on Consolidated Balance Sheet

December 31, 2019

(in thousands) As Reported Balances without adoption of ASC 842 Effect of Change Higher (Lower)

Operating lease right-of-use-assets $ 8,746 $ — $ 8,746

Operating lease liabilities 5,064 — 5,064

Operating lease liabilities — less current portion 4,329 — 4,329

Change in Accounting Policy

The Company determines if an arrangement is or contains a lease at inception.

Operating leases are included in operating lease ROU assets and operating lease liabilities in the Company’s condensed consolidated balance sheets.

Finance leases are included in property and equipment, and finance lease liabilities in the Company’s condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at the commencement date based on an amount equal to the present value of lease payments over the lease term.

As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments.

The Company uses the implicit rate when it is readily determinable.

The operating lease ROU asset also includes any lease payments made and excludes lease incentives.

The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Operating lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.

Acquisition of Whendu LLC

In November 2019, the Company acquired certain assets from Whendu LLC (“Whendu”), including Whendu’s iPaaS platform, which the Company has determined to be an asset acquisition.

As of December 31, 2020, the Company’s Bishop Ranch Lease had not yet commenced, representing a total commitment over its term of $ 46.4 million.

This operating lease commenced on February 1, 2021 with a lease term of 10 years.

Inference Solutions

On November 18, 2020, the Company acquired all of the issued and outstanding shares of Inference for total consideration of approximately $ 156.7 million.

The total consideration comprised of $ 137.0 million in cash, net of cash acquired, and $ 18.1 million in estimated fair value of contingent earn out consideration.

The contingent earn out consideration is up to $ 24.0 million and is based upon achievement of certain milestones and relative thresholds during the earn out measurement period which ends on December 31, 2021.

The range of amounts that the Company could pay under the contingent consideration arrangement is between $ 0.0 million and $ 24.0 million.

See Note 3 for additional information regarding the contingent consideration arrangement.

This acquisition, which was accounted for as a business combination, is intended to accelerate the Company’s AI position through the addition of Inference’s widely deployed IVA platform.

The excess of the purchase price over identifiable intangible assets and net tangible assets in the amount of $ 131.0 million was allocated to goodwill, which is not deductible for tax purposes.

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining to intangible assets acquired, liabilities assumed and tax liabilities assumed including calculation of deferred tax assets and liabilities.

During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill.

The following table presents the preliminary allocation of the purchase price at the acquisition date (in thousands):

Property and equipment acquired 124

Other assets acquired 2,238

Acquired technology 28,600

Customer relationships 1,100

Trade name and trademarks 400

Goodwill 130,976

Total assets acquired 164,832

Liabilities assumed ( 3,525 )

Deferred tax liability ( 4,616 )

Total consideration $ 156,691

Total consideration (net of cash acquired) $ 155,297

The acquired technology, customer relationships, and trade name will be amortized on a straight-line basis over their assigned useful lives of six years , five years , and two years , respectively.

The Company used the income approach to estimate the fair value of intangible assets acquired.

In connection with this acquisition, the Company incurred approximately $ 2.9 million of acquisition costs, which have been expensed as incurred and included in general and administrative expense in the consolidated statement of operations and comprehensive income.

The results of operations of this acquisition are included in the accompanying consolidated statements of operations from the date of acquisition.

No pro forma financial information is provided as the financial results of Inference were not material to the Company’s consolidated financial statements.

Virtual Observer

On April 1, 2020, the Company acquired all of the issued and outstanding shares of common stock of Virtual Observer, formerly Coordinated Systems, Inc., for cash consideration of approximately $ 32.2 million, subject to adjustment, pursuant to a stock purchase agreement by and among the Company and Robert H.

Hutcheon, David R.

Brower and Daniel J.

McGrail, dated January 15, 2020.

This acquisition, was accounted for as a business combination, is intended to expand the Company's portfolio to include a cloud-based Workforce Optimization ("WFO") offering as a complement to its ongoing strategic partnerships with leading WFO providers.

The excess of the purchase price over identifiable intangible assets and net tangible assets in the amount of $ 22.6 million was allocated to goodwill, which is not deductible for tax purposes.

The following table presents the preliminary allocation of the purchase price at the acquisition date (in thousands):

Tangible assets acquired 200

Acquired technology 12,200

Customer relationships 500

Trade name and trademarks 100

Goodwill 22,646

Total assets acquired 35,814

Deferred tax liability ( 2,910 )

Liabilities assumed ( 682 )

Total $ 32,222

The acquired technology, customer relationships, and trade name and trademarks will be amortized on a straight-line basis over their estimated useful lives of five years , five years , and two years , respectively.

The Company used the income approach to estimate the fair value of intangible assets acquired.

In connection with this acquisition, the Company incurred total acquisition-related transaction costs of $ 0.9 million that has been expensed as incurred and included in general and administrative expenses in the consolidated statements of operations in 2020, and expensed an additional $ 0.3 million in 2019.

The results of operations of this acquisition are included in the accompanying consolidated statements of operations from the date of acquisition.

No pro forma financial information is provided as the financial results of the acquiree were not material to the Company’s consolidated financial statements.

In November 2019, the Company acquired certain assets from Whendu, including its iPaaS platform, which the Company has determined to be an asset acquisition.

The purchase price, including the Company’s transaction costs, was approximately $ 15.9 million, of which $ 15.4 million was allocated to the Whendu iPaaS platform and $ 0.5 million was allocated to an assembled workforce, on a relative fair value basis.

The assets will be amortized on a straight-line basis over their useful lives of four and three years , respectively.

Subsequent Event

On January 15, 2020, the Company entered into a definitive agreement to acquire all of the outstanding shares of Coordinated Systems, Inc.

(rebranded as Virtual Observer) for cash consideration of approximately $ 32.0 million, which amount is to be adjusted at the closing for certain liabilities.

The Company expects this transaction will close in the second quarter of 2020, subject to the satisfaction of certain closing conditions.

Selected Quarterly Financial Data (Unaudited)

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Interest expense ( 9,481 ) ( 9,649 ) ( 5,734 ) ( 3,484 ) ( 3,506 ) ( 3,486 ) ( 3,406 ) ( 3,396 )

Loss on early extinguishment of debt ( 887 ) ( 282 ) ( 5,794 ) 0 0 0 0 0

Interest income and other 501 631 829 1,072 1,384 1,460 1,490 1,745

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Income (loss) before income taxes ( 7,202 ) ( 11,085 ) ( 18,928 ) ( 7,368 ) 910 ( 1,554 ) ( 1,831 ) ( 1,973 )

Provision for income taxes 74 50 29 ( 49 ) 150 41 64 45

Provision for (benefit from) income taxes 8 346 ( 2,876 ) 69 74 50 29 ( 49 )

Net income (loss) $ ( 7,210 ) $ ( 11,431 ) $ ( 16,052 ) $ ( 7,437 ) $ 836 $ ( 1,604 ) $ ( 1,860 ) $ ( 1,924 )

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data