What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-18 · 199 added, 178 removed, 406 unchanged (48% of the section changed)

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Factors that could cause or contribute to these differences include those under “Risk Factors” included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K.

We provide a low-code automation platform that accelerates the creation of high-impact business applications, enabling our customers to automate the most important aspects of their business.

We provide a low-code platform that accelerates the creation of high-impact business applications and workflows, enabling our customers to automate the most important aspects of their business.

Global organizations use our applications to improve customer experience, achieve operational excellence, and simplify global risk management and compliance.

With our platform, organizations can rapidly and easily design, build, and implement powerful, enterprise-grade custom applications through our intuitive, visual interface with little or no coding required.

Our customers have used applications built on our platform to launch new business lines, automate vital employee workflows, manage complex trading platforms, accelerate drug development, and build global procurement systems.

With our platform, organizations can rapidly and easily discover, design, and automate powerful, enterprise-grade workflows and custom applications through our intuitive, visual interface with little or no coding required.

Our customers have used workflows and applications built on our platform to launch new business lines, automate vital employee workflows, manage complex trading platforms, accelerate drug development, and build global procurement systems.

With our platform, decision makers can reimagine their products, services, processes, and customer interactions by removing much of the complexity and many of the challenges associated with traditional approaches to software development.

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Since inception, we have invested in our Customer Success organization to help ensure customers are able to build and deploy applications on our platform.

We have several strategic partnerships, including with KPMG, PwC, Accenture, and Deloitte, for them to refer customers to us in order to purchase subscriptions and then to provide professional services directly to the customers using our platform.

We have several strategic partnerships, including with KPMG, Accenture, PwC, Infosys, Wipro, and Deloitte, for them to refer customers to us in order to purchase subscriptions and then to provide professional services directly to the customers using our platform.

We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities.

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As of December 31, 2021, we had 816 customers in a variety of industries, of which 635 customers were commercial and 181 customers were government or non-commercial entities.

Our customers include financial services, government, life sciences, telecommunications, media, energy, manufacturing, and transportation organizations.

Generally, our sales force targets its efforts to organizations with over 2,000 employees and $2 billion in annual revenue.

Our customers include financial services, government, life sciences, insurance, manufacturing, energy, healthcare, telecommunications, and transportation organizations.

Generally, our sales team targets its efforts to organizations with over 2,000 employees and $2 billion in annual revenue.

As of December 31, 2021, 25% of our commercial customers were Global 2000 organizations, and 68 of our customers were Fortune 500 companies.

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Our subscriptions revenue was $263.7 million, $198.7 million, and $151.3 million in 2021, 2020,

and 2018, respectively, and includes sales of our SaaS subscriptions, on-premises term license subscriptions, and maintenance support.

and 2019, respectively, and includes sales of our SaaS subscriptions, on-premises term license subscriptions, and maintenance and support.

Our cloud subscription revenue was $179.4 million, $129.2 million, and $95.0 million in 2021, 2020, and 2019, respectively.

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We also used cash in operations of $53.9 million, $7.6 million, and $8.9 million in 2021, 2020, and 2019, respectively.

Recent Developments

Beginning in late 2019 and continuing into 2022, the outbreak of the novel coronavirus disease, or COVID-19, has resulted in the declaration of a global pandemic and adversely affected economic activity across virtually all sectors and industries on a local, national, and global scale.

The impact of COVID-19 on the economy and our business continues to be a fluid situation.

The impact of COVID-19, including the emergence of new variant strains of COVID-19, on the economy and our business continues to be a fluid situation.

Operationally, we remain focused on supporting our customers, employees, and communities during this time.

We have responded quickly to adopt a virtual corporate strategy consisting of enabling most of our employees to work productively from home while continuing to guard the health and safety of our teams, support our customers, and mitigate risk.

We are focused on ensuring continuity for our customers.

To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and marketing events.

At the outset of the pandemic, we responded quickly to adopt a virtual corporate strategy consisting of enabling most of our employees to work productively from home while continuing to guard the health and safety of our teams, support our customers, and mitigate risk.

In the third quarter of 2021, we announced an option allowing for our employees to return to offices in select jurisdictions if they elect to do so.

We remain focused on ensuring continuity for our customers and we continue to conduct business as usual, with necessary or advisable modifications to employee travel, employee work locations, and marketing events.

Through December 31, 2021, we have not seen a meaningful adverse impact to our financial position, results of operations, and cash flows and liquidity as a result of COVID-19.

While the verticals from which we have historically generated the majority of our revenue have been less impacted by COVID-19 to date, there may be impacts to our financial condition and results of operations in 2022 as a result of reduced demand for our products and services and longer sales cycles.

The ultimate impact of COVID-19 on our business is not estimable at this time and will be largely dependent upon a number of factors outside of our control including the extent and duration of the outbreak as well as any mitigating actions which may be undertaken by global governments and the general public.

The ultimate impact of COVID-19 and any variant strains thereof on our business is not estimable at this time and will be largely dependent upon a number of factors outside of our control including the extent and duration of the outbreak as well as any mitigating actions which may be undertaken by global governments and the general public.

Our Business Model

Our business model focuses on maximizing the lifetime value of customer relationships, which is a function of the duration of a customer’s deployment of Appian as well as the price and number of subscriptions of Appian a customer purchases.

We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who generally take more than one year to become productive given the length of our sales cycle, and marketing costs, all of which, with the exception of sales commissions, are expensed as incurred.

Our business model focuses on maximizing the lifetime value of customer relationships, which is a function of the duration of a customer’s deployment of our platform as well as the price and number of subscriptions of our platform that a customer purchases.

We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who can take anywhere from six months to a year to become productive given the length of our sales cycle, and marketing costs, all of which, with the exception of sales commissions, are expensed as incurred.

At the same time, we believe the costs we incur to retain customers and drive additional purchases of software are lower than our customer acquisition costs on a relative basis.

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Over the last three completed fiscal years, we had an average cloud subscription renewal rate of 98%.

We calculate our cloud subscription renewal rate by dividing (i) the cloud subscription revenue from renewing cloud customers in the current 12-month period that were cloud customers during the entirety of the prior 12-month period, giving effect to price increases but excluding additional cloud subscriptions for additional users, or upsells, by (ii) our cloud subscription revenue from all cloud customers in the corresponding prior 12-month period that were cloud customers during the entirety of such prior 12-month period.

We calculate our cloud subscription renewal rate by dividing (i) the cloud subscription revenue from renewing cloud customers in the current 12-month period that were cloud customers during the entirety of the prior 12-month period, giving effect to price increases but excluding additional cloud subscription for additional users, or upsells, by (ii) our cloud subscription revenue from all cloud customers in the corresponding prior 12-month period that were cloud customers during the entirety of such prior 12-month period.

For example, to obtain our cloud subscription renewal rate for the 12-month period ended December 31, 2021, we identified the amount of cloud subscription revenue in 2021 from cloud customers that were our cloud customers for all of 2020 and subtracted the amount of upsells to such cloud customers and new users from those cloud customers in 2021.

We then divided the balance of 2020 cloud subscription revenue from such cloud customers by all cloud subscription revenue generated in 2019 from cloud customers that were cloud customers for the entirety of 2019.

We then divided the balance of 2021 cloud subscription revenue from such cloud customers by all cloud subscription revenue generated

in 2020 from cloud customers that were cloud customers for the entirety of 2020.

With respect to the average for our last three completed fiscal years, we calculated the average of the three applicable 12-month periods.

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We measure the effectiveness of our business model by comparing the lifetime value of our customer relationships to our customer acquisition costs.

For fiscal years 2018 and prior, revenue was recognized under Accounting Standards Codification Topic 605, Revenue Recognition, or ASC 605.

Under ASC 605, we calculated lifetime customer value as (1) average gross margin multiplied by average subscription and maintenance and support revenue from customers for a given month divided by (2) the average percentage of monthly recurring revenue that did not renew in each month for the previous 12 months.

We then divided this calculated lifetime customer value by our customer acquisition cost, which is the total sales and marketing expense incurred during the corresponding month.

In response to our adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) , or ASC 606, in the year ended December 31, 2019, we revised the calculation of the lifetime value of our customer relationships by replacing subscription revenue with cloud subscription revenue in the calculation.

Because we primarily recognize revenue from our on-premises term license subscriptions upfront under ASC 606, we believe cloud subscription revenue better reflects the performance of our business.

The calculation of lifetime customer value as compared to customer acquisition costs for the prior years were unchanged.

On a rolling 12 month basis, we estimate that for each of the past five fiscal years, the average lifetime value of a customer has exceeded 7x the associated average cost of acquiring them, including the year ended December 31, 2021.

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We expect our revenue growth will be primarily driven by the pace of adoption and penetration of our platform.

We offer a leading custom software automation platform and intend to continue to invest to expand our customer base.

We offer a leading custom software platform and intend to continue to invest to expand our customer base.

The degree to which prospective customers recognize the need for low-code software that enables organizations to digitally transform, and subsequently allocate budget dollars to purchase our software, will drive our ability to acquire new customers and increase sales to existing customers, which, in turn, will affect our future financial performance.

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We believe we have a substantial opportunity to grow our customer base.

We define a customer as an entity with an active subscription or maintenance and support contract related to a perpetual software license as of the specified measurement date.

To the extent we contract with one or more entities under common control, we count those entities as separate customers.

We have aggressively invested, and intend to continue to invest, in our sales force in order to drive sales to new customers.

We define a customer as an entity with an active subscription or maintenance and support contract or a legacy perpetual license as of the specified measurement date.

Furthermore, we define a new customer as an entity that has entered into its first active subscription or maintenance and support contract within one calendar year of the specified measurement date while existing customers are defined as entities that have maintained an active subscription or maintenance and support contract for at least one calendar year from the specified measurement date.

Legacy customers from entities acquired in business combinations are not counted as new customers until they enter into a new active subscription or maintenance and support contract with us subsequent to the completion of the business combination.

Additionally, to the extent we contract with one or more entities under common control, we count those entities as separate customers.

We have aggressively invested, and intend to continue to invest, in our sales team in order to drive sales to new customers.

We continue to make investments to enhance the expertise of our sales and marketing organization within our key industry verticals of financial services, government, and life sciences.

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• Further Penetration of Existing Customers.

Our sales force seeks to generate additional revenue from existing customers by adding new users to our platform.

Our sales team seeks to generate additional revenue from existing customers by adding new users to our platform.

Many of our customers begin by building a single application and then grow to build dozens of applications on our platform.

Generally, the development of new applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue to us because we charge subscription fees on a per-user basis and, to a lesser degree, non-user based single application licenses.

Generally, the development of new applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue to us because we charge subscription fees on a per-user basis or through non-user based single application licenses.

As a result of this “land and expand” strategy, we have generated significant additional revenue from our customer base.

Our ability to increase sales to existing customers will depend on a number of factors, including the size of our sales force and professional services teams, customers’ level of satisfaction with our platform and professional services, pricing, economic conditions, and our customers’ overall spending levels.

We have also re-focused some of our

professional services personnel to become customer success managers.

Their role is to ensure the customer realizes value from our platform and support the "land and expand" strategy versus delivering billable hours.

Our ability to increase sales to existing customers will depend on a number of factors, including the size of our sales and professional services teams, customers’ level of satisfaction with our platform and professional services, pricing, economic conditions, and our customers’ overall spending levels.

We have also re-focused some of our professional services personnel to become customer success managers.

Their role is to ensure the customer realizes value from our platform and support strategic partners and the “land and expand” strategy versus delivering billable hours.

• Mix of Subscriptions and Professional Services Revenue.

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Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect subscriptions revenue as a percentage of total revenue to increase.

In addition, we intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities.

These partners perform professional services with respect to any new service contracts they sign.

In addition, we continue to grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities.

These partners perform professional services with respect to any new service contracts they originate.

As the usage of partners expands, we expect the proportion of our total revenue from subscriptions to increase over time relative to professional services.

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• Investments in Growth.

We have made, and plan to continue to make, investments for long-term growth, including investment in our platform and infrastructure to continuously maximize the power and simplicity of the platform to meet the evolving needs of our customers and to take advantage of our market opportunity.

We have made, and plan to continue to make, investments for long-term growth, including investing in our platform and infrastructure to continuously maximize their power and speed, meet the evolving needs of our customers, and take advantage of our market opportunity.

In addition, we continue to pursue strategic acquisitions that enhance our product offerings.

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Cloud subscription revenue $ 179,415 $ 129,219 $ 95,028

Pursuant to adoption of ASC 606 in 2019, we primarily recognize revenue from our on-premises term license subscriptions upfront.

As a result, we believe our previous key business metric, subscription revenue, no longer best reflects the performance of our business and overemphasizes the volatility in our results.

Therefore, we are no longer presenting subscription revenue and have transitioned to a new key metric, cloud subscription revenue.

Cloud subscription revenue includes SaaS subscriptions bundled with maintenance and support and hosting services.

In 2021, 2020, and 2019, 68.0%, 65.0%, and 62.8%, respectively, of subscriptions revenue was cloud subscription revenue.

As we generally sell our SaaS subscriptions on a per-user basis, our cloud subscription revenue for any customer is primarily determined by the number of users who access and utilize the applications built on our platform as well as the price paid.

We believe increasing cloud subscription revenue is an indicator of the demand for our platform, the pace at which the market for our solutions is growing, the productivity of our sales force and strategic relationships in growing our customer base, and our ability to further penetrate our existing customer base.

The adoption of ASC 606 did not have a material impact on our cloud subscription revenue.

As we generally sell our SaaS subscriptions on a per-user basis or through non-user based single application licenses, our cloud subscription revenue for any customer is primarily determined by the number of users who access and utilize the applications built on our platform or by the number of application licenses purchased, as well as the price paid.

We believe increasing cloud subscription revenue is an indicator of the demand for our platform, the pace at which the market for our solutions is growing, the productivity of our sales team and strategic relationships in growing our customer base, and our ability to further penetrate our existing customer base.

Cloud Subscription Revenue Retention Rate

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Our cloud subscription revenue retention rate can fluctuate from period to period due to large customer contracts in any given period.

The cloud subscription revenue retention rate as of December 31, 2018 was elevated as we focused on converting customers with on-premises term license subscriptions to cloud subscriptions.

The adoption of ASC 606 did not have a material impact on our cloud subscription revenue retention rate.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP operating loss, non-GAAP net loss, non-GAAP net loss per share, non-GAAP weighted average shares outstanding, and adjusted EBITDA, which we collectively refer to as non-GAAP financial measures.

As reflected in the following reconciliation tables, these non-GAAP financial measures exclude either or both stock-based compensation expense and gain or loss on disposal of asset.

We define non-GAAP operating loss as operating loss before stock-based compensation expense.

We define non-GAAP net loss as net loss before stock-based compensation expense and gain or loss on disposal of assets.

We define non-GAAP operating loss as operating loss before stock-based compensation expense and certain litigation-related expenses.

We define non-GAAP net loss as net loss before stock-based compensation expense, certain litigation-related expenses, and gains or losses on disposals of property and equipment.

In periods we report non-GAAP net income, we calculate non-GAAP weighted average shares outstanding as GAAP weighted average shares outstanding adjusted for the effect of potentially dilutive securities that would otherwise be antidilutive under GAAP.

We define adjusted EBITDA as net loss before (1) other (income) expense, net, (2) interest expense, (3) income tax expense, (4) depreciation and amortization expense, and (5) stock-based compensation expense.

We define adjusted EBITDA as net loss before (1) other expense (income), net, (2) interest expense, (3) income tax expense, (4) depreciation and amortization expense, (5) stock-based compensation expense, and (6) certain litigation-related expenses.

We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions, and the variety of equity instruments that can impact our non-cash expense.

We believe providing non-GAAP financial measures excluding stock-based compensation expense allow for more meaningful comparisons between our operating results from period to period.

We exclude gains or losses on disposals of assets as these transactions are unrelated to current operations nor predictive of future results, which we believe allows for a more meaningful comparison between our operating results from period to period.

Accordingly, we believe excluding these expenses and income provides investors and management with greater visibility into the underlying performance of our business operations, facilitates comparison of our results with other periods, and may also provide comparison with the results of other companies in our industry.

We exclude certain litigation-related expenses consisting of professional fees and other costs incurred in connection with two separate lawsuits, one involving reciprocal false advertising and related claims with a competitor and one involving an effort to enforce our intellectual property, because we believe such costs are outside of our ordinary course of business.

We exclude gains or losses on disposals of property and equipment as these transactions are unrelated to current operations nor predictive of future results.

We believe providing non-GAAP financial measures excluding the aforementioned items provides investors and management with greater visibility into the underlying performance of our business operations, aids to provide supplemental information and comparable financial results from period to period, and may also provide comparison with the results of other companies in our industry.

The presentation of non-GAAP financial measures is not intended to be considered in isolation from, as a substitute for, or superior to the financial information prepared and presented in accordance with GAAP.

We use non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons.

We believe our non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making.

A reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures is included below for review.

We use non-GAAP financial measures as a means to evaluate period-to-period comparisons.

We also believe our non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to metrics used by our management in its financial and operational decision making.

Reconciliations of our non-GAAP financial measures to the most directly comparable GAAP financial measures are included below for review.

Reliance should not be placed on any single financial measure to evaluate our business.

Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry as other companies in our industry may calculate non-GAAP financial results differently, particularly

with respect to non-recurring, unusual items.

Non-GAAP financial measures do not have uniform definitions, and our definitions will likely differ from the definitions used by other companies, including peer companies.

In addition, non-GAAP financial measures exclude expenses that may have a material impact upon our reported financial results.

Further, stock-based compensation expense will continue to be a significant recurring expense in our business and an important part of the compensation provided to our employees for the foreseeable future.

Note for the years ended December 31, 2020 and 2019, revenue was recognized under ASC 606 while for the year ended December 31, 2018, revenue was recognized under ASC 605.

Consequently, our non-GAAP financial measures across those years are not directly comparable to one another.

For a reconciliation of the impact of the adoption of ASC 606 on our non-GAAP financial measures for the year ended December 31, 2019, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 20, 2020.

Further, stock-

based compensation expense will continue to be a significant recurring expense in our business and an important part of the compensation provided to our employees for the foreseeable future.

The table below reconciles GAAP operating loss to non-GAAP operating loss for the years ended December 31, 2021, 2020, and 2019 (in thousands):

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Stock-based compensation expense 23,844 15,279 16,443

Litigation expenses 16,400 — —

Non-GAAP operating loss $ (43,663) $ (22,623) $ (34,025)

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Stock-based compensation expense 23,844 15,279 16,443

Loss (gain) on disposal of asset 22 146 (4)

Litigation expenses 16,400 — —

Loss on disposal of property and equipment 79 22 146

Non-GAAP net loss $ (48,318) $ (18,176) $ (34,125)

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GAAP net loss $ (88,641) $ (33,477) $ (50,714)

Other (income) expense, net (5,786) (941) 2,295

Other expense (income), net 3,584 (5,786) (941)

Interest expense 372 478 367

Income tax expense 778 883 820

Depreciation and amortization expense 5,851 4,742 2,020

Depreciation and amortization 5,743 5,851 4,742

Stock-based compensation expense 23,844 15,279 16,443

Litigation expenses 16,400 — —

Adjusted EBITDA $ (37,920) $ (16,772) $ (29,283)

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We generate revenue primarily through sales of subscriptions to our platform as well as professional services.

We generally sell our software on a per-user basis and, to a lesser degree, non-user based single application licenses.

We generally sell our software on a per-user basis or through non-user based single application licenses.

We generally bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly, or monthly basis.

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Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect professional services revenue as a percentage of total revenue to decrease.

Additionally, if there is a decline in our procurement of new customers as a result of the COVID-19 pandemic, we may also see a similar decline in professional services revenue.

We have several strategic partnerships, including with KPMG, PwC, Accenture, and Deloitte.

Additionally, professional services revenue may be negatively impacted if there is a decline in our procurement of new customers as a result of the COVID-19 pandemic.

We have several strategic partnerships, including with KPMG, Accenture, PwC, Infosys, Wipro, and Deloitte.

These partners refer software subscription customers to us and generally perform professional services with respect to any new service contracts they originate, increasing our subscriptions revenue without any change to our professional services revenue.

Our agreements with our strategic partners have indefinite terms and may be terminated for convenience by either party.

We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities.

As we expand the network of strategic partners, we expect professional services revenue to decline as a percentage of total revenue over time since our strategic partners may perform professional services associated with software subscriptions we sell.

As we expand the network of strategic partners, we expect professional services revenue to decline as a percentage of total revenue

over time since our strategic partners may perform professional services associated with software subscriptions we sell.

Professional services revenue may also decline in absolute dollars if we increasingly rely on our network to procure new customers.

Cost of Revenue

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Cost of professional services revenue includes all direct and indirect costs to deliver our professional services and training, including employee compensation for our global professional services and training personnel, third-party contractor costs, allocated facility costs and overhead, and the costs of billable expenses such as travel and lodging.

The unpredictability of the timing of entering into significant professional services agreements sold on a standalone basis may cause significant fluctuations in our quarterly financial results and allocated facility costs and overhead.

The unpredictability of the timing of entering into significant professional services agreements sold on a standalone basis may cause significant fluctuations in our cost of professional services which, in turn, may impact our quarterly financial results and allocated facility costs and overhead.

Gross profit and gross margin, or gross profit as a percentage of total revenue, have been, and will continue to be, affected by various factors, including the mix of SaaS subscriptions and on-premises term license subscriptions, the mix of total subscriptions revenue and professional services revenue, subscription pricing, the costs associated with third-party hosting facilities, and the extent to which we expand our professional services to support future growth.

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Subscriptions gross margin is primarily affected by the growth in our subscriptions revenue as compared to the growth in, and timing of, costs to support such revenue.

We expect to continue to invest in customer support and SaaS operations to support growth in our business, and the timing of those investments is expected to cause gross margins to fluctuate in the short term but improve over time.

We expect to continue to invest in customer support and SaaS operations to support growth in our business, and the timing of those investments is expected to cause subscriptions gross margin to fluctuate on a quarterly basis.

Professional Services Gross Margin

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Professional services gross margin is also impacted by the amount of services performed by subcontractors and partners as opposed to internal resources.

More recently, we have reduced our usage of subcontractors, and the COVID-19 pandemic has resulted in fewer in-person professional services engagements and deployments, both of which have reduced certain classes of expenses and improved professional services margins.

However, our improved margins may not be indicative of future trends

and are subject to fluctuation based on factors discussed above and uncertainties related to the COVID-19 pandemic outside of our control.

Beginning in 2020, we lowered our usage of subcontractors, and the COVID-19 pandemic resulted in fewer in-person professional services engagements and deployments, both of which reduced certain classes of expenses and improved professional services margins.

In 2021, these margins began to normalize but remain subject to fluctuation based on the factors discussed above and uncertainties related to the COVID-19 pandemic outside of our control.

Operating Expenses

Operating expenses consist of sales and marketing, research and development, and general and administrative expenses.

Salaries, bonuses, and other personnel-related costs are the most significant components of each of these expense categories.

In general, our operating expenses are expected to continue to increase as we invest resources in growing our various teams.

Personnel-related costs such as salaries, bonuses, commissions, payroll tax payments, and stock-based compensation expense are the most significant components of each of these expense categories.

Other components of each category include professional fees for third-party services such as contract labor, legal, development resources, and consulting as well as allocated facility and overhead, which can include, among other types of costs, travel and entertainment expenditures, human

resources costs such as placement fees, referral bonuses, training costs, and employee relations spending, office-related expenditures, and information technology costs for such items as infrastructure, software, and cloud computing services.

In general, our operating expenses are expected to continue to increase in absolute dollars as we invest resources in growing our various teams.

We grew from 1,460 employees at December 31, 2020 to 1,798 employees at December 31, 2021, and we expect to continue to hire new employees in order to support our anticipated revenue growth.

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Sales and marketing expense primarily includes personnel costs, including salaries, bonuses, commissions, stock-based compensation, and other personnel costs related to sales teams.

Additional expenses in this category include travel and entertainment, marketing activities and promotional events, subcontracting fees, and allocated facility costs and overhead.

Additional major expenses in this category include travel and entertainment, marketing activities and promotional events, subcontracting fees, and allocated facility costs and overhead.

The number of employees in sales and marketing functions grew from 445 at December 31, 2020 to 552 at December 31, 2021.

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The number of employees in research and development functions grew from 381 at December 31, 2020 to 488 at December 31, 2021.

We expect research and development expense to continue to increase as they are critical to maintain and improve the quality of applications and our competitive position.

We expect research and development expense to continue to increase in absolute dollars as such costs are critical to maintain and improve the quality of applications and our competitive position.

General and Administrative Expense

General and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, and other personnel costs for our administrative, legal, information technology, human resources, finance and accounting employees, and executives.

Additional expenses included in this category are non-personnel costs such as travel-related expenses, contracting and professional fees, audit fees, tax services and legal fees, insurance and other corporate expenses, allocated facility costs and overhead, bad debt expenses, and depreciation and amortization costs.

Additional expenses included in this category are non-personnel costs such as travel-related expenses, contracting and professional fees for such services as audits, taxation, and legal, insurance and other corporate expenses, allocated facility costs and overhead, bad debt expenses, and depreciation and amortization costs.

The number of employees in general and administrative functions grew from 206 at December 31, 2020 to 224 at December 31, 2021.

We expect our general and administrative expense to increase in absolute dollars as we continue to support our growth.

Other (Income) Expense

Other (Income) Expense, Net

Other (income) expense, net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates, interest income on our cash and cash equivalents, gains or losses on the disposal of property and equipment, and other sources of income or expense not related to our core business.

Other Expense (Income)

Other Expense (Income), Net

Other expense (income), net, net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates, interest income on our cash and cash equivalents and investments, gains or losses on the disposal of property and equipment, and other sources of income or expense not related to our core business operations.

Interest Expense

Interest expense consists primarily of interest on our finance leases and debt, unused credit facility fees, and commitment fees on our letters of credit.

Interest expense consists primarily of interest on our debt, unused credit facility fees, and commitment fees on our letters of credit.

Results of Operations

The following table sets forth our consolidated statement of operations data (in thousands):

The following table sets forth our consolidated statements of operations data (in thousands):

Year Ended December 31,

2021 2020 2019

Consolidated Statement of Operations Data:

Consolidated Statements of Operations Data:

Subscriptions $ 263,738 $ 198,710 $ 151,299

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Operating loss (83,907) (37,902) (50,468)

Other (income) expense:

Other (income) expense, net (5,786) (941) 2,295

Other expense (income)

Other expense (income), net 3,584 (5,786) (941)

Interest expense 372 478 367

Total other (income) expense (5,308) (574) 2,493

Total other expense (income) 3,956 (5,308) (574)

Loss before income taxes (87,863) (32,594) (49,894)

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Total stock-based compensation expense $ 23,844 $ 15,279 $ 16,443

The following table sets forth our consolidated statement of operations data expressed as a percentage of total revenue:

The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue:

Year Ended December 31,

2021 2020 2019

Consolidated Statement of Operations Data:

Consolidated Statements of Operations Data:

Subscriptions 71.4 % 65.2 % 58.1 %

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Total cost of revenue 28.2 29.1 36.1

Gross margin 70.9 63.9 62.5

Gross profit 71.8 70.9 63.9

Operating expenses

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Operating loss (22.8) (12.5) (19.4)

Other (income) expense:

Other (income) expense, net (1.9) (0.4) 1.0

Other expense (income)

Other expense (income), net 1.0 (1.9) (0.4)

Interest expense 0.1 0.2 0.1

Total other (income) expense (1.7) (0.3) 1.1

Total other expense (income) 1.1 (1.7) (0.3)

Loss before income taxes (23.9) (10.8) (19.1)

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Total revenue increased $64.7 million, or 21.2%, in 2021 compared to 2020 due to an increase in our subscriptions revenue of $65.0 million, which was partially offset by a decrease in our professional services revenue of $0.3 million.

Of the increase in subscriptions revenue, $34.2 million was attributable to cloud subscription revenue, $11.0 million was attributable to on-premises software revenue, and $2.2 million was attributable to maintenance and support revenue.

With respect to new versus existing customers, $36.5 million of the increase in subscriptions revenue stemmed from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $10.9 million was the result of sales of subscriptions to new customers, $2.8 million of which related to a three-year on-premises contract which closed in the first quarter of 2020.

The decrease in professional services revenue was due primarily to a $16.9 million decrease

in revenue from existing customers which was substantially offset by $13.7 million in sales to new customers.

Further contributing to the decrease in professional services revenue was our increased usage of partners to perform professional services in 2020 as compared to 2019, which has resulted in increases to our subscriptions revenue without any change to our professional services revenue.

The increase in subscriptions revenue was driven largely by a $50.2 million increase in cloud subscription revenue, an $11.8 million increase in on-premises software revenue, and a $3.0 million increase in maintenance and support revenue.

With respect to new versus existing customers, $48.1 million of the increase in subscriptions revenue stemmed from expanded deployments and corresponding sales of additional subscriptions to existing customers while $16.6 million stemmed from sales of subscriptions to new customers.

The remainder of the increase is attributable to revenue recognized from Lana Labs GmbH, or Lana Labs, subsequent to the acquisition.

The decrease in professional services revenue was due primarily to a $19.7 million decrease in

revenue from existing customers which was largely offset by $19.3 million in sales to new customers.

Further impacting the decrease in professional services revenue were increased contributions of partners performing professional services on our behalf in 2021 as compared to 2020, which has resulted in increases to our subscriptions revenue without any change to our professional services revenue.

Cost of Revenue

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Total gross margin 71.8 % 70.9 %

Cost of revenue decreased $5.1 million, or 5.4%, in 2020 compared to 2019, primarily due to a $10.4 million decrease in contractor costs, a $4.1 million decrease in billable expenses, and a $0.4 million decrease in facility and overhead costs.

These decreases were partially offset by a $6.8 million increase in professional services and product support personnel costs and a $3.0 million increase in other cost of revenue.

Contractor costs decreased in 2020 compared to 2019 because of a decrease in the usage of subcontractors for professional service engagements.

Billable expenses decreased primarily due to lower travel and entertainment related expenses as a result of our shift to largely remote work in 2020 while the decrease in facility and overhead costs was largely due to a reduction in rent expense.

Personnel costs increased due to an increase in professional services and product support staff personnel headcount of 11.5% from December 31, 2019 to December 31, 2020.

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in 2020.

Subscriptions gross margin was 89.5% in 2020 compared to 88.7% in 2019 due to an increase in subscriptions revenue in 2020, partially offset by increased hosting costs as sales of our cloud offering increased and became a larger proportion of our overall subscriptions revenue.

Professional services gross margin was 35.8% in 2020 compared to 29.6% in 2019 due to a decrease in the usage of subcontractors for professional services engagements, a decrease in travel and entertainment related expenses, a decrease in rent expenses, and a $1.3 million decrease in stock-based compensation expense.

Due to the higher percentage of subscriptions revenue for the comparable periods as well as the aforementioned declines in professional services expenses, gross margin was 70.9% in 2020 as compared to 64.0% in 2019.

Cost of revenue increased $15.3 million, or 17.3%, in 2021 compared to 2020, primarily due to a $15.2 million increase in professional services and product support personnel costs, a $4.4 million increase in other cost of revenue, and a $1.5 million increase in facility and overhead costs.

These increases were partially offset by a $4.8 million decrease in contractor costs and a $1.0 million decrease in billable expenses.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 24.8% from December 31, 2020 to December 31, 2021, coupled with a $1.9 million increase in stock-based compensation.

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering grew in 2021, while the increase in facility and overhead costs was due largely to an increase in certain allocated costs tied to our growth such as spending for offices, human resources costs, and information technology expenses.

Contractor costs decreased in 2021 compared to 2020 due to a decrease in the usage of subcontractors for professional service engagements, which is in line with our strategic shift towards increasing professional services headcounts and utilizing more internal resources to complete engagements.

Billable expenses decreased primarily as a result of lower travel and entertainment costs pursuant to a shift to remote work that began in the second quarter of 2020 and continued into 2021.

Subscriptions gross margin slightly increased to 89.6% in 2021 compared to 89.5% in 2020 due to an increase in subscriptions revenue in 2021, which was largely offset by increased hosting costs as sales of our cloud offering increased and became a larger proportion of our overall subscriptions revenue.

Professional services gross margin decreased to 27.3% in 2021 compared to 35.8% in 2020 due to higher personnel costs in 2021 as well as a decrease in professional services revenue.

Additionally, fewer in-person professional services engagements and deployments in 2020 led to temporarily improved margins in the prior year.

These impacts were partially offset by a decrease in the usage of subcontractors for professional services engagements.

Given the higher percentage of subscriptions revenue for the comparable periods and the aforementioned decline in professional services revenue, gross margin rose to 71.8% in 2021 as compared to 70.9% in 2020.

Sales and Marketing Expense

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% of revenue 45.5 % 42.8 %

Sales and marketing expense increased $12.9 million, or 11.0%, in 2020 compared to 2019, primarily due to a $17.6 million increase in sales and marketing personnel costs and a $2.3 million increase in professional fees, which were partially offset by a $6.7 million decrease in facility and overhead costs and a $0.4 million decrease in marketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 10.4% from December 31, 2019 to December 31, 2020 and increased sales commissions driven by our subscriptions revenue growth, partially offset by a $1.9 million decrease in stock-based compensation expense.

Professional fees increased due to an increase in consulting fees and contract labor to support our growth.

Facility and overhead costs decreased due to lower travel and entertainment related expenses as a result of our shift to largely remote work in 2020.

Marketing costs decreased due to reduced costs incurred as a result of moving our

annual user conference, Appian World, to virtual-only as well as a reduction in the number of in-person marketing events held in 2020, partially offset by an increase in advertising expenses.

Sales and marketing expense increased $37.5 million, or 28.8%, in 2021 compared to 2020, primarily due to a $28.8 million increase in sales and marketing personnel costs, a $5.1 million increase in marketing costs, a $3.0 million increase in facility and overhead costs, and a $0.6 million increase in professional fees.

Personnel costs increased due to an increase in

sales and marketing personnel headcount of 24.0% from December 31, 2020 to December 31, 2021, increased sales commissions driven by our subscriptions revenue growth, and a $2.6 million increase in stock-based compensation expense.

Marketing costs increased due to an increase in the number of marketing events held during 2021 as compared to 2020 as well as increased spending on marketing materials, slightly offset by a decrease in advertising expense.

Facility and overhead costs increased due to higher allocated costs tied to our growth, such as information technology spending and human resources costs.

Professional fees increased due to higher fees paid to third-party marketing consultants pursuant to new marketing campaigns and initiatives.

Research and Development Expense

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% of revenue 26.4 % 23.1 %

Research and development expense increased $12.2 million, or 21.0%, in 2020 compared to 2019, primarily due to a $13.1 million increase in research and development personnel costs, partially offset by a $0.5 million decrease in facility and overhead costs and a $0.3 million decrease in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 14.8% from December 31, 2019 to December 31, 2020, partially offset by a $0.8 million decrease in stock-based compensation expense.

Facilities and overhead costs decreased due to non-recurring charges incurred in 2019 to support our personnel growth coupled with lower travel and entertainment related expenses as a result of our shift to largely remote work in 2020.

Professional fees decreased due to a decrease in consulting fees.

Research and development expense increased $27.3 million, or 38.8%, in 2021 compared to 2020, primarily due to a $22.9 million increase in research and development personnel costs, a $3.2 million increase in facility and overhead costs, and a $1.1 million increase in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 28.1% from December 31, 2020 to December 31, 2021, coupled with a $2.5 million increase in stock-based compensation expense.

Facility and overhead costs increased due largely to higher allocated costs tied to our growth, such as information technology spending, human resources costs, and office spending.

Professional fees increased due to an increase in consulting services fees stemming from higher usage of external resources to assist in our platform development efforts.

General and Administrative Expense

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% of revenue 22.7 % 17.5 %

General and administrative expense increased $11.7 million, or 28.1%, in 2020 compared to 2019, primarily due to a $7.2 million increase in general and administrative personnel costs, a $3.0 million increase in professional fees, and a $1.5 million increase in facility and overhead costs.

Personnel costs increased due to an increase in general and administrative personnel headcount of 32.1% from December 31, 2019 to December 31, 2020 coupled with a $2.5 million increase in stock-based compensation expense in 2020, which was primarily attributable to a stock option to purchase 700,000 shares of our Class A common stock granted to our Chief Executive Officer in May 2019.

Professional fees increased due to increased legal fees.

Facility and overhead costs increased due to costs incurred to support our personnel growth, an increase in bad debt expense, and an increase in amortization expense stemming from our intangible assets which were acquired in 2020.

Other Income, Net

General and administrative expense increased $30.6 million, or 57.5%, in 2021 compared to 2020, primarily due to a $15.8 million increase in professional fees, an $11.7 million increase in general and administrative personnel costs, and a $2.4 million increase in facility and overhead costs.

Professional fees increased due largely to higher legal fees.

Personnel costs increased due to the acceleration of $3.3 million in stock-based compensation expense stemming from the vesting of the 2019 CEO grant, coupled with an increase in general and administrative personnel headcount of 8.7% from December 31, 2020 to December 31, 2021.

Facility and overhead costs increased primarily due to higher allocated costs tied to our growth, such as information technology spending, human resources costs, and office spending as well as higher withholding taxes at certain of our foreign subsidiaries.

Other Expense (Income), Net

Year Ended December 31, % Change

(dollars in thousands)

Other income, net $ (5,786) $ (941) ***

Other expense (income), net

$ 3,584 $ (5,786) ***

% of revenue 1.0 % (1.9) %

*** - Indicates a percentage that is not meaningful

Other income, net increased by $4.8 million in 2020 compared to 2019, primarily due to $4.3 million in foreign exchange gains in 2020 compared to $0.2 million in foreign exchange losses in 2019.

The increase in foreign exchange gains was primarily due to currency fluctuations of the Euro, Swedish krona, British pound sterling, and Swiss franc versus the U.S.

dollar in 2020 compared to the same period in 2019.

Additionally, we recognized $1.0 million of other income in 2020 due to a payment received from a state government as a result of our achievement of certain job creation and capital investment goals.

Other expense was $3.6 million in 2021 compared to other income of $5.8 million in 2020.

This change was primarily due to $3.7 million in foreign exchange losses in 2021 compared to $4.3 million in foreign exchange gains in 2020.

Additionally, we recognized $1.0 million in other income in 2020 due to a payment received from a state government as a result of our achievement of certain job creation and capital investment goals.

Interest Expense

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% of revenue 0.1 % 0.2 %

Interest expense increased by $0.1 million, or 30.2%, in 2020 compared to the same period in 2019, primarily due to commitment fees on the letter of credit outstanding.

Interest expense decreased by a nominal amount in 2021 compared to the same period in 2020, primarily due to lower commitment fees on the letter of credit outstanding.

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

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Consequently, a decline in new sales or renewals in any one period may not be immediately reflected in our revenue results for that period.

This decline, however, will negatively affect our revenue in future periods.

Such a decline, however, will negatively affect our revenue in future periods.

Accordingly, the effect of significant downturns in sales and market acceptance of our platform and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods.

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Approximately 34% of our backlog as of December 31, 2021 is not expected to be recognized in 2022.

The increase in backlog is due to an increase in the number of multiple-year SaaS agreements entered into during 2020.

We expect the amount of backlog relative to the total value of our contracts will change from quarter to quarter and year to year for several reasons, including the specific timing and duration of SaaS and term license subscription agreements with large customers, the specific timing of customer renewals, changes in customer financial circumstances, and foreign currency fluctuations.

We expect backlog to continue to increase in absolute dollars as we continue to increase the number of SaaS agreements we enter into.

However, the amount of backlog relative to the total value of our contracts can change from quarter to quarter and year to year for several reasons, including the specific timing and duration of SaaS and term license subscription agreements with large customers, the specific timing of customer renewals, changes in customer financial circumstances, and foreign currency fluctuations.

We often sign multiple-year SaaS subscription agreements.

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Short-term investments and marketable securities 55,179 109,826 —

Long-term investments 36,120 — —

Property and equipment, net 36,913 35,404 39,554

Long-term investments 12,044 36,120 —

Working capital* 121,752 209,532 165,381

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Net cash used in operating activities $ (53,918) $ (7,620) $ (8,926)

Net cash used in investing activities (153,357) (32,421) (7,010)

Net cash provided by (used in) investing activities 41,936 (153,357) (32,421)

Net cash provided by financing activities 2,786 110,468 105,549

As of December 31, 2020, we ha d $112.5 million of cash and cash equivalents and $109.8 million of short-term investments and marketable securities.

We believe our existing cash and cash equivalents and short-term investments and marketable securities, together with any positive cash flows from operations and available borrowings under our revolving line of credit, will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and functions as well as platform enhancements and professional services offerings, the level of market acceptance of our applications, spending we may incur on our new headquarters, and the global economic uncertainty caused by the COVID-19 pandemic and its impact on financial market conditions and our business.

* Exclusive of the current portion of restricted cash

As of December 31, 2021, we had $100.8 million of cash and cash equivalents and $55.2 million of short-term investments and marketable securities.

We believe our existing cash and cash equivalents and short-term investments and marketable securities, together with any positive cash flows from operations and available borrowings under our line of credit, will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

We expect future sources of funds to consist primarily of cash generated from sales of subscriptions and the related professional services.

We may also elect to raise additional sources of funding through draws on our existing line of credit, entering into new debt financing arrangements, or conducting additional public offerings.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and functions as well as platform enhancements and professional services offerings, the level of market acceptance of our applications, spending we may incur on our headquarters, and the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic and its impact on our business.

In the event additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all.

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* Net of underwriting discounts and commissions and offering expenses

In addition, we have financed our operations through sales of subscriptions and professional services.

We also have the ability to draw upon a $20.0 million revolving line of credit which we entered into in November 2017.

The facility matures in November 2022.

We may elect whether amounts drawn on the revolving line of credit bear interest at a floating rate per annum equal to either the LIBOR or the Prime rate plus an additional interest rate margin determined by the availability of borrowings under the revolving line of credit.

The additional interest rate margin will range from 2.00% to 2.50% in the case of LIBOR advances and from 1.00% to 1.50% in the case of Prime rate advances.

The revolving line of credit contains an unused facility fee in an amount between 0.15% and 0.25% of the average unused portion of the revolving line of credit, which is payable quarterly.

The agreement contains certain customary affirmative and negative covenants and requires us to maintain (i) an adjusted quick ratio of at least 1.35 and (ii) minimum adjusted EBITDA in the amounts and for the periods set forth in the agreement.

We also have the ability to draw upon a $20.0 million revolving line of credit with a lender with an original maturity date of November 2022.

In December 2021, we executed the first loan modification agreement which extended the revolving line of credit's maturity date to November 2025 and amended certain borrowing terms and financial covenants.

Under the amended agreement, we may elect whether amounts drawn on the revolving line of credit bear interest on the outstanding principal amount at a rate per annum equal to either a) the Prime rate plus an additional interest rate margin or b) secured overnight financing rate (“SOFR”) plus an additional interest rate margin that is determined by the availability of the borrowings under the revolving line of credit.

The additional interest rate margin will range from 0.75% to 1.25% in the case of Prime rate advances and from 1.75% to 2.25% in the case of SOFR rate advances.

The revolving line of credit contains an unused facility fee up to 0.20% of the average unused portion of the revolving line of credit, which is payable quarterly.

The agreement contains certain customary affirmative and negative covenants and requires us to maintain (i) an adjusted quick ratio of at least 1.35 to 1.00 subject to a net cash threshold as set forth in the agreement and (ii) minimum adjusted EBITDA, in the amounts and for the periods set forth in the agreement.

Any amounts borrowed under the credit facility are collateralized by substantially all of our assets.

We were in compliance with all covenants as of December 31, 2021.

As of December 31, 2020, we had not made any borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $11.2 million in connection with securing our leased office space.

As of December 31, 2021, we had no outstanding borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $11.2 million in connection with securing our leased office space.

Uses of Funds

Our current principal uses of cash are funding operations and other working capital requirements.

More recently, we have utilized cash to pay for the acquisition of Novayre, which we believe is complementary to our business.

Historically, we have also utilized cash to pay for the acquisition of entities we believe to be complementary to our business, and we may pursue similar opportunities in the future.

Over the past several years, revenue has increased significantly from year to year and, as a result, cash flows from customer collections have increased.

However, operating expenses have also increased as we have invested in growing our business.

Our uses of cash in 2020 included purchases of investments, the acquisition of Novayre, and modest capital expenditures while cash uses in 2019 and 2018 included the build out of our new headquarters, which included spending approximately $21.0 million above the $18.4 million tenant improvement allowance provided by the landlord for the build out, $4.5 million of which related to the financing of office furniture and fixtures and computer hardware.

Outside of cash used to fund operations, our uses of cash in 2021 included the acquisition of Lana Labs, purchases of investments, and capital expenditures.

Cash uses in 2020 included the acquisition of Novayre Solutions SL, or Novayre, and modest capital expenditures.

With respect to future uses of funds, we expect to incur annual royalty fees of $0.3 million for the foreseeable future related to a non-cancellable agreement for the use of technology that is integral in the development of our software.

Additionally, we expect to incur capital expenditures in relation to the expanded occupancy of our headquarters which commenced in July 2020, although such expenditures do not represent capital commitments.

Additionally, we expect to incur capital expenditures in relation to the expanded occupancy of our headquarters, although such expenditures do not represent capital commitments.

Furthermore, we are contractually obligated to make cash payments on our various operating leases through October 2031.

As of December 31, 2021, the amount of funds we expect to utilize over this time period for our lease commitments is approximately $92.9 million.

Refer to Note 13 for discussion on our commitments and contingencies and to Note 4 for further information related to our current lease portfolio.

In 2021, we executed a non-cancellable cloud hosting arrangement with Amazon Web Services, or AWS, that contains provisions for minimum purchase commitments.

Purchase commitments under the agreement total $131.0 million over five years, including $22.0 million in the first year, $25.0 million in the second year, and $28.0 million in each of the third, fourth, and fifth years.

The timing of payments under the agreement may vary, and the total amount of payments may exceed the

minimum depending on the volume of services utilized.

Spending under this agreement for the year ended December 31, 2021 totaled $11.8 million.

Furthermore, we have other non-cancellable agreements for subscription software products that contain provisions stipulating minimum purchase commitments.

However, the annual purchase commitments under these contracts are, individually and in the aggregate, immaterial to our consolidated statements of operations.

Historical Cash Flows

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For the year ended December 31, 2021, net cash used in operating activities of $53.9 million consisted of a net loss of $88.6 million, offset by $29.6 million in adjustments for non-cash items and $5.1 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted primarily of stock-based compensation of $23.8 million, depreciation and amortization expense of $5.7 million, bad debt expense of $0.4 million, and losses on the disposal of property and equipment of $0.1 million.

These adjustments were partially offset by deferred income tax adjustments of $0.5 million.

The increase in cash, cash equivalents, and restricted cash resulting from changes in working capital primarily consisted of a $33.4 million increase in deferred revenue as a result of increased subscription sales, a $12.6 million increase in accrued compensation and related benefits as a result of the timing around and increase in employee benefit accruals for such costs as commissions and bonuses stemming from increased headcounts, an $11.5 million increase in accounts payable and accrued expenses due to larger accruals related to legal costs, AWS hosting costs, and marketing costs as well as timing differences between billings and payments, a $2.1 million decrease in prepaid expenses and other assets primarily due to the timing of payments, and a $1.5 million net decrease in right-of-use lease assets.

These increases to working capital were offset by a $33.9 million increase in accounts receivable stemming from increased sales and the timing of billings and collections in the fourth quarter, a $21.6 million increase in deferred commissions due to increased sales activity combined with the timing of order completions, and a $0.4 million decrease in other current and non-current liabilities.

For the year ended December 31, 2020, net cash used in operating activities of $7.6 million consisted of a net loss of $33.5 million, offset by $22.0 million in adjustments for non-cash items and $3.9 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted primarily of stock-based compensation of $15.3 million, depreciation and amortization expense of $5.9 million, and bad debt expense of $1.0 million, offset by a provision for deferred income taxes of $0.2 million.

a contract liability arising from a three year deal that included a termination for convenience clause, a $3.7 million decrease in prepaid expenses and other assets attributable to timing, and a $3.4 million increase in operating lease liabilities as a result of recognizing a new right-of-use liability related to the expanded occupancy of our headquarters building.

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $27.6 million increase in deferred revenue as a result of increased subscription sales, an $11.8 million increase in accrued compensation and related benefits as a result of higher employee benefit accruals such as vacation and bonuses, a $3.7 million increase in other liabilities due to the deferral of social security tax payments pursuant to the provisions of the CARES Act and a contract liability arising from a three year deal that included a termination for convenience clause, a $3.7 million decrease in prepaid expenses and other assets attributable to timing, and a $3.4 million increase in operating lease liabilities as a result of recognizing a new right-of-use liability related to the expanded occupancy of our headquarters building.

The increase to working capital was partially offset by a $33.6 million increase in accounts receivable stemming from increased sales as well as the timing of billings and collections, an $8.6 million increase in deferred commissions due to increased sales activity, and a $4.2 million decrease in accounts payable and accrued expenses due to the timing of payments.

For the year ended December 31, 2019, net cash used in operating activities of $8.9 million consisted of a net loss of $50.7 million, offset by $21.1 million in adjustments for non-cash items and $20.7 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted of stock-based compensation of $16.4 million, depreciation and amortization expense of $4.7 million, a loss on disposal of equipment of $0.1 million, and bad debt expense of $0.1 million, offset by a provision for deferred income taxes of $0.3 million.

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $12.6 million increase in deferred revenue adjusted for the impact of the $35.4 million reduction to the opening balance resulting from the adoption of ASC 606.

The increase in deferred revenue was due to increased subscription sales.

There was also a $9.0 million decrease in prepaid expenses and other assets adjusted for the impact of the $20.4 million increase to the opening balance from the adoption of ASC 606.

The decrease in prepaid expenses and other assets was primarily due to the receipt of the non-trade receivable resulting from our tenant improvement allowance.

In accordance with GAAP, the $17.0 million of tenant improvement allowance reimbursements received during the year ended December 31, 2019 are a source of cash in operating activities, whereas the capital expenditures are recorded as cash used in investing activities.

There was also a $7.4 million decrease in accounts receivable due to increased cash collections during the year ended December 31, 2019.

There was also a $6.8 million increase in operating lease liabilities following the adoption of ASC 842, as a result of taking initial possession of the second phase of our new headquarters in February 2019.

There was also a $1.3 million increase in other current liabilities.

These increases were partially offset by a $9.3 million increase in deferred commissions adjusted for the impact of the $5.1 million increase to the opening balance from the adoption of ASC 606.

The increase was due to increased sales as well as an increase in the estimated economic life over which deferred commissions are amortized.

There was also a $4.0 million decrease in accounts payable and accrued expenses, primarily due to the timing of payments and a $3.1 million decrease in accrued compensation and related benefits, primarily due to a decrease in accrued vacation expense because of our new paid-time off policy, which took effect on January 1, 2019.

Investing Activities

For the year ended December 31, 2021, net cash provided by investing activities was $41.9 million, which was primarily the result of $120.6 million in proceeds from investments, partially offset by $41.9 million in purchases of investments, $30.7 million in payments, net of cash acquired, related to the acquisition of Lana Labs, and $6.1 million in purchases of property and equipment stemming from spending related to the expanded occupancy of our headquarters.

For the year ended December 31, 2020, net cash used in investing activities was $153.4 million which was primarily the result of $146.0 million in purchases of investments and $6.1 million in payments, net of cash acquired, related to the acquisition of Novayre.

In addition there were approximately $1.3 million in purchases of property and equipment.

For the year ended December 31, 2019, net cash used in investing activities was $32.4 million which was related to the build-out of our new headquarters and the purchase of property and equipment.

Financing Activities

For the year ended December 31, 2020, net cash provided by financing activities was $110.5 million, consisting of $108.3 million in proceeds from our underwritten public offering, net of underwriting discounts and commissions, and $6.4 million in proceeds received from stock option exercises.

These increases were offset by principal payments on finance lease obligations of $3.8 million and payment of public offering costs of $0.3 million.

For the year ended December 31, 2021, net cash provided by financing activities was $2.8 million, consisting entirely of proceeds received from stock option exercises.

These increases were offset by principal payments on finance lease obligations of $3.8 million and payment of public offering costs of $0.3 million.

For a discussion and analysis of net cash used in or provided by operating, investing, and financing activities for the year ended December 31, 2018, refer to our 2019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 20, 2020.

Off-Balance Sheet Arrangements

During the year ended December 31, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We do not engage in off-balance sheet financing arrangements.

In addition, we do not engage in trading activities involving non-exchange traded contracts.

As a result, we believe we are not materially exposed to any financing, liquidity, market, or credit risks that could arise if we had engaged in these relationships.

For a discussion and analysis of net cash used in or provided by operating, investing, and financing activities for the year ended December 31, 2019, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 18, 2021.

Critical Accounting Estimates

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Factors considered when determining to incorporate variable consideration in the transaction price include, but are not limited to, whether the variable consideration is highly susceptible to factors outside of the company's influence, the length of time the uncertainty surrounding reversal is expected to last, our experience levels with similar types of contracts, our historical practices for similar contracts in similar circumstances, and the number and range of possible consideration amounts.

The amount of variable consideration excluded from the transaction price for the year ended December 31, 2020 was insignificant.

The amount of variable consideration excluded from the transaction price for the years ended December 31, 2021, 2020, and 2019 was insignificant.

Allocating the Transaction Price Based on Standalone Selling Prices

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SaaS subscriptions - Given the highly variable selling price of our SaaS subscriptions, we establish the SSP of our SaaS subscriptions using a residual approach after first determining the SSP of consulting and training services.

Term license subscriptions - Given the highly variable selling price of our term license subscriptions, we have established the SSP of term license subscriptions using a residual approach after first determining the SSP of

maintenance and support.

Maintenance and support is sold on a standalone basis with renewals of our legacy perpetual software licenses and within a narrow range of the net license fee, resulting in a defined economic relationship existing between the license and maintenance and support.

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Current trading price - The current price of our stock is based on the closing market price of our Class A common stock as quoted on the Nasdaq Global Market on the date of grant.

The expected stock price volatility - Expected volatility is based on historical volatilities of our publicly traded stock as well as the publicly traded stock of comparable companies within our industry over the estimated expected term of the stock options.

The expected stock price volatility - Expected volatility is based on the historical volatilities of our publicly traded stock as well as the publicly traded stock of comparable companies within our industry over the estimated expected term of the stock options.

Expected volatility is sensitive to market- and company-specific conditions which may cause our stock price or the stock prices of our peers to fluctuate.

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We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed.

We establish a valuation allowance against our deferred tax

assets to the extent it is more likely than not that some or all of the deferred tax assets will not be realized.

We establish a valuation allowance against our deferred tax assets to the extent it is more likely than not that some or all of the deferred tax assets will not be realized.

This requires us to make judgments and estimates regarding future reversals of existing taxable temporary differences, future taxable income, and the impact of tax planning strategies.

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To the extent the assessment of such tax position changes, we record the change in estimate in the period in which we make that determination.

Business Combinations

We account for business combinations using the acquisition method of accounting as of the business combination date.

Under this method, we allocate the fair value of purchase consideration to identifiable tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is allocated to goodwill.

Determining the fair value of assets acquired and liabilities assumed requires us to use significant estimates and assumptions that may vary between transactions.

Examples include, but are not limited to:

• Selection of valuation methodologies;

• Estimated fair values of intangible assets and liabilities;

• Estimated fair values of contractual obligations assumed from the acquiree under existing contractual obligations at the date of acquisition;

• Estimated fair value of pre-acquisition contingent considerations;

• Future expected cash flows from subscription and support contracts, professional services contracts, other customer contracts and acquired developed technologies and patents;

• Discount rates;

• Fair value of any assumed equity awards;

• Estimated fair value of any trade names and non-compete agreements.

While we use our best estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the date of acquisition, our estimates and assumptions are inherently uncertain and subject to refinement.

As a result, during the measurement period, which can be up to one year from the acquisition date, these estimates may be refined, as necessary, and we may record adjustments to the fair value of tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill.

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

Impairment of Goodwill and Long-Lived Assets

We review goodwill, long-lived assets, and certain intangible assets for impairment at least annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.

With respect to our goodwill impairment assessment, we first perform a qualitative assessment, which requires us to consider events or circumstances including but not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, litigation, changes in the composition or carrying amount of a reporting unit’s net assets, and changes in our stock price.

The events and factors listed above are examples and not all-inclusive.

None of these events or circumstances by themselves would indicate it is more likely than not that goodwill associated with a reporting unit is impaired.

As part of our analysis, we also weigh any positive or mitigating factors identified and holistically evaluate all events since the most recent quantitative impairment test to determine whether it is more likely than not the goodwill associated with the reporting unit is impaired.

If, after assessing the totality of events or circumstances, we determine it is more likely than not the fair value of a reporting unit is greater than the carrying amount, then the quantitative goodwill impairment test is not performed.

Because we operate under one reporting unit, the fair value of our reporting unit is based on our enterprise value.

Additionally, because our enterprise value is significantly in excess of carrying value, any sensitivity in the underlying assumptions and estimates is not likely to trigger an impairment.

No indicators of goodwill impairment were identified for the years ended December 31, 2021 and 2020.

Long-Lived Assets

Our long-lived assets, excluding goodwill, consist of property, leasehold improvements, hardware, software, equipment, and intangible assets.

Such assets are reviewed for impairment at least annually or more frequently whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate.

If such review indicates the carrying amount of our long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value.

There were no indicators of impairment of our long-lived assets noted for the years ended December 31, 2021, 2020, and 2019.

Recent Accounting Pronouncements

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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 7. Management’s Discussion and Analysis