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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-17 · 269 added, 323 removed, 282 unchanged (68% 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 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 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.

We have generated the majority of our revenue from sales of subscriptions, which include (1) SaaS subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support.

Our subscription fees are based primarily on the number of users who access and utilize the applications built on our platform or, alternatively, non-user based single application licenses.

Our customer contract terms generally vary from one to three years with most providing for payment in advance on an annual, quarterly, or monthly basis.

Appian is a software company that automates business processes.

The Appian Platform includes everything you need to design, automate, and optimize even the most complex processes, from start to finish.

The world's most innovative organizations trust Appian to improve their workflows, unify data, and optimize operations—resulting in better growth and superior customer experiences.

We have generated the majority of our revenue from sales of subscriptions, which include (1) cloud subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support.

Our subscription contracts are priced based primarily on the number of users who access and utilize the applications built on our platform or, alternatively, non-user based single application licenses.

Our subscription contract terms generally vary from one to three years with most providing for payment in advance on an annual, quarterly, or monthly basis.

Due to the variability of our billing terms and the episodic nature of our customers purchasing additional subscriptions, we do not believe changes in our deferred revenue in a given period are directly correlated with our revenue growth.

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, 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 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, Accenture, PwC, EY, Infosys, Wipro, and Deloitte, which allow them to refer customers to us in order to purchase subscriptions and then our partners 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.

In addition, over time we expect professional services revenue as a percentage of total revenue to decline as we increasingly rely on strategic partners to help our customers deploy our software.

In addition, over time we expect our professional services revenue as a percentage of total revenue to decline as we increasingly rely on strategic partners to help our customers deploy our software.

We believe our investment in professional services, including strategic partners building their practices around Appian, will drive increased adoption of our platform.

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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.

Revenue from government agencies represented 19.2%, 19.6%, and 18.1% of our total revenue in 2022, 2021, and 2020, respectively.

No single end-customer accounted for more than 10% of our total revenue in 2022, 2021, and 2020.

Our platform supports multiple languages to facilitate collaboration and address challenges in multinational organizations.

We offer our platform globally.

Our platform supports multiple languages to facilitate collaboration and address challenges in multinational organizations.

In 2022, 2021, and 2020, 33.5%, 34.0%, and 33.8%, respectively, of our total revenue was generated from customers outside of the United States.

As of December 31, 2022, we operated in 15 countries.

We believe we have a significant opportunity to grow our international footprint.

We believe we have a significant opportunity to continue to grow our international footprint.

We are investing in new geographies, including through investment in direct and indirect sales channels, professional services, and customer support and implementation partners.

We have experienced strong revenue growth, with revenue of $468.0 million, $369.3 million, and $304.6 million in 2022, 2021, and 2020, respectively.

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

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

Our subscriptions revenue was $340.2 million, $263.7 million, and $198.7 million in 2022, 2021, and 2020, respectively, and includes sales of our cloud subscriptions, on-premises term license subscriptions, and maintenance and support.

Our cloud subscription revenue was $236.9 million, $179.4 million, and $129.2 million in 2022, 2021, and 2020, respectively.

We have invested in developing our platform, expanding our sales and marketing and research and development capabilities, and providing general and administrative resources to support our growth.

We intend to continue to invest in our business to take advantage of our market opportunity.

We intend to continue to invest in our

business to take advantage of our market opportunity.

As a result, we incurred net losses of $150.9 million, $88.6 million, and $33.5 million in 2022, 2021, and 2020, respectively.

We also used cash in operations of $106.6 million, $53.9 million, and $7.6 million in 2022, 2021, and 2020, 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, 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.

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 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 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.

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, 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.

Over time, we expect a large portion of our customers to renew their subscriptions and purchase additional subscriptions as they continue to build more applications and add more users to our platform.

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 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 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.

We also expect the proportion of annual revenue from existing customers to grow relative to annual revenue from new customers.

We believe this mix shift over time will have a positive impact on our operating margins, as we expect the percentage of revenue spent on sales and marketing to decline.

Over the last three completed fiscal years, we had an average cloud subscription gross revenue renewal rate of 99%, which is calculated 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.

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

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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.

The degree to which prospective customers recognize the need for our software platform 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.

• Growth of Our Customer Base.

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We had a total customer count of 925, 816, and 693 as of December 31, 2022, 2021, and 2020, respectively.

Our number of customers with active software subscription agreements was 783, 654, and 487 as of December 31, 2021, 2020, and 2019, respectively.

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

Our number of customers with active software subscription agreements was 896, 783, and 654 as of December 31, 2022, 2021, and 2020,

respectively.

Our ability to continue to grow our customer base is dependent, in part, upon our ability to differentiate ourselves within the increasingly competitive markets in which we participate.

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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 or through 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.

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

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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.

Their role is to ensure customers realize 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.

We believe our professional services have driven customer success and facilitated the adoption of our platform by customers.

During the initial period of deployment by a customer, we generally provide a greater amount of support in building applications and training than later in the deployment, with a typical engagement extending from two to six months.

At the same time, many of our customers have historically purchased subscriptions only for a limited set of their total potential end users.

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We also intend to continue to invest in sales and marketing as we further expand our sales teams, increase our marketing activities, and grow our international operations.

We have historically experienced seasonality in terms of when we enter into agreements with customers.

We typically enter into a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter.

The increase in customer agreements for the fourth quarter is attributable to large enterprise account buying patterns typical in the software industry.

Furthermore, we usually enter into a significant portion of agreements with customers during the last month of each quarter, and often the last two weeks of each quarter.

However, we recognize the majority of our subscriptions revenue ratably over the terms of our subscription agreements, which are generally one to three years in length.

As a result, a substantial portion of the subscriptions revenue we report in each period will be derived from the recognition of deferred revenue relating to agreements entered into during previous periods.

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

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.

While we will continue to recognize the majority of our subscriptions revenue ratably over the terms of our subscription agreements, we may experience greater variability and reduced comparability of our quarterly revenue and results with respect to the timing and nature of our term license subscription agreements due to the upfront revenue recognition.

See Note 3 to the consolidated financial statements for further details on our revenue recognition policies.

We monitor the following metrics to help us measure and evaluate the effectiveness of our operations.

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Cloud subscription revenue $ 236,922 $ 179,415 $ 129,219

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

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

In 2022, 2021, and 2020, 69.7%, 68.0%, and 65.0%, respectively, of subscriptions revenue was 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.

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.

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Cloud subscription revenue retention rate is then calculated by dividing the aggregate recurring cloud subscription revenue in the current trailing 12-month period by the previous trailing 12-month period.

This calculation includes the impact on our revenue from customer non-renewals, pricing changes, and growth in the number of users on our platform.

This calculation includes the combined impact on our revenue from customer non-renewals, pricing changes, and growth in the number of users on our platform.

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

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.

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 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 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 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.

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

Year Ended December 31,

2021 2020 2019

GAAP operating loss $ (83,907) $ (37,902) $ (50,468)

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

Litigation expenses 16,400 — —

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

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

Year Ended December 31,

2021 2020 2019

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

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

Litigation expenses 16,400 — —

Loss on disposal of property and equipment 79 22 146

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

The following table sets forth non-GAAP net loss per share for the years ended December 31, 2021, 2020, and 2019 (in thousands except share and per share data):

Year Ended December 31,

2021 2020 2019

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

Non-GAAP weighted average shares used to compute net loss per share, basic and diluted 71,036,490 69,050,565 65,479,327

Non-GAAP net loss per share, basic and diluted $ (0.68) $ (0.26) $ (0.52)

GAAP basic and diluted weighted average shares outstanding were equal to non-GAAP basic and diluted weighted average shares outstanding for each of the years ended December 31, 2021, 2020, and 2019.

The following table reconciles GAAP net loss per share to non-GAAP net loss per share for the years ended December 31, 2021, 2020, and 2019:

Year Ended December 31,

2021 2020 2019

GAAP net loss per share, basic and diluted $ (1.25) $ (0.48) $ (0.77)

Non-GAAP adjustments to net loss per share 0.57 0.22 0.25

Non-GAAP net loss per share, basic and diluted $ (0.68) $ (0.26) $ (0.52)

The following table reconciles GAAP net loss to adjusted EBITDA for the years ended December 31, 2021, 2020, and 2019 (in thousands):

Year Ended December 31,

2021 2020 2019

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

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

Interest expense 372 478 367

Income tax expense 778 883 820

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)

Key Components of Results of Operations

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Subscriptions

Subscriptions revenue is primarily derived from:

• SaaS subscriptions bundled with maintenance and support and hosting services;

• On-premises term license subscriptions bundled with maintenance and support.

Our maintenance and support agreements provide customers with the right to unspecified software upgrades, maintenance releases and patches released during the term of the maintenance and support agreement on a when-and-if-available basis, and rights to technical support.

Subscriptions revenue is primarily derived from cloud subscriptions bundled with maintenance and support and hosting services and on-premises term license subscriptions bundled with maintenance and support.

Our maintenance and support agreements provide customers with the right to unspecified software upgrades, maintenance releases and patches released

during the term of the maintenance and support agreement on a when-and-if-available basis, and rights to technical support.

On-premises term license subscriptions are offered when the customer prefers to self-manage the deployment of our platform within their own infrastructure.

When our platform is delivered as a SaaS subscription, we manage their operational needs in third-party hosted data centers.

When our platform is delivered as a cloud subscription, we manage operational needs in third-party hosted data centers.

Professional Services

Our professional services revenue is comprised of fees for consulting services, including application development, deployment assistance, and training related to our platform.

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, 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.

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

Over time, we expect professional services revenue as a percentage of total revenue to decrease as the usage of our partner network expands.

Cost of Revenue

Subscriptions

Cost of subscriptions revenue consists primarily of fees paid to our third-party managed hosting providers and other third-party service providers, personnel costs, including payroll and benefits for our technology operations and customer support teams, and allocated facility costs and overhead.

We expect cost of revenue to continue to increase in absolute dollars for the foreseeable future as our customer base grows.

Professional Services

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 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.

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 overhead costs, and the costs of billable expenses such as travel and lodging.

The unpredictability of the timing of providing services related to 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 financial results.

Gross Profit and Gross Margin

Gross profit and gross margin (defined as gross profit as a percentage of total revenue), have been, and will continue to be, affected by various factors, including the mix of cloud 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 providers, and the extent to which we expand our professional services to support future growth.

Our gross margin may fluctuate from period to period based on the above factors.

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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 subscriptions gross margin to fluctuate on a quarterly basis.

We expect to continue to invest in customer support and cloud 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.

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.

In 2021, we had a lower usage of subcontractors and performed fewer in-person professional services engagements and deployments, both of which reduced certain classes of expenses and improved professional services margins.

In 2022, these margins began to decline.

In 2023, we expect professional services gross margin to be consistent with 2022;

however, the margin remains subject to fluctuation based on the factors discussed above.

Operating Expenses

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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.

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

Our total employee headcount grew from 1,798 employees at December 31, 2021 to 2,307 employees at December 31, 2022.

We expect to continue to hire new employees in order to support our anticipated revenue growth, although at a more measured rate than prior years.

Sales and Marketing Expense

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

Additional major 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 overhead costs.

The number of employees in sales and marketing functions grew from 552 at December 31, 2021 to 730 at December 31, 2022.

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Research and development expense consists primarily of personnel costs for our employees who develop and enhance our platform, including salaries, bonuses, stock-based compensation, and other personnel costs.

Also included are non-personnel costs such as subcontracting, consulting, and professional fees to third party development resources, allocated facility costs, and overhead.

Our research and development efforts are focused on enhancing the speed and power of our software platform.

Also included are non-personnel costs such as subcontracting, consulting, and professional fees to third party development resources, and allocated overhead costs.

Our research and development efforts are focused on enhancing the capabilities, speed, and power of our software platform.

The number of employees in research and development functions grew from 488 at December 31, 2021 to 652 at December 31, 2022.

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.

A portion of our headcount growth in 2022 was attributable to a new product development center opened in India.

Although 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, we believe our new product development center will result in cost savings over time.

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, as well as our executives.

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.

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, including allocated overhead costs, and bad debt expenses.

The number of employees in general and administrative functions grew from 224 at December 31, 2021 to 316 at December 31, 2022.

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

Other Expense (Income)

Additionally, we incurred significant legal costs in 2021 and 2022 in connection with two separate lawsuits involving an effort to enforce our intellectual property and to defend against reciprocal false advertising and related claims with a competitor.

In 2023, we expect general and administrative expense to decrease in absolute dollars largely due to an anticipated decline in legal costs.

Other Non-Operating 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.

Other expense (income), 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 debt, unused credit facility fees, and commitment fees on our letters of credit.

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

Results of Operations

2 unchanged sentences

2022 2021 2020

Consolidated Statements of Operations Data:

Subscriptions $ 340,152 $ 263,738 $ 198,710

3 unchanged sentences

Subscriptions (1)

36,005 27,330 20,826

Professional services (1)

97,301 76,763 67,940

Total cost of revenue 133,306 104,093 88,766

2 unchanged sentences

Sales and marketing (1)

220,374 167,852 130,316

Research and development (1)

139,210 97,517 70,241

General and administrative (1)

120,111 83,704 53,152

Total operating expenses 479,695 349,073 253,709

Operating loss (145,010) (83,907) (37,902)

Other expense (income)

Other non-operating expense (income)

Other expense (income), net 3,545 3,584 (5,786)

Interest expense 1,673 372 478

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

Total other non-operating expense (income) 5,218 3,956 (5,308)

Loss before income taxes (150,228) (87,863) (32,594)

16 unchanged sentences

2022 2021 2020

Consolidated Statements of Operations Data:

Subscriptions 72.7 % 71.4 % 65.2 %

12 unchanged sentences

Operating loss (31.0) (22.8) (12.5)

Other expense (income)

Other non-operating expense (income)

Other expense (income), net 0.8 1.0 (1.9)

Interest expense 0.4 0.1 0.2

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

Total other non-operating expense (income) 1.2 1.1 (1.7)

Loss before income taxes (32.2) (23.9) (10.8)

2 unchanged sentences

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Year Ended December 31, % Change

Year Ended December 31,

2022 2021 $ Change % Change

(dollars in thousands)

2 unchanged sentences

Total revenue $ 467,991 $ 369,259 $ 98,732 26.7%

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.

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.

Total revenue increased $98.7 million, or 26.7%, in 2022 compared to 2021 due to an increase in our subscriptions revenue of $76.4 million and an increase in our professional services revenue of $22.3 million.

The increase in subscriptions revenue was driven by a $57.5 million increase in cloud subscription revenue, a $16.6 million increase in on-premises software revenue, and a $2.4 million increase in maintenance and support revenue.

With respect to new versus existing customers, $63.2 million of the increase in subscriptions revenue was derived from expanded deployments and corresponding sales of additional subscriptions to existing customers while $13.2 million was driven from sales of subscriptions to new customers.

The increase in professional services revenue was due to a $9.2 million increase in revenue from existing customers coupled with a $13.1 million increase in sales to new customers.

Cost of Revenue

Year Ended December 31, % Change

Year Ended December 31,

2022 2021 $ Change % Change

(dollars in thousands)

6 unchanged sentences

Total gross margin 71.5 % 71.8 %

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.

Cost of revenue increased $29.2 million, or 28.1%, in 2022 compared to 2021, primarily due to a $17.2 million increase in professional services and product support personnel costs, a $5.9 million increase in other cost of revenue, a $2.9 million increase in contractor costs, a $1.8 million increase in travel and entertainment expenses, and a $1.4 million increase in overhead costs.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 14.0% from December 31, 2021 to December 31, 2022 in addition to increased wages and fringe benefits, coupled with a $2.0 million increase in stock-based compensation.

The increase in other cost of revenue was driven by increased hosting costs as sales of our cloud offering grew in 2022, while the increase in 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 as well as allocated depreciation and amortization.

Contractor costs increased in 2022 compared to 2021 due to an increase in the usage of subcontractors for professional service engagements.

Travel and entertainment expenses increased primarily as a result of an increasing shift towards in-person engagements and activities as COVID restrictions eased in 2022.

Subscriptions gross margin was 89.4% in 2022 as compared to 89.6% in 2021.

Professional services gross margin decreased to 23.9% in 2022 compared to 27.3% in 2021 due to higher personnel and allocated resources costs in 2022.

These cost increases were partially offset by higher professional services revenue.

Additionally, fewer in-person professional services engagements and deployments and a lower usage of subcontractors in 2021 led to temporarily improved margins in the prior year driven by impacts from the COVID-19 pandemic.

Total gross margin fell slightly to 71.5% in 2022 as compared to 71.8% in 2021 driven largely by the higher cost of professional services revenue.

Sales and Marketing Expense

Year Ended December 31, % Change

Year Ended December 31,

2022 2021 $ Change % Change

(dollars in thousands)

1 unchanged sentence

% of revenue 47.1 % 45.5 %

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.

Sales and marketing expense increased $52.5 million, or 31.3%, in 2022 compared to 2021, primarily due to a $33.3 million increase in sales and marketing personnel costs, a $13.7 million increase in overhead costs, and a $7.2 million increase in marketing costs.

These increases were partially offset by a $1.7 million decrease in professional fees.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 32.2% from December 31, 2021 to December 31, 2022 in addition to increased wages and fringe benefits, increased sales commissions driven by both contracts with new customers and renewals with existing customers, and a $3.7 million increase in stock-based compensation expense.

Overhead costs increased due to larger travel and entertainment expenses as return to office initiatives increased and more in-person sales and marketing events were held during 2022 as compared to 2021.

Additionally, allocated costs tied to our growth increased in such areas as facilities, information technology, and human resources.

Marketing costs increased due to an increase in the number of marketing events held year over year as well as increased spending on advertising and lead generation.

These increases were slightly offset by lesser spending on marketing materials.

Professional fees decreased due to lower engagement of and fees paid to third-party marketing consultants.

Research and Development Expense

Year Ended December 31, % Change

Year Ended December 31,

2022 2021 $ Change % Change

(dollars in thousands)

1 unchanged sentence

% of revenue 29.7 % 26.4 %

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.

Research and development expense increased $41.7 million, or 42.8%, in 2022 compared to 2021, primarily due to a $34.6 million increase in research and development personnel costs, a $5.4 million increase in overhead costs, and a $1.6 million increase in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 33.6% from December 31, 2021 to December 31, 2022 in addition to increased wages and fringe benefits, coupled with a $7.3 million increase in stock-based compensation expense.

Overhead costs increased due largely to higher allocated costs tied to our growth, such as information technology spending related to cloud computing, human resources costs, and office spending.

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

General and Administrative Expense

Year Ended December 31, % Change

Year Ended December 31,

2022 2021 $ Change % Change

(dollars in thousands)

1 unchanged sentence

% of revenue 25.7 % 22.7 %

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

General and administrative expense increased $36.4 million, or 43.5%, in 2022 compared to 2021, primarily due to a $15.4 million increase in general and administrative personnel costs, a $10.9 million increase in professional fees, and a $10.1 million increase in overhead costs.

Personnel costs increased due to an increase in general and administrative personnel headcount of 41.1% from December 31, 2021 to December 31, 2022 in addition to increased wages and fringe benefits, coupled with a $2.0 million increase in stock compensation expense.

Professional fees increased due largely to higher legal and consulting fees.

Overhead costs increased primarily due to higher allocated costs tied to our growth in areas such as information technology

spending, human resources costs, and office spending as well as an increase in certain general corporate costs such as rent expense, depreciation, and bad debt expense.

Other Expense, Net

Year Ended December 31,

2022 2021 $ Change % Change

(dollars in thousands)

Other expense (income), net

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

Other expense, net $ 3,545 $ 3,584 $ (39) (1.1)%

% of revenue 0.8 % 1.0 %

*** - Indicates a percentage that is not meaningful

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.

Other expense, net was $3.5 million in 2022 compared to other expense, net of $3.6 million in 2021.

There were $6.1 million in foreign exchange losses in 2022 compared to $3.7 million in foreign exchange losses in 2021.

However, the increase in foreign exchange losses was offset by a $1.2 million increase in other income attributable to a payment received in 2022 from a local government as a result of the Company achieving certain economic development criteria and a $1.1 million increase in interest income.

Interest Expense

Year Ended December 31, % Change

Year Ended December 31,

2022 2021 $ Change % Change

(dollars in thousands)

1 unchanged sentence

% of revenue 0.4 % 0.1 %

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.

*** - Indicates a percentage change that is not meaningful

Interest expense increased $1.3 million in 2022 compared to the same period in 2021, primarily due to interest expense on the new term loan facility we entered into during the fourth quarter of 2022.

Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

For a discussion and analysis of changes in financial condition and results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 17, 2022.

We have historically experienced seasonality in terms of when we enter into agreements with customers.

We typically enter into a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter.

The increase in customer agreements for the fourth quarter is attributable to large enterprise account buying patterns typical in the software industry.

Furthermore, we usually enter into a significant portion of agreements with customers during the last month of each quarter.

However, we recognize the majority of our subscriptions revenue ratably over the terms of our subscriptions agreements, which are generally one to three years in length.

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

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

Backlog represents non-cancellable future amounts to be recognized under SaaS and term license subscription agreements and is representative of our remaining performance obligations.

Backlog represents non-cancellable future amounts to be recognized under cloud and on-premises term license subscription agreements and is representative of our remaining performance obligations.

As of December 31, 2022 and 2021, we had backlog of $376.5 million and $285.5 million, respectively.

Approximately 35% of our backlog as of December 31, 2022 is not expected to be recognized in 2023.

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.

Backlog may vary based on changes in the average non-cancellable term of SaaS and term license subscription agreements.

The change in backlog resulting from changes in the average non-cancellable term of SaaS and term license subscription agreements may not be an indicator of the likelihood of renewal or expected future revenue.

Accordingly, we believe fluctuations in backlog may not be a reliable indicator of future revenue, and we do not utilize backlog as a key management metric internally.

Additionally, we expect backlog to continue to increase in absolute dollars as we continue to increase the number of cloud 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 cloud 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 cloud subscription agreements.

Backlog may vary based on changes in the average non-cancellable term of a cloud and on-premises term license subscription agreements.

Non-GAAP Financial Measures

To supplement its consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial performance measures.

We use these non-GAAP financial performance

measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons.

Management believes these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenses that may not be indicative of its recurring core business operating results.

We believe both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods.

These non-GAAP financial measures also facilitate management’s internal comparisons to historical performance as well as comparisons to competitors’ operating results.

We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to measures used by management in its financial and operational decision-making and (2) they are used by institutional investors and the analyst community to help them analyze the health of our business.

The non-GAAP financial performance measures include non-GAAP net loss, non-GAAP net loss per share, and non-GAAP operating loss.

These non-GAAP financial performance measures exclude the effect of stock-based compensation expense and certain litigation-related expenses consisting of legal and other professional fees which are not indicative of our core operating performance and are not part of our normal course of business.

While these items may be recurring in nature and should not be disregarded in the evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods as these items can vary significantly from period to period depending on specific underlying transactions or events that may occur.

Therefore, while we may incur or recognize these types of expenses in the future, the Company believes removing these items for purposes of calculating the non-GAAP financial measures provides investors with a more focused presentation of our ongoing operating performance.

We also discuss adjusted EBITDA, a non-GAAP financial performance measure we believes offers a useful view of the overall operation of its businesses.

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

The most directly comparable GAAP financial measure to adjusted EBITDA is net loss.

Users should consider the limitations of using adjusted EBITDA, including the fact this measure does not provide a complete measure of our operating performance.

Adjusted EBITDA is not intended to purport to be an alternate to net loss as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.

The presentation of these 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, and our non-GAAP measures may be different from non-GAAP measures used by other companies.

The following tables reconcile our non-GAAP measures to their nearest comparable GAAP measures.

The reconciliation of GAAP operating loss to non-GAAP operating loss for the years ended December 31, 2022, 2021, and 2020 is as follows (in thousands):

Year Ended December 31,

2022 2021 2020

GAAP operating loss $ (145,010) $ (83,907) $ (37,902)

Stock-based compensation expense 38,830 23,844 15,279

Litigation expenses 22,886 16,400 —

Non-GAAP operating loss $ (83,294) $ (43,663) $ (22,623)

The following table reconciles GAAP net loss to non-GAAP net loss for the years ended December 31, 2022, 2021, and 2020 (in thousands):

Year Ended December 31,

2022 2021 2020

GAAP net loss $ (150,920) $ (88,641) $ (33,477)

Stock-based compensation expense 38,830 23,844 15,279

Litigation expenses 22,886 16,400 —

Loss on disposal of property and equipment 3 79 22

Non-GAAP net loss $ (89,201) $ (48,318) $ (18,176)

The following table sets forth non-GAAP net loss per share for the years ended December 31, 2022, 2021, and 2020 (in thousands except share and per share data):

Year Ended December 31,

2022 2021 2020

Non-GAAP net loss $ (89,201) $ (48,318) $ (18,176)

Non-GAAP weighted average shares used to compute net loss per share, basic and diluted 72,455,175 71,036,490 69,050,565

Non-GAAP net loss per share, basic and diluted $ (1.23) $ (0.68) $ (0.26)

GAAP basic and diluted weighted average shares outstanding were equal to non-GAAP basic and diluted weighted average shares outstanding for each of the years ended December 31, 2022, 2021, and 2020.

The following table reconciles GAAP net loss per share to non-GAAP net loss per share for the years ended December 31, 2022, 2021, and 2020:

Year Ended December 31,

2022 2021 2020

GAAP net loss per share, basic and diluted $ (2.08) $ (1.25) $ (0.48)

Non-GAAP adjustments to net loss per share 0.85 0.57 0.22

Non-GAAP net loss per share, basic and diluted $ (1.23) $ (0.68) $ (0.26)

The following table reconciles GAAP net loss to adjusted EBITDA for the years ended December 31, 2022, 2021, and 2020 (in thousands):

Year Ended December 31,

2022 2021 2020

GAAP net loss $ (150,920) $ (88,641) $ (33,477)

Other expense (income), net 3,545 3,584 (5,786)

Interest expense 1,673 372 478

Income tax expense 692 778 883

Depreciation and amortization of intangible assets 7,297 5,743 5,851

Stock-based compensation expense 38,830 23,844 15,279

Litigation expenses 22,886 16,400 —

Adjusted EBITDA $ (75,997) $ (37,920) $ (16,772)

Liquidity and Capital Resources

The following table presents selected financial information and statistics as of and for the years ended December 31, 2021, 2020, and 2019 (in thousands):

The following table presents selected financial information and statistics pertaining to liquidity and capital resources as of and for the years ended December 31, 2022 and 2021 (in thousands):

As of December 31,

2021 2020 2019

Cash and cash equivalents $ 148,132 $ 100,796

3 unchanged sentences

Working capital* 149,996 121,752

Year Ended December 31,

2021 2020 2019

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

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

* Exclusive of the current portion of restricted cash

* Defined as current assets net of current liabilities, excluding the current portion of restricted cash

As of December 31, 2022, we had $148.1 million of cash and cash equivalents and $47.9 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.

To the extent existing cash and cash equivalents, short-term investments, and cash from operations are not sufficient to fund future activities, we may need to raise additional funds.

We may seek to raise additional funds through equity, equity-linked, or debt financings.

If we raise additional funds through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our equity securities and could contain covenants that restrict operations.

Any additional equity financing may be dilutive to our existing stockholders.

We recently have, and in the future may enter into, investments in or acquisitions of complementary businesses, products, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources.

2 unchanged sentences

Sources of Funds

We have financed our operations in large part with equity and debt financing arrangements, specifically proceeds raised from our initial public offering in 2017 and subsequent underwritten public offerings as summarized in the table below (in thousands except share and per share information):

Shares Sold by Us Price per Share Proceeds to Us *

May 2017 initial public offering

7,187,500 $ 12.00 $ 77,789

August 2018 public offering

1,675,000 35.15 57,829

September 2019 public offering

1,825,000 55.70 101,303

June 2020 public offering

1,931,206 56.50 107,914

Total 12,618,706 $ 344,835

* Net of underwriting discounts and commissions and offering expenses

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 have historically financed our operations in large part with equity financing arrangements.

Through 2022, we have completed four public offerings and received net proceeds of $344.8 million.

Outside of equity offerings, we have financed our operations through sales of subscriptions and professional services.

To further help strengthen our financial position and support our growth initiatives, on November 3, 2022 we entered into a new Senior Secured Credit Facilities Credit Agreement (the “Credit Agreement”) which provides for a five-year term loan facility in an aggregate principal amount of $100.0 million and, in addition, up to $50.0 million for a revolving credit facility, including a letter of credit sub-facility in the aggregate availability amount of $15.0 million and a swingline sub-facility in the aggregate availability amount of $10.0 million (as a sublimit of the revolving loan facility).

On December 13, 2022, we executed the first amendment to the credit agreement which increased the aggregate principal amount of the term loan facility by $20.0 million and increased the limit of the revolving facility by $10.0 million.

The new Credit Agreement matures on November 3, 2027.

We will use the proceeds from the $120.0 million term loan to fund the continued growth of our business and support our working capital requirements.

We were in compliance with all covenants as of December 31, 2022.

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.

As of December 31, 2022, we had no outstanding borrowings under the revolving credit facility.

The new Credit Agreement replaced our existing line of credit that was in place as of September 30, 2022.

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 new revolving credit facility, entering into new debt financing arrangements, or conducting additional public offerings.

Uses of Funds

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

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.

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, 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.

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.

Historically, we have also utilized cash to acquire complementary businesses, 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 also grown.

However, as we continue to invest in growing our business, operating expenses have also increased.

Outside of cash used to fund operations, other uses of cash in 2022 included capital expenditures related to the expansion of our headquarters and purchases of short-term investments.

Cash uses in 2021 included the acquisition of Lana Labs, purchases of investments, and capital expenditures.

Furthermore, in July 2021, we executed a non-cancellable cloud hosting arrangement with Amazon Web Services (“AWS”) that contains provisions for minimum purchase commitments.

Specifically, 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, 2022 totaled $33.1 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.

In 2021, AWS spend totaled $22.0 million, $11.8 million of which was incurred under the new agreement.

Historical Cash Flows

Year Ended December 31,

2022 2021 $ Change % Change

(dollars in thousands)

Beginning cash, cash equivalents, and restricted cash $ 103,960 $ 112,462 $ (8,502) (7.6) %

Operating activities:

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.

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.

Net loss (150,920) (88,641) (62,279) 70.3

Stock-based compensation and other non-cash adjustments 46,382 29,578 16,804 56.8

Changes in working capital (2,013) 5,145 (7,158) ***

Net cash used by operating activities (106,551) (53,918) (52,633) 97.6

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.

Net cash provided by investing activities 10,264 41,936 (31,672) (75.5)

Financing activities:

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.

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.

Net cash provided by financing activities 142,867 2,786 140,081 ***

Effect of exchange rates (159) 694 (853) ***

Net increase (decrease) in cash, cash equivalents, and restricted cash 46,421 (8,502) 54,923 ***

Ending cash, cash equivalents, and restricted cash $ 150,381 $ 103,960 $ 46,421 44.7 %

*** Indicates a percentage that is not meaningful.

Operating Activities

Net cash used by operating activities was $106.6 million for 2022 as compared to $53.9 million used by operating activities for 2021.

The increase in net cas h used by operating activities was primarily due to a $62.3 million increase in net losses, most notably driven by the increase in operating expenses as discussed above.

In addition, the increase in cash used by operating activities for 2022 was attributed to an increase in the use of working capital of $7.2 million.

The change in working capital was primarily comprised of declines in accounts payable, prepaid assets, and accrued expenses, all due to timing of payments, partially offset by an increase in deferred revenue driven by higher cash payments from increases from subscription contracts.

Investing Activities

Net cash provided by investing activities was $10.3 million for 2022 as compared to $41.9 million provided by investing activities for 2021.

The change in net cash provided by investing activities was primarily impacted by a $23.4 million increase in purchases of investments , a $3.0 million increase in capital expenditures stemming from spending on the expansion of our headquarters, and a $36.0 million decrease in proceeds from the sale of investments.

Partially offsetting these changes was a $30.7 million decrease related to the 2021 acquisition of Lana Labs.

Financing Activities

Net cash provided by financing activities was $142.9 million for 2022 as compared to $2.8 million in net cash provided by financing activities for 2021.

The increase in net cash provided by financing activities was primarily due to $120.0 million in proceeds received from the new term loan facility and a $22.6 million increase in proceeds received from the exercise of stock options primarily resulting from the vesting of the 2019 CEO stock options during 2022.

These increases were partially offset by $1.9 million in payments for debt issuance costs and a $0.6 million principal payment on the term loan.

For a discussion and analysis of net cash used in or provided by operating, investing, and financing activities for the year ended December 31, 2020, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 17, 2022.

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Accordingly, these are the estimates we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations.

See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of our other significant accounting policies and estimates.

This commentary should be read in conjunction with our consolidated financial statements and the remainder of this Form 10-K.

Revenue Recognition

We generate subscriptions revenue primarily through the sale of SaaS subscriptions bundled with maintenance and support and hosting services and term license subscriptions bundled with maintenance and support.

We generate subscriptions revenue primarily through the sale of cloud subscriptions bundled with maintenance and support and hosting services and term license subscriptions bundled with maintenance and support.

We generate professional services revenue from fees for our consulting services, including application development and deployment assistance and training related to our platform.

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Variable consideration is also included in the transaction price only to the extent it is probable a significant reversal will not occur.

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.

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 years ended December 31, 2022, 2021, and 2020 was insignificant.

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We establish SSP as follows:

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.

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

On-premises 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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We measure and recognize compensation expense for all instrument types, including stock options, awards with market conditions, and restricted stock units, or RSUs, based on the estimated fair value of the award on the grant date.

The methods for determining fair value vary by instrument type.

For the vast majority of our stock options, we estimate fair value using the Black-Scholes Option Pricing Model.

For the option to purchase 700,000 shares of our Class A common stock granted to our Chief Executive Officer in May 2019, we estimated fair value using a Monte Carlo simulation because the award contains a market condition.

Both valuation methods require the use of subjective assumptions, including but not limited to, the following:

The valuation of stock options requires management to make certain estimates and judgments as discussed below.

Stock options

In June 2022, our Board of Directors granted a stock option to purchase 700,000 shares of our Class A common stock granted to our Chief Executive Officer.

This was the only stock option awarded during 2022, 2021, and 2020.

See Note 11 to the consolidated financial statements for further discussion of the award.

The valuation method requires the use of subjective assumptions, including but not limited to, the following:

The expected term of the option - The expected term represents the period of time the stock options are expected to be outstanding.

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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 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.

The expected stock price volatility - Expected volatility is based on the historical volatilities of our publicly traded stock.

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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Treasury bonds, that have maturities commensurate with the expected term of the options.

The fair value of RSUs 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.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.

As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.

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.

Significant judgment is required in determining our annual tax expense and in evaluating our tax positions.

Tax law requires certain items to be included in our tax returns at different times than when the items are reflected in the financial statements.

The annual tax expense reflected in the consolidated income statement is different than that reported in our tax returns.

Some of these differences are permanent (for example, expenses recorded for accounting purposes that are not deductible in the returns such as certain entertainment expenses) and some differences are temporary and reverse over time, such as depreciation expense.

Temporary differences create deferred tax assets and liabilities.

Deferred tax liabilities generally represent income recognized in the financial statements for which payment has been deferred, or expense for which a deduction has been taken already in the tax return but the expense has not yet been recognized in the financial statements.

Deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which a benefit has already been recorded in the financial statements, as well as tax attributes, such as loss or credits, that can be carried over and used in future years.

Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts we believe are more likely than not to be recovered.

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.

As of December 31, 2022, we continued to maintain a full valuation allowance against U.S.

deferred tax assets based on our cumulative operating results as of December 31, 2022, three-year cumulative loss, and an assessment of our expected future results of operations.

We have evaluated all evidence, both positive and negative, in assessing the likelihood of realizability, and we determined the negative evidence outweighed the positive evidence.

As of December 31, 2022, we have a valuation allowance of $18.7 million against gross foreign deferred tax assets of $24.0 million, before deferred tax liability netting.

Based on our cumulative operating results as of December 31, 2022 and assessment of our expected future results of operations, we determined it was not more likely than not we would be able to realize the remaining deferred tax assets prior to expiration.

Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world.

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This determination involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws.

As of December 31, 2022 and 2021, we have an unrecognized tax benefit of $4.5 million and $3.1 million, respectively, none of which would affect our effective tax rate if recognized due to the full valuation allowance against U.S.

deferred tax assets.

We calculate the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified.

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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