What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-16 · 195 added, 227 removed, 324 unchanged (57% of the section changed)

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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 Appian AI Process 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.

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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.

We have several strategic partnerships, including with Accenture, Capgemini, Deloitte, EY, KPMG, PwC, and TCS, which allow them to refer customers to us in order to purchase subscriptions.

Our partners then provide professional services directly to the customers using our platform.

We intend to continue focusing on adding new customers with our strategic partners.

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.

As of December 31, 2022, we had 925 customers in a variety of industries, of which 712 customers were commercial and 213 customers were government or non-commercial entities.

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

As of December 31, 2023, we had approximately 1,000 customers.

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

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

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As of December 31, 2023, we operated in 16 countries.

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 believe we have a significant opportunity to continue to grow our international footprint, and 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 $545.4 million, $468.0 million, and $369.3 million in 2023, 2022, and 2021, respectively.

Our subscriptions revenue was $412.3 million, $340.2 million, and $263.7 million in 2023, 2022, and 2021, 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.

Our cloud subscriptions revenue was $304.5 million, $236.9 million, and $179.4 million in 2023, 2022, and 2021, 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 $111.4 million, $150.9 million, and $88.6 million in 2023, 2022, and 2021, respectively.

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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 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, 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 which, with the exception of certain types 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 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.

On a rolling 12-month basis, we estimate that for each of the past five fiscal years, the average lifetime value of a customer has exceeded 7x the associated average cost of acquiring them, including the year ended December 31, 2022.

Over the last three completed fiscal years, we had an average cloud subscription gross revenue renewal rate of 98%, which is calculated by dividing (i) the cloud subscriptions revenue from renewing cloud customers in the current 12-month period that were cloud customers during the entirety of the prior 12-month period, giving effect to price increases but excluding additional cloud subscriptions for additional users, or upsells, by (ii) our cloud subscriptions 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 also measure the effectiveness of our business model by comparing the lifetime value of our customer relationships to our customer acquisition costs.

On a rolling 12-month basis, we estimate that for each of the past five fiscal years, the average lifetime value of a customer has been at least seven times greater than the associated average cost of acquiring them, including the year ended December 31, 2023.

Key Factors Affecting Our Performance

The following are several key factors that affect our performance:

• Market Adoption of Our Platform.

Our ability to grow our customer base and drive market adoption of our platform is affected by the pace at which organizations digitally transform.

• Market Adoption of Our Platform - Our ability to grow our customer base and drive market adoption of our platform is affected by the pace at which organizations digitally transform.

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

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

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.

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

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

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

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

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

The degree to which prospective customers recognize the need for our software platform and its ability to enable their 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 - We believe we have a substantial opportunity to grow our customer base.

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

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

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

In 2023, we generated over 76% of our subscriptions revenue from customers in these verticals.

In addition, we have established relationships with strategic partners who work with organizations undergoing digital transformations.

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 896, 783, and 654 as of December 31, 2022, 2021, and 2020,

respectively.

As of December 31, 2023 our total customer count was approximately 1,000.

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.

• Further Penetration of Existing Customers.

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

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

• Further Penetration of Existing Customers - Our sales team seeks to generate additional revenue from existing customers by adding new users to our platform.

Many of our customers begin by building a

single application and then grow to build dozens of applications on our platform.

Generally, the development of new applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue.

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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 lasting from two to six months.

• 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 of our platform 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 lasting 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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These partners perform professional services with respect to any new service contracts they originate.

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

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

In 2023, 2022, and 2021, 75.6%, 72.7%, and 71.4% of our revenue, respectively, was derived from sales of subscriptions, while the remaining 24.4%, 27.3%, and 28.6%, respectively, was derived from the sale of professional services.

• Investments in Growth.

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

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

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

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

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.

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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.

However, we recognize the majority of our subscriptions revenue ratably over the terms of our subscription agreements.

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.

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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.

Accordingly, the effect of significant downturns in sales, the market acceptance of our platform, or 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.

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All dollar amounts are presented in thousands.

Cloud Subscription Revenue

Cloud Subscriptions Revenue

Year Ended December 31,

2023 2022 2021

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

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.

Our cloud subscription revenue for any customer is primarily determined by the number of users who access and utilize the applications built on our platform or by the number of application licenses purchased, as well as the price paid.

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

Cloud Subscription Revenue Retention Rate

Cloud subscriptions revenue

$ 304,481 $ 236,922 $ 179,415

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

In 2023, 2022, and 2021, 73.8%, 69.7%, and 68.0%, respectively, of subscriptions revenue was cloud subscriptions revenue.

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

Cloud Subscriptions Revenue Retention Rate

As of December 31,

2023 2022 2021

Cloud subscription revenue retention rate 115 % 116 % 119 %

Cloud subscriptions revenue retention rate

119 % 115 % 116 %

A key factor to our success is the renewal and expansion of subscription agreements with our existing customers.

We calculate this metric over a set of customers who have been with us for at least one full year.

To calculate our cloud subscription revenue retention rate for a particular trailing 12-month period, we first establish the recurring cloud subscription revenue for the previous trailing 12-month period.

To calculate our cloud subscriptions revenue retention rate for a particular trailing 12-month period, we first establish the recurring cloud subscriptions revenue for the previous trailing 12-month period.

This effectively represents recurring dollars we should expect in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period without any expansion or contraction.

We subsequently measure the recurring cloud subscription revenue in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period.

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.

We subsequently measure the recurring cloud subscriptions revenue in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period.

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

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.

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

Key Components of Results of Operations

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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.

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.

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Professional Services Gross Margin

Professional services gross margin is affected by the growth in our professional services revenue as compared to the growth in, and timing of, the cost of our Customer Success organization as we continue to invest in the growth of our business.

Professional services gross margin is affected by the growth in our professional services revenue as compared to the growth in, and timing of, the costs of our Customer Success organization as we continue to invest in the growth of our business, as well as by consultant utilization rates.

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

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.

2022, 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 2023, these margins began to decline.

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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, 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.

Other components of each category include professional fees for third-party services such as legal, software development resources, and contractors.

In addition, operating expenses include allocated overhead costs, which are primarily comprised of facility costs, employee medical benefits, employee relations expense, and certain 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.

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.

During 2023, our total employee headcount remained relatively consistent, decreasing from 2,307 employees at December 31, 2022 to 2,257 employees at December 31, 2023.

In 2024, we expect to hire new employees in key growth areas, although at a more measured rate than prior years.

Sales and Marketing Expense

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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.

In order to continue to grow our business, geographical footprint, and brand awareness, we expect to continue investing resources in sales and marketing by increasing the number of sales and account management teams.

As a result, we expect sales and marketing expense to increase in absolute dollars as we continue to invest to acquire new customers and further expand usage of our platform within our existing customer base.

The number of employees in sales and marketing functions decreased from 730 at December 31, 2022 to 666 at December 31, 2023.

While headcount declined in 2023, we expect to grow sales and marketing headcount during 2024 in our principal markets and strategic growth areas.

We expect sales and marketing expense to increase in absolute dollars as we continue to invest to acquire new customers and further expand usage of our platform within our existing customer base.

We will continue our efforts to build on our brand reputation and increase market awareness of our platform.

Research and Development Expense

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, and allocated overhead costs.

Also included are non-personnel costs such as subcontracting, consulting, 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 652 at December 31, 2022 to 681 at December 31, 2023.

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.

Most of this increase was attributable to expansion at our product development center in India that we opened in August 2022.

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 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, as well as our senior 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, 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.

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)

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 decreased from 316 at December 31, 2022 to 280 at December 31, 2023.

In 2024, we expect general and administrative expense to increase in absolute dollars largely due to amortization expense associated with the judgment preservation insurance as discussed in Note 13 to the consolidated financial statements and investments in our information technology team.

Other Non-Operating Expense

Other Expense (Income), Net

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.

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

Interest Expense

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Results of Operations

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

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

Year Ended December 31,

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Operating loss (107,973) (145,010) (83,907)

Other non-operating expense (income)

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

Other non-operating expense

Other (income) expense, net (17,603) 3,545 3,584

Interest expense 17,862 1,673 372

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

Total other non-operating expense 259 5,218 3,956

Loss before income taxes (108,232) (150,228) (87,863)

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Operating loss (19.8) (31.0) (22.8)

Other non-operating expense (income)

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

Other non-operating expense

Other (income) expense, net (3.2) 0.8 1.0

Interest expense 3.3 0.4 0.1

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

Total other non-operating expense 0.1 1.2 1.1

Loss before income taxes (19.9) (32.2) (23.9)

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Total revenue increased $77.4 million, or 16.5%, in 2023 compared to 2022 due to an increase in our subscriptions revenue of $72.2 million and an increase in our professional services revenue of $5.2 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.

The increase in subscriptions revenue was driven by a $67.6 million increase in cloud subscriptions revenue, a $2.5 million increase in on-premises software revenue, and a $2.1 million increase in maintenance and support revenue.

With respect to new versus existing customers, $53.8 million of the increase in subscriptions revenue was derived from expanded deployments and corresponding sales of additional subscriptions to existing customers while $18.4 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.

The increase in professional services revenue was due to a $12.5 million increase in sales to new customers, which was partially offset by a $7.3 million decrease in revenue from existing customers.

Cost of Revenue

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Total gross margin 73.7 % 71.5 %

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.

Cost of revenue increased $10.0 million, or 7.5%, in 2023 compared to 2022, primarily due to a $5.9 million increase in hosting costs, a $2.8 million increase in professional services and product support personnel costs, and a $1.7 million increase in overhead costs.

These increases were partially offset by a $0.8 million decrease in contractor costs.

Hosting costs increased due to an increase in sales of our cloud offering during 2023.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 3.4% from December 31, 2022 to December 31, 2023 in addition to increased wages, coupled with a $0.7 million increase in stock-based compensation.

The increase in overhead costs was driven by higher costs associated with employee medical benefits and information technology expenses.

Contractor costs decreased in 2023 compared to 2022 due to a decrease in the usage of subcontractors for professional service engagements.

Subscriptions gross margin was 89.4% in 2023, consistent with the prior year as increases in subscriptions revenue were offset by a corresponding increase in hosting costs.

Professional services gross margin increased to 25.0% in 2023 as compared to 23.9% in 2022 due to higher professional services revenue, which was partially offset by higher personnel costs in 2023.

Total gross margin increased to 73.7% in 2023 as compared to 71.5% in 2022 driven largely by the increases in revenue and the improved professional services gross margin as compared to the prior year.

Sales and Marketing Expense

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% of revenue 44.4 % 47.1 %

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.

Sales and marketing expense increased $22.0 million, or 10.0%, in 2023 compared to 2022, primarily due to a $25.1 million increase in sales and marketing personnel costs and a $1.0 million increase in overhead costs.

These increases were partially offset by a $3.6 million decrease in marketing costs.

Although there was a 8.8% decrease in sales and marketing personnel headcount from December 31, 2022 to December 31, 2023, personnel costs overall increased due to increased wages, a $7.4 million increase in sales commissions driven by both contracts with new customers and renewals with existing customers, a $4.7 million increase in severance expense, and a $1.7 million increase in stock-based compensation expense.

Overhead costs increased primarily due to a $0.8 million increase in employee relations costs stemming from higher expenditures related to internal sales and marketing events.

Marketing costs decreased due to declines in advertising and lead generation expenses as well as a decrease in spending on marketing materials.

Research and Development Expense

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% of revenue 28.1 % 29.7 %

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.

Research and development expense increased $13.9 million, or 10.0%, in 2023 compared to 2022, primarily due to a $13.1 million increase in research and development personnel costs and a $1.4 million increase in overhead costs.

These increases were partially offset by a $0.6 million decrease in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 4.4% from December 31, 2022 to December 31, 2023 in addition to increased wages and a $1.0 million increase in severance expense.

Overhead costs increased due to higher costs associated with employee medical benefits and rent.

Professional fees decreased due to a decrease in consulting services fees driven by lower usage of external resources to assist in our platform development efforts.

General and Administrative Expense

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% of revenue 21.0 % 25.7 %

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

General and administrative expense decreased $5.6 million, or 4.6%, in 2023 compared to 2022, primarily due to a $21.1 million decrease in professional fees.

These decreases were partially offset by a $9.9 million increase in overhead costs and a $6.0 million increase in general and administrative personnel costs.

Professional fees decreased due largely to lower legal and consulting fees.

Overhead costs increased primarily due to a $6.0 million increase in amortization expense associated with our judgment preservation insurance policy, a $2.4 million increase in depreciation expense, and higher costs associated with employee medical benefits.

Although there was a decrease in general and administrative personnel headcount of 11.4% from December 31, 2022 to December 31, 2023, personnel costs increased due to increased wages, a $2.2 million increase in stock compensation expense, and a $0.4 million increase in severance expense.

Other (Income) Expense, Net

Year Ended December 31,

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(dollars in thousands)

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

Other (income) expense, net

$ (17,603) $ 3,545 $ (21,148) ***

% of revenue (3.2) % 0.8 %

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.

Other income, net was $17.6 million in 2023 compared to other expense, net of $3.5 million in 2022.

There were $8.7 million in foreign exchange gains in 2023 compared to $6.1 million in foreign exchange losses in 2022.

Additionally, there was a $7.7 million increase in interest income stemming from increased investments.

These increases were partially offset by a $1.2 million decrease in other income attributable to a payment received in 2022 from a local government as a result of achieving certain economic development criteria.

Interest Expense

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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.

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 on-premises 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.

Backlog may vary based on changes in the average non-cancellable term of our 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.

To supplement our 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.

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.

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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.

Our non-GAAP financial performance measures include the following:

non-GAAP subscriptions cost of revenue, non-GAAP professional services costs of revenue, non-GAAP total cost of revenue, non-GAAP total operating expense, non-GAAP operating loss, non-GAAP income tax expense, non-GAAP net loss, and non-GAAP net loss per share, basic and diluted.

These non-GAAP financial performance measures exclude the effect of stock-based compensation expense, certain non-ordinary litigation-related expenses consisting of legal and other professional fees associated with the Pegasystems cases (net of insurance reimbursements), or Litigation Expense, amortization of the judgment preservation insurance policy, or JPI Amortization, and severance costs related to an involuntary

reduction in our workforce in 2023, or Severance Costs.

While some of 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, we believe removing these items for purposes of calculating our 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 believe offers a useful view of the overall operation of our business.

We define adjusted EBITDA as net loss before (1) other non-operating (income) expenses, net, (2) interest expense, (3) income tax expense, (4) depreciation expense and amortization of intangible assets, (5) stock-based compensation expense, (6) Litigation Expense, (7) JPI Amortization, and (8) Severance Costs.

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.

Adjusted EBITDA is not intended to purport to be an alternative 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):

The following tables reconcile our non-GAAP measures to their nearest comparable GAAP measures (in thousands, except per share data):

GAAP Measure Stock-Based Compensation Litigation Expense

JPI Amortization Severance Costs Non-GAAP Measure

Year Ended December 31, 2023

Subscriptions cost of revenue

$ 43,563 $ (925) $ — $ — $ (30) $ 42,608

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,

Professional services cost of revenue

99,759 (6,055) — — (158) 93,546

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):

Total cost of revenue

143,322 (6,980) — — (188) 136,154

Total operating expense 510,014 (36,407) 2,064 (6,038) (6,111) 463,522

Operating loss (107,973) 43,387 (2,064) 6,038 6,299 (54,313)

Income tax expense 3,209 1,302 — — 139 4,650

Net loss (111,441) 42,085 (2,064) 6,038 6,160 (59,222)

Net loss per share, basic and diluted

$ (1.52) $ 0.58 $ (0.03) $ 0.08 $ 0.08 $ (0.81)

Year Ended December 31, 2022

Subscriptions cost of revenue

$ 36,005 $ (996) $ — $ — $ — $ 35,009

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:

Professional services cost of revenue

97,301 (5,309) — — — 91,992

Total cost of revenue

133,306 (6,305) — — — 127,001

Total operating expense 479,695 (32,525) (22,886) — — 424,284

Operating loss (145,010) 38,830 22,886 — — (83,294)

Net loss (150,920) 38,830 22,886 — — (89,204)

Net loss per share, basic and diluted

$ (2.08) $ 0.54 $ 0.32 $ — $ — $ (1.23)

Year Ended December 31, 2021

Subscriptions cost of revenue

$ 27,330 $ (1,199) $ — $ — $ — $ 26,131

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)

Professional services cost of revenue

76,763 (3,131) — — — 73,632

Total cost of revenue

104,093 (4,330) — — — 99,763

Total operating expense

349,073 (19,514) (16,400) — — 313,159

Operating loss

(83,907) 23,844 16,400 — — (43,663)

(88,641) 23,844 16,400 — — (48,397)

Net loss per share, basic and diluted

$ (1.25) $ 0.34 $ 0.23 $ — $ — $ (0.68)

The following table reconciles GAAP net loss to adjusted EBITDA for the years ended December 31, 2023, 2022, and 2021 (in thousands):

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GAAP net loss $ (111,441) $ (150,920) $ (88,641)

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

Other (income) expense, net (17,603) 3,545 3,584

Interest expense 17,862 1,673 372

Income tax expense 3,209 692 778

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

Depreciation expense and amortization of intangible assets

9,473 7,297 5,743

Stock-based compensation expense 43,387 38,830 23,844

Litigation expenses 22,886 16,400 —

Litigation Expense

(2,064) 22,886 16,400

JPI Amortization

Severance Costs

Adjusted EBITDA $ (44,840) $ (75,997) $ (37,920)

Liquidity and Capital Resources

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):

The following table presents selected financial information and statistics pertaining to liquidity and capital resources as of December 31, 2023 and 2022 (in thousands):

As of December 31,

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Property and equipment, net 42,682 41,855

Long-term investments — 12,044

Working capital *

43,183 149,996

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

As of December 31, 2023, we had $149.4 million of cash and cash equivalents and $9.7 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 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.

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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.

Our last public offering was completed in June 2020, which was our fourth round of public offerings.

Through these public offerings we received net proceeds of $344.8 million.

To further help strengthen our financial position and support our growth initiatives, in November 2022 we entered into a Senior Secured Credit Facilities Credit Agreement, or the Credit Agreement, which provides for a five-year term loan facility in an aggregate principal amount of $150.0 million and, in addition, up to $75.0 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).

In addition, on February 12, 2024, we executed the fourth amendment to the credit agreement, which increased the aggregate principal amount of the term loan facility by $50.0 million, increased the limit of the revolving credit facility by $25.0 million, and amended certain covenants and definitions.

The total aggregate term loan facility is now $200.0 million and the revolving credit facility is $100.0 million.

The Credit Agreement matures on November 3, 2027.

We will use the proceeds from the 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, 2023.

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.

As of December 31, 2023, we had used borrowing capacity of $62.0 million under our $75.0 million revolving credit facility, and we had outstanding letters of credit totaling $11.8 million in connection with securing our leased office space.

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.

We may also elect to raise additional sources of funding through draws on our revolving credit facility, 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, and the level of market acceptance of our product.

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

Historically, we have also utilized cash to acquire complementary businesses, and we may pursue similar opportunities in the future.

Historically, we have also utilized cash to pay for the acquisition of businesses that were complementary to ours, 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.

Outside of cash used in operations, other uses of cash in 2023 included capital expenditures related to the expansion of our headquarters, repayments of existing debt, and purchases of investments.

In addition, in September 2023, we entered into a judgment preservation insurance policy in connection with our $2.036 billion judgment against Pegasystems.

The policy provides up to $500.0 million of coverage.

See Note 13 to the consolidated financial statements for additional details.

The total cost of the policy was $57.3 million, which we paid with operating cash on hand.

Furthermore, we have a non-cancellable cloud hosting arrangement with Amazon Web Services that contains provisions for minimum purchase commitments.

Specifically, purchase commitments under the agreement total $131.0 million over five years.

The agreement, which started in July 2021 and is now in its third year as of December 31, 2023, contains minimum spending requirements of $28.0 million in each of the third, fourth, and fifth years.

Spending under this agreement for the years ended December 31, 2023, 2022, and 2021 totaled $36.6 million, $33.1 million, and $11.8 million, respectively.

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.

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

Historical Cash Flows

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Effect of exchange rates 1,657 (159) 1,816 ***

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

Net (decrease) increase in cash, cash equivalents, and restricted cash (1,030) 46,421 (47,451) ***

Ending cash, cash equivalents, and restricted cash $ 149,351 $ 150,381 $ (1,030) (0.7) %

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Net cash used by operating activities was $110.4 million for 2023 as compared to $106.6 million used by operating activities for 2022.

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.

The increase in net cash used by operating activities was primarily due to the $57.3 million payment for the premium of our judgment preservation insurance policy.

This increase was partially offset by a $25.3 million decline in legal fees and stronger collections from accounts receivable during 2023.

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.

Net cash provided by investing activities was $28.6 million for 2023 as compared to $10.3 million in net cash provided by investing activities for 2022.

The increase in net cash provided by investing activities was primarily impacted by an $11.8 million decrease in purchases of investments and a $7.0 million increase in proceeds from the maturities of investments, both of which were partially offset by a $0.5 million increase in capital expenditures.

Financing Activities

Net cash provided by financing activities was $79.2 million for 2023 as compared to $142.9 million in net cash provided by financing activities for 2022.

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.

The decrease in net cash provided by financing activities was primarily due to a $28.0 million decrease in proceeds from borrowings and a $24.7 million decrease in proceeds received from the exercise of stock options.

In addition, the decrease was driven by a $9.7 million increase in payments for employee tax withholdings associated with the net settlement of stock awards and a $2.9 million increase in principal payments on the term loan.

These decreases were partially offset by a $1.7 million decrease in payments for debt issuance costs.

For a discussion and analysis of net cash used in or provided by operating, investing, and financing activities for the year ended December 31, 2021, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 16, 2023.

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Although we believe the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.

We believe the following accounting estimates involve a high degree of judgment and complexity.

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.

We believe the following accounting estimates embedded in our revenue recognition involve a high degree of judgment and complexity.

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

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

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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.

The amount of variable consideration excluded from the transaction price for the years ended December 31, 2022, 2021, and 2020 was insignificant.

The amount of variable consideration excluded from the transaction price for the years ended December 31, 2023, 2022, and 2021 was immaterial.

Allocating the Transaction Price Based on Standalone Selling Prices

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Consulting services and training services - The SSP of consulting services and training services is established based on the observable pricing of standalone sales within each geographic region where the services are sold.

Stock-Based Compensation

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 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.

Due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the stock options, we use the simplified method to estimate the expected term.

Under the simplified method, the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term.

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.

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.

Furthermore, expected volatility can be impacted by the companies we select as peers for inclusion in the analysis.

Expected dividend yield - We assume no dividend yield because dividends on our common stock are not expected to be paid in the near future, which is consistent with our history of not paying dividends on our common stock.

The risk-free interest rate - We utilize the yields of U.S.

government securities, typically U.S.

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

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.

We recognize the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority.

We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority.

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.

The amount of income taxes paid is subject to examination by U.S.

federal, state, and foreign tax authorities.

The estimate of the potential outcome of any uncertain tax issue is subject to our assessment of relevant risks, facts, and circumstances existing at that time.

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.

Recent Accounting Pronouncements

1 unchanged sentence

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