What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-03-01 · 117 added, 129 removed, 235 unchanged (51% of the section changed)

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You should read the following discussion in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

We are a pioneer and leading provider of intelligent cloud software for contact centers, facilitating more than seven billion call minutes between our more than 2,000 clients and their customers per year.

We believe we achieved this leadership position through our expertise and technology, which has empowered us to help organizations of all sizes transition from legacy on-premise contact center systems to our cloud solution.

We are a pioneer and leading provider of intelligent cloud software for contact centers, facilitating more than nine billion call minutes between our more than 2,500 clients and their customers per year.

We believe we achieved this leadership position through our expertise and technology, which has empowered us to help organizations of all

sizes transition from legacy on-premise contact center systems to our cloud solution.

Our solution, comprised of our VCC cloud platform and applications, allows simultaneous management and optimization of customer interactions across voice, chat, email, web, social media and mobile channels, either directly or through our APIs.

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We provide our solution through a SaaS business model with recurring subscriptions.

We offer a comprehensive suite of applications delivered on our VCC cloud platform that are designed to enable our clients to

manage and optimize interactions across inbound and outbound contact centers.

We offer a comprehensive suite of applications delivered on our VCC cloud platform that are designed to enable our clients to manage and optimize interactions across inbound and outbound contact centers.

We primarily generate revenue by selling subscriptions and related usage of our VCC cloud platform.

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Fixed subscription fees, including bundled plans, are generally billed monthly in advance, while related usage fees are billed in arrears.

For the years ended December 31, 2020, 2019 and 2018, subscription and related usage fees accounted for 92%, 92% and 93% of our revenue, respectively.

For the years ended December 31, 2021, 2020 and 2019, subscription and related usage fees accounted for 92% of our revenue for each of these years, respectively.

The remainder was comprised of professional services revenue from the implementation and optimization of our solution.

Termination of Proposed Merger with Zoom

On July 16, 2021, we entered into an Agreement and Plan of Merger, or the Merger Agreement, by and among our company, Zoom, and Summer Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Zoom, or Merger Sub.

The Merger Agreement provided for the merger of Merger Sub with and into our company, or the Merger, with our company surviving the Merger and continuing as a wholly owned subsidiary of Zoom.

On September 30, 2021 at a special meeting of our stockholders, a vote to approve the Merger was unsuccessful.

As a result, immediately following the special meeting, on September 30, 2021, we and Zoom mutually agreed to terminate the Merger Agreement, effective immediately.

Except as otherwise set forth in the Merger Agreement, none of our company, Zoom or Merger Sub shall have any further liability thereunder.

We incurred approximately $7.6 million in transaction costs related to the Merger that was recorded in general and administrative expense in our consolidated statements of operations.

Effects of COVID-19

In December 2019, a novel coronavirus disease known as COVID-19 was reported and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

This pandemic has resulted in a widespread health crisis that has significantly harmed the U.S.

This pandemic has resulted in a widespread health crisis that has

significantly harmed the U.S.

and global economies and caused significant fluctuation in financial markets, including those on which our common stock and our convertible senior notes trade, and may impact demand for our solution.

In accordance with the various social distancing and other office closure orders and recommendations of applicable government agencies, all of our employees have transitioned to work-from-home operations and we have canceled all business travel by our employees except where necessary and properly authorized, which has changed how we operate our business.

Our clients and business partners are also subject to various and changing social distancing and office closure orders and recommendations and travel restrictions and prohibitions, which have changed the way we interact with our clients and business partners.

COVID-19 had a moderately positive impact on our 2020 financial results due to the shift from brick-and-mortar to virtual.

In accordance with the various social distancing and other office closure orders and recommendations of applicable government agencies, all of our employees transitioned to work-from-home operations and we canceled all business travel by our employees except where necessary and properly authorized, which changed how we operated our business.

Our clients and business partners have been, and continue to be subject to various and changing social distancing and office closure orders and recommendations and travel restrictions and prohibitions, which have changed the way we interact with our clients and business partners.

Recently, we have re-opened our U.S.

offices for employees to voluntarily return, subject to capacity restrictions and applicable government regulations.

Appropriate measures are being taken to protect the health of employees who return to the office.

We have also reinstated business travel on a voluntary basis and subject to prior approval.

COVID-19 had a moderately positive impact on our 2020 and 2021 financial results due to the shift from brick-and-mortar to virtual.

The severity and duration of the COVID-19 pandemic, and its impact on the U.S.

and global economy, is uncertain, but we believe that there will be a continuing net benefit to us longer term.

and global economy remains uncertain, but we believe that there may be a continuing net benefit to us longer term.

See Part I, Item 1A.

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We primarily evaluate the success of our business based on revenue growth and the efficiency and effectiveness of our investments.

The growth of our business and our future success depend on many factors, including our ability to continue to expand our base of larger clients, grow revenue from our existing client base, innovate and expand internationally.

While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results, including the impact of the COVID-19 pandemic.

Due to our continuing investments to grow our business, increase our sales and marketing efforts, pursue new opportunities, enhance our solution and build our technology, we expect our cost of revenue and operating expenses to increase in absolute dollars in the long term.

However, we expect cost of revenue and certain operating expenses to fluctuate as a percentage of revenue in the near term taking into consideration the impact of COVID-19 and the macroeconomic environment.

While these areas represent significant opportunities for us, they also pose risks and challenges, including the impact of the COVID-19 pandemic, that we must successfully address in order to sustain the growth of our business and improve our operating results.

Key Operating and Non-GAAP Financial Performance Metrics

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We believe that our Annual Dollar-Based Retention Rate provides insight into our ability to retain and grow revenue from our clients, and is a measure of the long-term value of our client relationships.

Prior Calculation - Net Invoicing.

Our Annual Dollar-Based Retention Rate is calculated by dividing our Retained Net Invoicing by our Retention Base Net Invoicing on a monthly basis, which we then average using the rates for the trailing twelve months for the period being presented.

We define Retention Base Net Invoicing as recurring net invoicing from all clients in the comparable prior year period, and we define Retained Net Invoicing as recurring net invoicing from that same group of clients in the current period.

We define recurring net invoicing as subscription and related usage revenue excluding the impact of service credits, reserves and deferrals.

Historically, the difference between recurring net invoicing and our subscription and related usage revenue has been within 10%.

The following table shows our Annual Dollar-Based Retention Rate based on Net Invoicing for the periods presented:

Twelve Months Ended December 31,

Annual Dollar-Based Retention Rate 110% 105%

Our Dollar-Based Retention Rate improved year over year primarily due to our larger clients increasing their number of agent seats.

New Calculation - Net Revenue .

Starting from the fourth quarter of 2020, we revised our Annual Dollar-Based Retention Rate calculation to be based on Net Revenue, rather than Net Invoicing.

We now have eight quarters of trended Annual Dollar-Based Retention Rates based on ASC 606 Net Revenue and, consistent with our peers, we are using Net Revenue rather than Net Invoicing and will no longer report the Net Invoicing calculation going forward.

Starting with the fourth quarter of 2020, we revised our Annual Dollar-Based Retention Rate calculation to be based on Net Revenue, rather than Net Invoicing.

Our Annual Dollar-Based Retention Rate is calculated by dividing our Retained Net Revenue by our Retention Base Net Revenue on a monthly basis, which we then average using the rates for the trailing twelve months for the period presented.

We define Retention Base Net Revenue as recurring net revenue from all clients in the comparable prior year period, and we define Retained Net Revenue as recurring net revenue from that same group of clients in the current period.

We define recurring net revenue as net subscription and related usage revenue.

The following table shows our Annual Dollar-Based Retention Rate based on Net Revenue for the periods presented:

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Annual Dollar-Based Retention Rate 122% 117%

Our Dollar-Based Retention Rate based on Net Revenue improved year-over-year primarily due to our larger clients increasing their number of agent seats.

Our Dollar-Based Retention Rate improved year-over-year primarily due to our larger clients increasing their number of agent seats.

Adjusted EBITDA

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GAAP measure, net loss.

We calculate adjusted EBITDA as net loss before (1) depreciation and amortization, (2) stock-based compensation, (3) interest income, expense and other, (4) loss on early extinguishment of debt, (5) acquisition-related transaction costs and one-time integration costs, (6) COVID-19 relief bonuses for employees, (7) provision for (benefit from) income taxes, and (8) other items that do not directly affect what we consider to be our core operating performance.

We calculate adjusted EBITDA as net loss before (1) depreciation and amortization, (2) stock-based compensation, (3) interest expense, (4) other expense and interest income, (5) acquisition-related transaction costs and one-time integration costs, (6) COVID-19 relief bonuses for employees, (7) loss on early extinguishment of debt, (8) contingent consideration expense, (9) (benefit from) provision for income taxes, and (10) other items that do not directly affect what we consider to be our core operating performance.

The following table shows a reconciliation of net loss to adjusted EBITDA for the periods presented (in thousands):

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Interest expense 8,027 28,348

Interest (income) and other (3,034) (6,079)

Legal settlement (3)

Legal and indemnification fees related to settlement — 356

Other expense and interest (income) 8 (3,034)

Acquisition related transaction costs and one-time integration costs 13,576 6,335

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Loss on early extinguishment of debt — 6,964

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

Contingent consideration expense 5,640 —

Benefit from income taxes (11,285) (2,453)

Adjusted EBITDA $ 110,503 $ 85,681

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(2) See Note 7 to the consolidated financial statements for stock-based compensation expense included in our results of operations for the periods presented.

(3) See “Legal Matters” in Note 10 to the consolidated financial statements for additional information.

Key Components of Our Results of Operations

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Fixed subscription fees, including plans with bundled usage, are generally billed monthly in advance, while variable usage fees are billed in arrears.

Fixed subscription fees are recognized on a straight-line basis over the

applicable term, which is predominantly the monthly contractual billing period.

Fixed subscription fees are recognized on a straight-line basis over the applicable term, which is predominantly the monthly contractual billing period.

Support activities include technical assistance for our solution and upgrades and enhancements on a when and if available basis, which are not billed separately.

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Cost of revenue can fluctuate based on a number of factors, including the fees we pay to telecommunications providers, which vary depending on our clients’ usage of our VCC cloud platform, the timing of capital expenditures and related depreciation charges and changes in headcount.

We expect to continue investing in our network infrastructure and operations and client support function to maintain high quality and availability of service, resulting in absolute dollar increases in cost of revenue but percentage of revenue declines in the long-term through economies of scale.

In the near-term, however, we expect cost of revenue to increase both in absolute dollars and as a percentage of revenue, primarily due to increased investments in public cloud.

We expect to continue investing in our network infrastructure and operations and client support function to maintain high quality and availability of services, which investments will result in absolute dollar increases in cost of revenue but percentage of revenue declines in the long-term through economies of scale.

In the near-term, however, we expect cost of revenue to increase both in absolute dollars and as a percentage of revenue, primarily due to increased investments in public cloud, cloud operations and professional services to support our growth initiatives.

Operating Expenses

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We expense research and development expenses as they are incurred except for internal use software development costs that qualify for capitalization.

We believe that continued investment in our solution is important for our future growth, and we expect our research and development expenses to increase in absolute dollars and as a percentage of revenue in the near term.

Sales and Marketing .

Sales and marketing expenses consist primarily of salaries and related expenses, including stock-based compensation, for personnel in sales and marketing, sales commissions, as well as advertising, marketing, corporate communications, travel costs and allocated overhead.

We believe it is important to continue investing in sales and marketing to continue to generate revenue growth, and we expect sales and marketing expenses to increase in absolute dollars over the long term and fluctuate as a percentage of revenue as we continue to support our growth initiatives.

Sales and marketing expenses consist primarily of salaries and related expenses, including stock-based compensation, for personnel in sales and marketing, sales commissions, as well as advertising,

marketing, corporate communications, travel costs and allocated overhead.

General and Administrative.

General and administrative expenses consist primarily of salary and related expenses, including stock-based compensation, for management, finance and accounting, legal, information systems and human resources personnel, professional fees, compliance costs, other corporate expenses and allocated overhead.

We expect that general and administrative expenses will fluctuate in absolute dollars and as a percentage of revenue in the near term, due to among other things, the impact of COVID-19 and the resulting macroeconomic conditions, but to increase in absolute dollars and decline as a percentage of revenue over time.

We expect that general and administrative expenses will fluctuate in absolute dollars and as a percentage of revenue in the near term, but to increase in absolute dollars and decline as a percentage of revenue in the longer term.

Results of Operations for the Years Ended December 31, 2021 and 2020

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Total operating expenses 66 % 61 %

Income (loss) from operations (2) % 1 %

Other income (expense), net:

(Loss) income from operations (10) % (2) %

Other (expense) income, net:

Interest expense (1) % (7) %

Loss on early extinguishment of debt — % (2) %

Interest income and other 1 % 2 %

Total other income (expense), net (8) % (2) %

Income (loss) before income taxes (10) % (1) %

Provision for income taxes — % — %

Other (expense) and interest income — % 1 %

Total other (expense) income, net (1) % (8) %

Loss before income taxes (11) % (10) %

Benefit from income taxes (2) % — %

Net loss (9) % (10) %

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% of Revenue 44% 41%

The increase in cost of revenue for 2020 compared to 2019 was primarily due to a $11.6 million increase in personnel costs, including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of employee equity awards due primarily to our increased stock price, a $10.2 million increase in depreciation and data center costs driven by increased capital expenditures to support our growing capacity needs and continuing expansion of our existing data center facilities, a $6.8 million increase in third-party hosted software costs driven by increased client activities, a $6.0 million increase in amortization expense due to the acquisitions of Virtual Observer

in April 2020 and Inference in November 2020 and the acquisition of certain intangible assets from Whendu in November 2019, a $4.5 million increase in USF contributions and other federal telecommunication service fees due primarily to increased client usage and an increase in the USF contribution rate, and a $1.9 million increase in office, facilities and related costs.

The increase in cost of revenue for 2021 compared to 2020 was primarily due to a $29.2 million increase in personnel costs, including stock-based compensation costs, driven mainly by increased headcount, higher salaries and a higher fair value of employee equity awards due primarily to our increased stock price, a $22.4 million increase in depreciation, data center and public cloud costs driven to support our growing capacity needs, an $18.5 million increase in third-party hosted software costs driven by increased client activities, a $5.7 million increase in USF contributions and other federal telecommunication service fees due primarily to increased client usage and an increase in the USF contribution rate, a $5.6 million increase in amortization expense due to the acquisitions of Virtual Observer in April 2020 and Inference in November 2020, and a $3.2 million increase in office, facilities and related costs.

Year Ended December 31,

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The increase in gross profit for 2021 compared to 2020 was primarily due to increases in subscription and related revenues.

Gross margin for 2020 was flat compared to 2019.

The decrease in gross margin for 2021 compared to 2020 was primarily due to the increase in personnel costs, driven by increased headcount, higher salaries and a higher fair value of employee equity awards primarily due to our increased stock price, the increase in depreciation, data center and public cloud costs to support our growing capacity needs, the increase in third-party hosted software costs driven by increased client activities, the increase in USF contributions and other federal telecommunication service fees due primarily to increased client usage and an increase in the USF contribution rate, the increase in amortization expense from the acquisition of certain intangible assets from Virtual Observer and Inference, and the increase in office, facilities and related costs.

Due to increased investments in public cloud, cloud operations and professional services, we expect gross margin to decline slightly in the near term and increase in the long term.

Operating Expenses

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% of Revenue 18% 16%

The increase in research and development expenses for 2020 compared to 2019 was primarily due to a $18.6 million increase in personnel-related costs including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of employee equity awards due primarily to our increased stock price.

The increase in research and development expenses for 2021 compared to 2020 was primarily due to a $33.6 million increase in personnel-related costs including stock-based compensation costs, driven mainly by increased headcount, higher salaries, higher fair value of employee equity awards due primarily to our increased stock price, and by incremental stock-based compensation costs due to the modification of certain stock-based awards of a former executive, and a $1.9 million increase in office, facilities and related costs.

Sales and Marketing

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% of Revenue 32% 30%

The increase in sales and marketing expenses for 2020 compared to 2019 was primarily due to a $25.5 million increase in personnel-related costs, including stock-based compensation costs driven mainly by increased headcount and higher fair value of equity awards due primarily to our increased stock price, a $6.7 million increase in sales commission expenses driven by the growth in sales and bookings of our solution, and a $1.8 million increase in facilities and related costs.

The increase in sales and marketing expenses for 2021 compared to 2020 was primarily due to a $38.9 million increase in personnel-related costs, including stock-based compensation costs driven mainly by increased headcount, higher salaries and higher fair value of equity awards due primarily to our increased stock price, a $9.0 million increase in sales commission expenses driven by the growth in sales and bookings of our solution, and a $3.9 million increase in office, facilities and related costs.

The remaining net increase in sales and marketing expenses was primarily due to the execution of our growth strategy to acquire new clients, increase the number of agent seats within our existing client base, and increased advertising and other marketing expenses to increase our brand awareness.

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% of Revenue 16% 15%

The increase in general and administrative expenses for 2020 compared to 2019 was primarily due to a $11.6 million increase in personnel-related costs including stock-based compensation costs, driven mainly by increased headcount and a higher fair value of equity awards due primarily to our increased stock price, and a $5.0 million increase in legal and other professional service costs mainly related to our acquisitions.

Other Income (Expense), Net

The increase in general and administrative expenses for 2021 compared to 2020 was primarily due to a $14.6 million increase in personnel costs including stock-based compensation costs, driven mainly by increased headcount, higher salaries and a higher fair value of equity awards due primarily to our increased stock price, a $6.9 million increase in legal and other professional service costs mainly related to the proposed Merger that was terminated on September 30, 2021, and a $5.6 million increase in contingent consideration expense for the Inference acquisition.

Other (Expense) Income, Net

Year Ended December 31,

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Loss on early extinguishment of debt — (6,964) 6,964 (100) %

Interest income and other 3,034 6,079 (3,045) 50 %

Total other income (expense), net $ (32,278) $ (7,715) $ (24,563) (318) %

Other (expense) and interest income (8) 3,034 (3,042) 100 %

Total other (expense) income, net $ (8,035) $ (32,278) $ 24,243 75 %

% of Revenue (1) % (8) %

The increase in interest expense for 2020 compared to 2019 was primarily due to increased interest expense under our 2025 convertible senior notes issued in May and June 2020, offset in part by the decrease in interest expense as a result of the 2023 Note Repurchase Transactions and other 2023 convertible senior note settlements, which decreased the aggregate outstanding principal amount of our 2023 convertible senior notes.

The $7.0 million of loss was from the early extinguishment of our 2023 convertible senior notes during 2020.

The decrease in interest income and other for 2020 compared to 2019 was primarily from lower interest income on our marketable investments.

The decrease in interest expense for 2021 compared to 2020 was primarily due to our adoption of ASU 2020-06, which resulted in the elimination of the debt discounts that were amortized to interest expense over the contractual term of the convertible senior notes prior to January 1, 2021, and due to the 2023 Note Repurchase Transactions and other 2023 convertible senior note settlements in 2020, which resulted in the decrease in contractual interest expense due to the reduction in the aggregate outstanding principal amount of our 2023 convertible senior notes.

The decrease in interest expense was offset in part by the increase in contractual interest expense due to the issuance of the 2025 convertible senior notes in May and June 2020.

See Note 6 to the consolidated financial statements for further details.

The 2023 Note Repurchase Transactions and other 2023 convertible senior note settlements in 2020 resulted in $7.0 million loss on early extinguishment of debt.

The settlements that occurred in 2021 were subject to ASU 2020-06, with such settlements accounted for as contractual conversions and did not result in any gain or loss upon their settlement.

The decrease in other (expense) and interest income for 2021 compared to 2020 was primarily due to a decrease in interest income on our marketable investments resulting from lower investible balances and lower interest rates.

Liquidity and Capital Resources

To date, we have financed our operations, primarily through sales of our solution, lease facilities and net proceeds from our equity and debt financings, including the issuance of our 2025 convertible senior notes in May and June 2020 and of our 2023 convertible senior notes in May 2018.

To date, we have financed our operations, primarily through sales of our solution, net proceeds from our equity and debt financings, including the issuance of our 2025 convertible senior notes in May and June 2020 and of our 2023 convertible senior notes in May 2018, and lease facilities.

As of December 31, 2021, we had $459.7 million in working capital, which included $90.9 million in cash and cash equivalents, $379.0 million in short-term marketable investments and $147.4 million in long-term marketable investments.

In May and June 2020, we issued $747.5 million aggregate principal amount of our 2025 convertible senior notes in a private offering.

The 2025 convertible senior notes mature on June 1, 2025 and are our senior unsecured obligations.

The 2025 convertible senior notes bear interest at a fixed rate of 0.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020.

The total net proceeds from the offering, after deducting initial purchasers’ discounts and commissions and estimated debt issuance costs, were approximately $728.8 million.

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

The 2023 convertible senior notes mature on May 1, 2023 and are our senior unsecured obligations.

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

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

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

For additional information regarding the convertible senior notes and related transactions, see Note 6 to the consolidated financial statements included in this report.

We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

We plan to continue to finance our operations in the future primarily through sales of our solution, net proceeds from equity and debt financings, and lease facilities.

Our future capital requirements will depend on many factors including our growth rate, continuing market acceptance of our solution, client retention, our ability to gain new clients, the timing and extent of spending to support research and development efforts, the outcome of any pending or future litigation or other claims by third parties or governmental entities, the expansion of sales and marketing activities and personnel, the introduction of new and enhanced offerings, and the impact of the COVID-19 pandemic on these or other factors.

We may also acquire or invest in complementary businesses, technologies and intellectual property rights, which may increase our use of cash and future capital requirements, either to pay acquisition costs or to support our combined operations.

We may also acquire or invest in complementary businesses, technologies and intellectual property rights, which may increase our use of cash and future capital requirements, both to pay acquisition costs and to support our combined operations.

We may raise additional capital through equity or engage in debt financings at any time to fund these or other requirements.

However, we may not be able to raise additional capital through equity or debt financings when needed on terms acceptable to us or at all, depending on our financial performance, market conditions and other factors, including the length and severity of the impact of the COVID-19 pandemic on general economic conditions and potential future impacts on the financial markets.

However, we may not be able to raise additional capital through equity or debt financings when needed on terms acceptable to us or at all, depending on our financial performance, market conditions, the trading price of our common stock, and other factors, including the length and severity of the impact of the COVID-19 pandemic on general economic conditions and potential future impacts on the financial markets.

If we are unable to raise additional capital as needed, our business, operating results and financial condition could be harmed.

In addition, if our

operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business also could be harmed.

In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business also could be harmed.

If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders would be diluted.

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Net cash used in investing activities (150,478) (382,330)

Net cash provided by financing activities 457,424 8,474

Net increase (decrease) in cash and cash equivalents $ 142,396 $ (3,936)

Year-to-year comparisons between 2019 and 2018 have been omitted from this Form 10-K but may be found in “Management's Discussion and Analysis of Financial Condition” in Part II, Item 7 of our Form 10-K for the fiscal year ended December 31, 2019, which specific discussion is incorporated herein by reference.

Net cash (used in) provided by financing activities (7,501) 457,424

Net (decrease) increase in cash and cash equivalents $ (129,494) $ 142,396

Cash Flows from Operating Activities

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Net cash provided by operating activities was $28.5 million during the year ended December 31, 2021.

Net cash provided by operating activities resulted from our net loss of $42.1 million adjusted for non-cash items of $128.8 million, primarily consisting of $64.7 million of stock-based compensation, $25.7 million of amortization of discount and issuance costs on our convertible senior notes, $25.1 million of depreciation and amortization and $7.0 million of loss from the early extinguishment of our 2023 convertible senior notes, offset by use of cash for operating assets and liabilities of $19.4 million primarily due to the timing of cash payments to vendors and cash receipts from customers.

Net cash provided by operating activities resulted from our net loss of $53.0 million adjusted for non-cash items of

$192.6 million, primarily consisting of $108.8 million of stock-based compensation, $38.7 million of depreciation and amortization, $26.1 million of amortization of commission costs, $5.6 million of contingent consideration expense and $4.0 million of amortization of issuance costs on our convertible senior notes, offset by use of cash for operating assets and liabilities of $111.1 million primarily due to the timing of cash payments to vendors and cash receipts from customers.

Cash Flows from Investing Activities

Net cash used in investing activities of $382.3 million in 2020 was comprised of $620.9 million related to purchases of marketable investments, $165.3 million, net of cash acquired, in connection with the acquisitions of Inference and Virtual Observer, and $30.4 million in capital expenditures, offset in part by $434.5 million related to cash proceeds from maturities of marketable investments.

Net cash used in investing activities of $150.5 million in 2021 was comprised of $680.5 million related to purchases of marketable investments and $42.2 million in capital expenditures, offset in part by $572.2 million related to cash proceeds from sales and maturities of marketable investments.

Cash Flows from Financing Activities

Net cash provided by financing activities of $457.4 million in 2020 related to net cash proceeds of $728.8 million from the issuance of the 2025 convertible senior notes, net of initial purchasers' discounts and commissions and estimated debt issuance costs, cash proceeds of $11.7 million from exercise of stock options, and $11.5 million from the sale of common stock under our employee stock purchase plan, partially offset by $181.5 million of cash paid in connection with the 2023 Note Repurchase Transactions, $18.9 million of cash paid in connection with other 2023 convertible senior note settlements, $90.5 million of cash paid in connection with the 2025 Capped Call Transactions and $3.7 million of payments related to finance leases.

Net cash used in financing activities of $7.5 million in 2021 related to $24.7 million of cash paid in connection with other 2023 convertible senior note settlements, $5.0 million in holdback payments related to acquisitions and $0.6 million of payments related to finance leases, partially offset by $15.4 million from the sale of common stock under our employee stock purchase plan and cash proceeds of $7.4 million from exercise of stock options.

Contractual and Other Obligations

Our material cash requirements include the following contractual and other obligations.

Convertible Senior Notes

In May and June 2020, we issued $747.5 million aggregate principal amount of our 2025 convertible senior notes in a private offering.

The 2025 convertible senior notes mature on June 1, 2025 and are our senior unsecured obligations.

The 2025 convertible senior notes bear interest at a fixed rate of 0.50% per annum, payable semiannually in arrears on June 1 and December 1 of each year, beginning December 1, 2020.

In addition, under the terms of the 2025 convertible senior notes, we were obligated to pay additional interest on the 2025 convertible senior notes at a rate equal to 0.500% per annum for the period from June 13, 2021 through July 8, 2021, after which such additional interest is no longer payable.

The total net proceeds from the offering, after deducting initial purchasers’ discounts and commissions and estimated debt issuance costs, were approximately $728.8 million.

As of December 31, 2021, the aggregate principal amount outstanding of our 2025 convertible senior notes was $747.5 million.

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

The 2023 convertible senior notes mature on May 1, 2023 and are our senior unsecured obligations.

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

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

As of December 31, 2021, after giving effect to the 2023 Note Repurchase Transactions and other settlements upon conversion requests, approximately $34.2 million aggregate principal amount of 2023 convertible senior notes remained outstanding.

For additional information regarding the convertible senior notes, see Note 6 to the consolidated financial statements included in this report.

We have leases for offices, data centers and computer and networking equipment that expire at various dates through 2031.

Our leases have remaining terms of one to ten years.

Some of the leases include an option to extend the leases for up to three to five years, and some of the leases include the option to terminate the leases upon 30-days notice.

We had outstanding operating lease obligations of $64.0 million as of December 31, 2021, with $11.4 million payable within 12 months, $18.4 million payable within one to three years, $11.3 million payable within three to five years, and $22.9 million after five years.

See Note 13 to the consolidated financial statements included in this report for further details.

Cloud Services

As of December 31, 2021, we had outstanding cloud service agreement commitments totaling $61.1 million, of which $21.8 million is expected to be paid in 2022 and the remaining $39.3 million in 2023.

Hosting and Telecommunication Usage Services

We have agreements with third parties to provide co-location hosting and telecommunication usage services.

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

and telecommunication availability.

As of December 31, 2021, we had outstanding hosting and telecommunication usage services obligations of $18.6 million, with $8.5 million payable within 12 months, $9.8 million payable within one to three years, and $0.3 million payable within three to five years.

Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify clients, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties.

In addition, we have entered into indemnification agreements with our directors, officers and certain employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.

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

Contingencies — Legal and Regulatory

We are subject to certain legal and regulatory proceedings, and from time to time may be involved in a variety of claims, lawsuits, investigations, and proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters, and other litigation matters relating to various claims that arise in the normal course of business.

We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated.

We assess our potential liability by analyzing specific litigation and regulatory matters using reasonably available information.

We develop our views on estimated losses in consultation with inside and outside counsel, which involves a subjective analysis of potential results and outcomes, assuming various combinations of appropriate litigation and settlement strategies.

Legal fees are expensed in the period in which they are incurred.

See Note 10 to the consolidated financial statements for more details.

Critical Accounting Policies and Estimates

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Our actual results may differ from these estimates under different assumptions or conditions.

We currently do not have any critical accounting estimates that involve a significant level of estimation uncertainty that could have a material impact on our consolidated financial statements.

Our significant accounting policies are described in Note 1 to the consolidated financial statements.

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Substantially all of our clients purchase both subscriptions and related telephony usage.

A small percentage of our clients subscribe to our platform but purchase telephony usage directly from a wholesale telecommunications service provider.

A small percentage of our clients subscribe to our platform but purchase telephony usage directly

from a wholesale telecommunications service provider.

We do not sell telephony usage on a stand-alone basis to any client.

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In the early stages of our larger contracts, in order to allocate the overall transaction fee on a relative stand-alone selling price basis to our multiple performance obligations, we estimate variable consideration to be included in the transaction fee to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

When services are included in the contract with the customer and are not sold at their stand-alone selling price, this requires us to estimate the number of seats the customer will use, especially during the initial ramp period of the contract, during which we bill under an ‘actual usage’ model for subscription-related services.

When services are included in the contract with the customer and are not sold at their stand-alone selling price, we are required to estimate the number of seats the customer will use, especially during the initial ramp period of the contract, during which we bill under an ‘actual usage’ model for subscription-related services.

The estimated variable consideration has had an immaterial impact on the allocation of transaction fees to multiple performance obligations in the past.

We recognize revenue on fixed fee professional services performance obligations based on the proportion of labor hours expended compared to the total hours expected to complete the related performance obligation.

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We allocate the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value at the acquisition dates, with the excess recorded to goodwill.

Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows, expected asset lives, royalty rates, and discount rates.

Critical estimates in valuing certain intangible assets and contingent consideration include, but are not limited to, future expected cash flows, expected asset lives, royalty rates, and discount rates.

The amounts and useful lives assigned to acquisition-related intangible assets impact the amount and timing of future amortization expense.

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Refer to Note 1 in Item 8 of this Form 10-K for information related to recent accounting pronouncements.

Off Balance Sheet Arrangements

As of December 31, 2020, we did not have any off balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.

Contractual Obligations

Our principal contractual obligations consist of future payment obligations under our convertible senior notes, finance leases to finance data centers and other computer and networking equipment, operating leases for office facilities, and agreements with third parties to provide co-location hosting, telecommunication usage and equipment maintenance services.

The following table summarizes our significant contractual obligations as of December 31, 2020 (in thousands).

Payment Due by Period

Less Than More than

Total 1 Year 1-3 Years 3-5 Years 5 Years

Convertible senior notes (1)

$ 806,367 $ — $ 58,867 $ 747,500 $ —

Finance lease obligations (2)

628 628 — — —

Operating lease obligations (3)

9,800 4,138 4,986 676 —

Operating lease not yet commenced (3)

46,387 1,094 8,955 11,965 24,373

Cloud services (4)

11,400 7,000 4,400 — —

Hosting services (5)

1,975 792 1,183 — —

Telecommunication usage (6)

5,372 3,304 2,017 51 —

Equipment maintenance (7)

Total $ 881,954 $ 16,981 $ 80,408 $ 760,192 $ 24,373

(1) Represents the outstanding principal balance under our 2025 convertible seniors and our 2023 convertible senior notes.

See Note 6 to the consolidated financial statements for more information.

(2) Represents financing of computer and networking equipment and software purchases for our co-location data centers.

(3) Represents our obligations to make payments under the lease agreements for our office facilities and office equipment leases.

The operating lease not yet commenced relates to our Bishop Ranch Building Lease, or the Bishop Ranch Lease, that we entered into on July 29, 2020, which commenced on February 1, 2021.

(4) Represents a three-year cloud services agreement that grants us a license to access and use certain cloud services.

(5) Represents guaranteed minimum payments for co-location facilities and services.

(6) Represents guaranteed minimum payments for telecommunication services.

(7) Represents our payment obligations under maintenance services contracts for certain data center equipment.

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding.

Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Indemnification Agreements

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

Contingencies — Legal and Regulatory

We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated.

We assess our potential liability by analyzing specific litigation and regulatory matters using reasonably available information.

are expensed in the period in which they are incurred.

See Note 10 to the consolidated financial statements for more details.

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