What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-28 compared with 2021-03-01 · 296 added, 306 removed, 1051 unchanged (36% of the section changed)

Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets

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Change in Accounting Principle

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

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for convertible senior notes as of January 1, 2021 due to the adoption of Accounting Standards Update (ASU) No.

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

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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Critical Audit Matters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On a sample basis, we tested the Company’s monthly client billing activity by comparing the client’s billed agent seats or minutes to the quantities and service type provided as evidenced in the relevant IT systems.

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

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

Valuation of acquired technology intangible assets acquired through business combinations

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

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

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

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

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

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

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

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

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

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

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

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

San Francisco, California

Santa Clara, California

February 28, 2022

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Prepaid expenses and other current assets 30,342 16,149

Deferred contract acquisition costs 20,695 13,014

Deferred contract acquisition costs, net 33,295 20,695

Total current assets 617,226 689,118

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Other assets 11,871 3,236

Deferred contract acquisition costs — less current portion 51,934 30,655

Deferred contract acquisition costs, net — less current portion 84,663 51,934

Total assets $ 1,192,942 $ 1,063,742

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Operating lease liabilities — less current portion 47,088 5,379

Finance lease liabilities — less current portion — 809

Other long-term liabilities 7,671 31,465

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Additional paid-in capital 439,787 476,941

Treasury stock, at cost;

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

Accumulated other comprehensive income 335 576

Accumulated other comprehensive (loss) income ( 287 ) 335

Accumulated deficit ( 228,436 ) ( 198,179 )

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Total operating expenses 394,742 266,929 190,228

Income (loss) from operations ( 12,305 ) 3,267 7,009

Other income (expense), net:

(Loss) income from operations ( 56,250 ) ( 12,305 ) 3,267

Other (expense) income, net:

Interest expense ( 8,027 ) ( 28,348 ) ( 13,794 )

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

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

Total other income (expense), net ( 32,278 ) ( 7,715 ) ( 6,930 )

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

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

Other (expense) and interest income ( 8 ) 3,034 6,079

Total other (expense) income, net ( 8,035 ) ( 32,278 ) ( 7,715 )

Loss before income taxes ( 64,285 ) ( 44,583 ) ( 4,448 )

(Benefit from) provision for income taxes ( 11,285 ) ( 2,453 ) 104

Net loss $ ( 53,000 ) $ ( 42,130 ) $ ( 4,552 )

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Net Loss $ ( 53,000 ) $ ( 42,130 ) $ ( 4,552 )

Other comprehensive income (loss) ( 241 ) 669 ( 93 )

Other comprehensive (loss) income ( 622 ) ( 241 ) 669

Comprehensive loss $ ( 53,622 ) $ ( 42,371 ) $ ( 3,883 )

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(In thousands)

Common Stock Additional Paid-In Capital Treasury Stock Accumulated

Common Stock Additional Paid-In Capital Accumulated

Other Comprehensive Income (Loss) Accumulated

Deficit Total Stockholders’ Equity

Shares Amount Shares Amount

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

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

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

Issuance of common stock upon exercise of stock options and warrants 1,285 1 7,778 — — — — 7,779

Issuance of common stock upon vesting of restricted stock units 1,047 1 ( 1 ) — — — — —

Issuance of common stock under ESPP 246 — 5,730 — — — — 5,730

Stock-based compensation — — 28,484 — — — — 28,484

Shares held for tax withholdings — — ( 260 ) — — — — ( 260 )

Other comprehensive loss — — — — — ( 93 ) — ( 93 )

Net loss — — — — — — ( 221 ) ( 221 )

Shares Amount

Balance as of December 31, 2018 59,210 $ 59 $ 294,279 $ ( 93 ) $ ( 151,497 ) $ 142,748

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

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

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

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Balance as of December 31, 2020 66,496 67 476,941 335 ( 198,179 ) 279,164

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

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

Cumulative effect adjustment due to adoption of ASU 2020-06 (1)

— — ( 168,412 ) — 22,743 ( 145,669 )

Issuance of common stock upon partial conversion of the 2023 convertible senior notes 454 — ( 353 ) — — ( 353 )

Partial unwind of capped calls and retirement of common stock related to the 2023 convertible senior notes ( 69 ) — 9 — — 9

Issuance of common stock upon exercise of stock options 389 — 7,402 — — 7,402

Issuance of common stock upon vesting of restricted stock units 1,097 1 ( 2 ) — — ( 1 )

Issuance of common stock under ESPP 121 — 15,397 — — 15,397

Stock-based compensation — — 108,805 — — 108,805

Other comprehensive loss — — — ( 622 ) — ( 622 )

Net loss — — — — ( 53,000 ) ( 53,000 )

Balance as of December 31, 2021 68,488 $ 68 $ 439,787 $ ( 287 ) $ ( 228,436 ) $ 211,132

(1) Effective January 1, 2021, the Company adopted ASU 2020-06.

Accordingly, the Company recorded a net reduction to opening accumulated deficit of $ 22.7 million and a net reduction to opening additional paid-in capital of $ 168.4 million as of January 1, 2021 due to the cumulative impact of adopting this new standard.

See Note 1 for more information.

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Amortization of operating lease right-of-use assets 8,698 5,687 4,735

Amortization of deferred contract acquisition costs 26,050 16,495 11,320

Amortization of premium on marketable investments 6,385 3,090 ( 1,108 )

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Deferred taxes ( 6,907 ) ( 178 ) —

Change in fair value of contingent consideration 5,640 — —

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

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Purchases of marketable investments ( 680,490 ) ( 620,948 ) ( 359,470 )

Proceeds from sales of marketable investments 44,288 1,899 19,433

Proceeds from maturities of marketable investments 527,940 432,579 309,307

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Proceeds from sale of common stock under ESPP 15,397 11,469 7,823

Payments of employee taxes related to vested common stock — — ( 260 )

Repayments on revolving line of credit — — ( 32,594 )

Repayments of notes payable — — ( 318 )

Payment of holdbacks related to acquisitions ( 5,000 ) — —

Payments of finance leases ( 612 ) ( 3,715 ) ( 7,054 )

Net cash provided by financing activities 457,424 8,474 191,092

Net increase (decrease) in cash and cash equivalents 142,396 ( 3,936 ) 12,965

Net cash (used in) provided by financing activities ( 7,501 ) 457,424 8,474

Net (decrease) increase in cash and cash equivalents ( 129,494 ) 142,396 ( 3,936 )

Cash and cash equivalents:

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Non-cash investing and financing activities:

Equipment obtained under finance lease $ — $ — $ 5,142

Equipment purchased and unpaid at period-end 13,871 8,114 2,890

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

Termination of Proposed Merger with Zoom

On July 16, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Zoom Video Communications, Inc., a Delaware corporation (“Zoom”), and Summer Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Zoom (“Merger Sub”).

The Merger Agreement provided for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger and continuing as a wholly owned subsidiary of Zoom.

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

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

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

The Company incurred approximately $ 7.6 million in transaction costs related to the Merger recorded in general and administrative expense in its consolidated statements of operations and comprehensive loss.

Basis of Presentation

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All intercompany transactions and balances have been eliminated in consolidation.

Certain prior period amounts within operating and investing activities in the consolidated statements of cash flows have been reclassified to conform to the current period presentation.

The consolidated balance sheet and the consolidated statement of stockholders' equity included in this Annual Report as of December 31, 2021 differ from the Form 10-K for the year ended December 31, 2020 as it reflects an immaterial error correction due to the reclassification of $ 2.3 million from treasury stock to additional paid-in-capital.

This reclassification was from the shares received for the partial unwind of capped calls related to the 2023 convertible senior notes.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

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

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

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

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Expenses are converted using average rates in effect on a monthly basis.

Exchange gains and losses resulting from foreign currency transactions were not significant in any period and are reported in “Other income (expense), net” in the consolidated statements of operations and comprehensive loss.

Exchange gains and losses resulting from foreign currency transactions were not significant in any period and are reported in “Other (expense) income, net” in the consolidated statements of operations and comprehensive loss.

Cash and Cash Equivalents

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Marketable Investments

The Company’s marketable investments consist of U.S agency securities and government sponsored securities, U.S.

The Company’s marketable investments consist of U.S.

agency securities and government sponsored securities, U.S.

treasury securities, certificates of deposit, municipal bonds, corporate bonds and commercial paper.

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Allowance for Doubtful Accounts

The Company's adoption of ASU No.

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

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

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

The Company uses an expected credit loss model, which requires it to consider historical loss rates and expectations of forward-looking losses to estimate its allowance for doubtful accounts on its trade accounts receivables, unbilled accounts receivables and contract assets.

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

Year Ended December 31,

2020 2019 2018

Balance, beginning of period $ 127 $ 11

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

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

Goodwill and Intangible Assets

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

Agent seats are defined as the maximum number of named agents allowed to concurrently access the VCC cloud platform.

Agent seats are defined as the maximum number of named

agents allowed to concurrently access the VCC cloud platform.

Clients typically have more named agents than agent seats.

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

Revenue generated

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

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

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

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The Company estimates the variable consideration in order to allocate the overall transaction fee on a relative stand-alone selling price basis to its multiple performance obligations.

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

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

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

operations, as well as with providing professional services.

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

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

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

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

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

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

Compensation expense is recognized net of forfeitures using the straight-line method over the service period, which is generally the vesting period.

Compensation expense is recognized net of actual forfeitures using the straight-line method over the service period, which is generally the vesting period.

The Company accounts for income taxes using the asset and liability method.

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

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

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

valuation allowance.

As of December 31, 2021 and 2020, the Company recognized a net deferred tax asset balance of $ 6.9 million and deferred tax liabilities of $ 4.4 million, respectively, related to its operations in the UK and Australia.

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

Comprehensive loss

Comprehensive loss consists of net income (loss), unrealized gains or losses on available-for-sale marketable investments and the effects of foreign currency translation adjustments.

The Company presents comprehensive loss as part of the consolidated statements of operations.

The changes in the accumulated balances of the components of other comprehensive income (loss) were not material for the periods presented.

Net Income (Loss) Per Share

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

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

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

Comprehensive loss consists of net loss, unrealized gains or losses on available-for-sale marketable investments, and the effects of foreign currency translation adjustments.

The Company presents comprehensive loss

as part of the consolidated statements of operations.

The changes in the accumulated balances of the components of other comprehensive loss were not material for the periods presented.

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period, and excludes any dilutive effects of employee stock-based awards and potential shares issuable upon conversion of the convertible senior notes.

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

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

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Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) and issued subsequent amendments to the initial guidance in 2017, 2018 and 2019 (collectively, “ASC 842”).

Under the new guidance, a lessee is required to recognize assets and liabilities for both finance, previously known as capital, and operating leases with lease terms of more than 12 months.

ASC 842 also requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.

Lessor accounting remained largely unchanged from previous GAAP.

In transition, the Company was required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach that included a number of optional practical expedients that the Company elected to apply.

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

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

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

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

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

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

In August 2020, the FASB issued ASU No.

2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements.

The Company early adopted ASU 2018-15 prospectively on January 1, 2019 to align the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalization costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license.

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

In June 2016, the FASB issued ASU No.

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

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

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

It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities.

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

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

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

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

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

Recent Accounting Pronouncements Not Yet Effective

In August 2020, the FASB issued ASU No.

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

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

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

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

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

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

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

The Company elected to early adopt ASU 2020-06 as of January 1, 2021 using a modified retrospective transition method.

Applying the transition guidance, the Company was required to apply the guidance to all impacted financial instruments that were outstanding as of January 1, 2021 with the cumulative effect recognized as an adjustment to the opening balance of accumulated deficit.

As a result of early adopting ASU 2020-06, the Company made certain adjustments to its accounting for the outstanding 0.125 % convertible senior notes due 2023 (the "2023 convertible senior notes") and the outstanding 0.500 % convertible senior notes due 2025 (the "2025 convertible senior notes", and, together with the 2023 convertible senior notes, the "convertible senior notes").

The adoption of ASU 2020-06 resulted in the re-combination of the liability and equity components of the convertible senior notes into a single liability instrument, which required the Company to record a $ 168.4 million decrease in additional paid in capital from the derecognition of the separated equity components of these convertible senior notes, a $ 145.7 million increase in debt from the derecognition of the discount associated with the separated equity components of the convertible senior notes, and a $ 22.7 million cumulative effect decrease to the opening balance of its accumulated deficit as of January 1, 2021 upon transition.

Interest expense recognized in future periods will be reduced as a result of accounting for the convertible senior notes as a single liability instrument.

Since the Company had a net loss for the year ended December 31, 2021, the convertible senior notes were determined to be anti-dilutive and therefore had no impact to basic or diluted net loss per share for fiscal 2021 as a result of adopting ASU 2020-06.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”) , which amends its guidance to simplify the accounting for income taxes by, among other provisions, removing exceptions to certain general principles in Topic 740, Income Taxes.

The standard will be effective for the Company beginning in the first quarter of 2021, with early adoption permitted.

The Company is currently evaluating the impact that the adoption of ASU 2019-12 will have on its consolidated financial statements.

There are several other new accounting pronouncements issued by the FASB, which the Company will adopt.

However, the Company does not believe any of those accounting pronouncements will have a material impact on its consolidated financial position, operating results or statements of cash flows.

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which amends its guidance to simplify the accounting for income taxes by, among other things, removing exceptions to certain general principles in Topic 740, Income Taxes.

standard was effective for the Company beginning in the first quarter of 2021.

The Company adopted ASU 2019-12 and concluded that the impact on its consolidated financial statements was immaterial.

Recent Accounting Pronouncements Not Yet Effective

The Company has reviewed, or is in the process of evaluating, all issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such accounting pronouncements will cause a material impact on its consolidated financial position, operating results or statements of cash flows.

Contract Balances

The following table provides information about accounts receivable, net, deferred contract acquisition costs, contract assets and contract liabilities from contracts with customers (in thousands):

The following table provides information about accounts receivable, net, deferred contract acquisition costs, net, contract assets and contract liabilities from contracts with customers (in thousands):

December 31, 2021 December 31, 2020

Accounts receivable, net $ 83,731 $ 48,731

Deferred contract acquisition costs:

Deferred contract acquisition costs, net:

Current $ 33,295 $ 20,695

Non-current 84,663 51,934

Total deferred contract acquisition costs $ 72,629 $ 43,669

Total deferred contract acquisition costs, net $ 117,958 $ 72,629

Contract assets and contract liabilities:

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Contract liabilities (deferred revenue) 43,720 31,983

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

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

Noncurrent contract liabilities (deferred revenue) (included in other long term liabilities) 2,097 3,373

Net contract liabilities $ ( 43,224 ) $ ( 34,059 )

The Company receives payments from customers based upon billing cycles.

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Accounts receivable are recorded when the right to consideration becomes unconditional.

Deferred contract acquisition costs are recorded when incurred and are amortized over a customer benefit period of five years .

Deferred contract acquisition costs are recorded when incurred and are amortized over an estimated customer benefit period of five years .

The Company’s contract assets consist of unbilled amounts typically resulting from professional services revenue recognition when it exceeds the total amounts billed to the customer.

3 unchanged sentences

As of December 31, 2021, the aggregate amount of the total transaction price allocated in contracts with original duration of greater than one year to the remaining performance obligations was $ 544.3 million.

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

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

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

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

Certificates of deposit $ 746 $ — $ ( 2 ) $ 744

treasury 63,566 — ( 251 ) 63,315

1 unchanged sentence

Municipal bonds 18,655 — ( 64 ) 18,591

Corporate bonds 1,026 — ( 5 ) 1,021

Total $ 147,953 $ — $ ( 576 ) $ 147,377

8 unchanged sentences

Total $ 383,121 $ 61 $ ( 11 ) $ 383,171

December 31, 2020

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

treasury $ 10,189 $ — $ — $ 10,189

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

Municipal bonds 461 — — 461

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

The following table presents the gross unrealized losses and the fair value for those marketable investments that were in an unrealized loss position for less than 12 months as of December 31, 2021 and 2020 (in thousands):

1 unchanged sentence

Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value

Certificates of deposit ( 2 ) 2,010 — —

treasury ( 275 ) 140,527 ( 4 ) 78,549

3 unchanged sentences

Total $ ( 767 ) $ 461,859 $ ( 13 ) $ 120,540

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

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

Cost Fair Value

Although the Company had certain available-for-sale debt securities in an unrealized loss position as of December 31, 2021, no impairment loss was recorded since it did not intend to sell them, did not anticipate a need to sell them, and the decline in fair value was not due to any credit-related factors.

The amortized cost and fair values of the Company’s marketable investments by contractual maturity as of December 31, 2021 and 2020 were as follows (in thousands):

December 31, 2021 December 31, 2020

Cost Fair Value Cost Fair Value

Due within one year $ 379,169 $ 378,980 $ 383,121 $ 383,171

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

Due after one year 147,953 147,377 42,119 42,127

Total $ 527,122 $ 526,357 $ 425,240 $ 425,298

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The Company performs routine procedures such as comparing prices obtained from independent source to ensure that appropriate fair values are recorded.

The following table sets forth the Company’s assets measured at fair value by level within the fair value hierarchy (in thousands):

The following tables set forth the Company’s assets measured at fair value by level within the fair value hierarchy (in thousands):

December 31, 2021

2 unchanged sentences

Money market funds $ 31,380 $ — $ — $ 31,380

treasury 39,997 — — 39,997

Certificates of deposit — 747 — 747

Total cash equivalents $ 31,380 $ 747 $ — $ 32,127

2 unchanged sentences

Treasury 146,528 — — 146,528

agency securities — 98,711 — 98,711

agency and government sponsored securities — 222,711 — 222,711

Commercial paper — 47,555 — 47,555

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

Commercial paper — 2,697 — 2,697

Treasury 39,997 — — 39,997

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

Marketable investments

Marketable investments (short and long-term)

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

5 unchanged sentences

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

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

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

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

As of December 31, 2021 and 2020, the estimated fair value of the Company’s outstanding 2023 convertible senior notes was $ 114.9 million and $ 253.1 million, respectively.

As of December 31, 2021 and 2020, the estimated fair value of the Company's outstanding 2025 convertible senior notes was $ 917.3 million and $ 1,098.5 million, respectively.

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

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

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

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

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

As part of the agreement to acquire Inference Solutions Inc.

(“Inference”) in November 2020, the Company may be obligated to pay contingent earn out consideration of up to $ 24.0 million based upon achievement of certain milestones and relative thresholds during the earn out measurement period which ended on December 31, 2021.

The fair value of the contingent consideration arrangement, estimated to be $ 23.7 million as of December 31, 2021, is classified within Level 3 and is determined using a probability-based scenario analysis approach.

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

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

During the year ended December 31, 2021, the Company recognized $ 5.6 million of contingent consideration expense due to an increase in fair value of the contingent consideration as a result of the estimated achievement of the forecast the shorter time to payment.

As of December 31, 2021, the Company does not expect any material change to the fair value of the contingent consideration other than due to the time value of money.

A reconciliation of the beginning and ending balance for contingent consideration consisted of the following (in thousands):

Year Ended December 31, 2021

Balance, December 31.

2020 $ 18,100

Change in fair value of contingent consideration 5,640

Balance, December 31, 2021 $ 23,740

There were no assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2021 and 2020.

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

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

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

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

Financial Statement Components

Cash and cash equivalents consisted of the following (in thousands):

Cash and cash equivalents:

Cash $ 58,751 $ 90,487

Certificates of deposit 747 —

Money market funds 31,380 89,888

Treasury — 39,997

Commercial paper — 2,697

Total cash and cash equivalents $ 90,878 $ 220,372

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Total $ 852 $ 3,113

Other assets consisted of the following (in thousands):

Other assets $ 4,964 $ 3,236

Deferred tax assets 6,907 —

Total $ 11,871 $ 3,236

Accrued and other current liabilities consisted of the following (in thousands):

1 unchanged sentence

Accrued compensation and benefits 34,729 29,233

Contingent consideration 23,740 —

Accrued and other current liabilities $ 78,577 $ 44,450

6 unchanged sentences

Goodwill and Intangible Assets

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

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

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

1 unchanged sentence

Beginning of the period, January 1, 2020 $ 11,798

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

Addition (Inference) 130,976

1 unchanged sentence

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

End of the period, December 31, 2021 $ 165,420

During the fourth quarter of 2021, the Company completed its annual goodwill impairment test.

5 unchanged sentences

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

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

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

The following table summarizes the activity in the Company's intangible asset balances during the years ended December 31, 2021 and 2020 (in thousands):

1 unchanged sentence

Beginning of the period, January 1, 2020 $ 15,533

Addition (Whendu) 15,784

Amortization ( 882 )

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

Addition (Inference) 30,100

3 unchanged sentences

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

Amortization ( 11,787 )

End of the period, December 31, 2021 $ 39,897

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

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Amortization expense related to intangible assets was $ 11.8 million, $ 6.8 million and $ 0.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The increase in amortization expense during the year ended

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

The increase in amortization expense from 2019 to 2020 and 2020 to 2021 was due to the acquisition of intangible assets from Whendu in November 2019, Virtual Observer in April 2020, and Inference in November 2020.

As of December 31, 2021, the expected future amortization expense for intangible assets was as follows (in thousands):

2 unchanged sentences

2022 $ 11,705

Thereafter 4,200

Total $ 39,897

4 unchanged sentences

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

In addition, under the terms of the 2025 convertible senior notes, the Company was 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 issuance of the 2025 convertible senior notes, after deducting initial purchasers' discounts and commissions and estimated debt issuance costs, were approximately $ 728.8 million.

1 unchanged sentence

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

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

The 2025 convertible senior notes

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

(1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;

4 unchanged sentences

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

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

If the Company undergoes a fundamental change (as defined in the indenture governing the 2025 convertible senior notes), subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their 2025 convertible senior notes, in principal amounts of $ 1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100 % of the principal amount of the 2025 convertible senior notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.

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

There have been no changes to the initial conversion price of the 2025 convertible senior notes since issuance.

The closing market price of the Company's common stock of $ 137.32 per share as of December 31, 2021, the last trading day during the three months ended December 31, 2021, was below $ 174.64 per share, which represents 130 % of the initial conversion price of $ 134.34 per share.

1 unchanged sentence

As such, during the three months ended December 31, 2021, the conditions allowing holders of the 2025 convertible senior notes to convert were not met.

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

The 2025 convertible senior notes are therefore not convertible for the three months ending March 31, 2022.

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

5 unchanged sentences

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

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

Prior to the adoption of ASU 2020-06 on January 1, 2021 and in accounting for the issuance of the 2025 convertible senior notes, the 2025 convertible senior notes were separated into liability and equity components.

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

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

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

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

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

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

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

The equity component was recorded in

additional paid-in-capital and was not re-measured as long as it continued to meet the conditions for equity classification.

The excess of the principal amount of the liability component over its carrying amount (the “Debt Discount”) was amortized to interest expense over the contractual term of the 2025 convertible senior notes at an effective interest rate of 5.76 %.

Prior to the adoption of ASU 2020-06 on January 1, 2021 and in accounting for the debt issuance costs of $ 18.7 million related to the 2025 convertible senior notes, the Company allocated the total amount incurred to the liability and equity components of the 2025 convertible senior notes based on their relative values.

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

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

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

December 31, 2020

On January 1, 2021, the Company elected to early adopt ASU 2020-06 based on a modified retrospective transition method.

Under such transition, prior-period information has not been retrospectively adjusted.

In accounting for the 2025 convertible senior notes after adoption of ASU 2020-06, the 2025 convertible senior notes are accounted for as a single liability, and the carrying amount of the 2025 convertible senior notes is $ 734.7 million as of December 31, 2021, with principal of $ 747.5 million, net of issuance cost of $ 12.8 million.

The 2025 senior convertible notes were classified as long term liabilities as of December 31, 2021.

The issuance cost related to the 2025 convertible senior notes is being amortized to interest expense over the contractual term of the 2025 convertible senior notes at an effective interest rate of 1.0 %.

The net carrying amount of the 2025 convertible senior notes as of December 31, 2021 (post-ASU 2020-06 adoption) and as of December 31, 2020 (pre-ASU 2020-06 adoption) was as follows (in thousands):

December 31, 2021 December 31, 2020

Principal $ 747,500 $ 747,500

2 unchanged sentences

Net carrying amount $ 734,665 $ 592,516

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

December 31, 2020

The net carrying amount of the equity component of the 2025 convertible senior notes as of December 31, 2021 (post-ASU 2020-06 adoption) and as of December 31, 2020 (pre-ASU 2020-06 adoption) was as follows (in thousands):

December 31, 2021 December 31, 2020

Equity component $ — $ 158,321

2 unchanged sentences

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

December 31, 2020

December 31, 2021 December 31, 2020

Contractual interest expense $ 4,007 $ 2,230

5 unchanged sentences

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

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

The 2025 Capped Call Transactions cover, subject to anti-dilution adjustments,

approximately 5.6 million shares of the Company’s common stock.

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

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

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

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

December 31, 2020

Conversion option $ 158,321

Payments for capped call transactions ( 90,448 )

Issuance costs ( 3,958 )

Total $ 63,915

The cost to the Company of the 2025 Capped Call Transactions was $ 90.5 million during the year ended December 31, 2020, which was recorded as a reduction to additional paid-in capital.

Maturity of the Company’s 2025 convertible senior notes as of December 31, 2021 was as follows (in thousands):

3 unchanged sentences

2023 Convertible Senior Notes and Related Capped Call Transactions

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

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

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

3 unchanged sentences

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

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

Pursuant to ASC Subtopic 470-20 under existing accounting rules prior to ASU 2020-06 adoption, total consideration for the 2023 Note Repurchase Transactions was separated into liability and equity components by estimating the fair value of a similar liability without a conversion option and assigning the residual value to the equity component.

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

7 unchanged sentences

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

(1) during any calendar quarter commencing after the calendar quarter ended on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;

(1) during any calendar quarter commencing after the calendar quarter ended on September 30, 2018 (and only during such calendar quarter), if the last reported

sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;

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

3 unchanged sentences

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

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

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

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

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

There have been no changes to the initial conversion price of the 2023 convertible senior notes since issuance.

During each of the quarters from the third quarter of 2019 through the fourth quarter of 2021, one of the triggers for convertibility of the 2023 convertible senior notes was triggered as the last reported sale price of the Company’s common stock was greater than $ 53.07 per share, which represents 130 % of the initial conversion price of $ 40.82 per share, for at least 20 trading days in the period of 30 consecutive trading days ended on, and including, the last trading day of the quarter for each quarter of 2020 and 2021.

As a result, the 2023 convertible senior notes were convertible, in multiples of $ 1,000 principal amount, at the option of the 2023 convertible senior note holders between October 1, 2019 to December 31, 2021, and are also currently convertible between January 1, 2022 and March 31, 2022.

Whether the 2023 convertible senior notes will be convertible after March 31, 2022 will depend on the continued satisfaction of this condition or other conversion conditions in the future.

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

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

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

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

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

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

During 2020, the Company paid $ 18.9 million in cash and issued 307,037 shares of its common stock to settle aggregate principal amount of $ 18.9 million of its 2023 convertible senior notes.

During 2021, the Company paid $ 24.7 million in cash and issued 453,943 shares of its common stock to settle aggregate principal amount of $ 24.6 million of its 2023 convertible senior notes.

As of December 31, 2021, approximately $ 34.2 million aggregate principal amount of the 2023 convertible senior notes remained outstanding.

The conversions that occurred prior to January 1, 2021 resulted in a $ 1.2 million loss on early debt extinguishment.

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

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

During 2021, the Company received an additional 68,905 shares from the partial unwind of capped calls resulting from the settlement of its 2023 convertible senior notes.

The receipt of the 15,714 and 68,905 shares reduced the number of shares of common stock outstanding.

In addition, on or prior to December 31, 2021, the Company received elections to convert aggregate principal amount of $ 34.0 million of its 2023 convertible senior notes that remain unsettled as of the end of the fourth quarter of 2021.

The Company expects to settle these conversions in cash or a combination of cash and shares during the first quarter of 2022.

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

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

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

The 2023 convertible senior notes became redeemable at the Company's option on May 5, 2021.

The Company may redeem for cash all or any portion of the 2023 convertible senior notes, at its option, if the last reported sale price of its common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading

day of such period) ending not more than two trading days immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100 % of the principal amount of the 2023 convertible senior notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

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

3 unchanged sentences

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

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

Prior to the adoption of ASU 2020-06 on January 1, 2021 and in accounting for the issuance of the 2023 convertible senior notes, the 2023 convertible senior notes were separated into liability and equity components.

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

The carrying amount of the equity component representing the conversion option was $ 63.8 million and was determined by deducting the fair value of the liability component from the par value of the 2023 convertible senior notes.

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

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

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

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

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

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

The excess of the principal amount of the liability component over its carrying amount (the "Debt Discount") was amortized to interest expense over the contractual term of the 2023 convertible senior notes at an effective interest rate of 6.39 %.

Prior to the adoption of ASU 2020-06 on January 1, 2021 and in accounting for the debt issuance costs of $ 8.0 million related to the 2023 convertible senior notes, the Company allocated the total amount incurred to the liability and equity components of the 2023 convertible senior notes based on their relative values.

Issuance costs attributable to the liability component were $ 6.0 million and were amortized to interest expense using the effective interest method over the contractual term of the 2023 convertible senior notes.

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

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

After the adoption of ASU 2020-06, the 2023 convertible senior notes are accounted for as a single liability, and the carrying amount of the 2023 convertible senior notes was $ 33.9 million as of December 31, 2021, with principal of $ 34.2 million , net of issuance cost of $ 0.3 million.

The 2023 senior convertible notes were classified as long term liabilities during 2021.

The issuance cost related to the 2023 convertible senior notes is being amortized to interest expense over the contractual term of the 2023 convertible senior notes at an effective interest rate of 0.76 %.

The net carrying amount of the 2023 convertible senior notes as of December 31, 2021 (post-ASU 2020-06 adoption) and as of December 31, 2020 (pre-ASU 2020-06 adoption) was as follows (in thousands):

December 31, 2021 December 31, 2020

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Net carrying amount $ 33,934 $ 50,800

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

The net carrying amount of the equity component of the 2023 convertible senior notes as of December 31, 2021 (post-ASU 2020-06 adoption) and as of December 31, 2020 (pre-ASU 2020-06 adoption) was as follows (in thousands):

December 31, 2021 December 31, 2020

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

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

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

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

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

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

December 31, 2018

Conversion option $ 63,756

Payments for capped call transactions ( 31,412 )

Issuance costs ( 1,998 )

Total $ 30,346

Maturity of the Company’s 2023 convertible senior notes as of December 31, 2021 was as follows (in thousands):

Period Amount to Mature

2023 $ 58,867

2023 (Maturity date of May 1, 2023) $ 34,225

Total $ 34,225

3 unchanged sentences

As of December 31, 2021 and 2020, the Company had 68,488,337 and 66,496,060 shares of common stock issued and outstanding, respectively.

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

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

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

During 2021 and 2020, the Company issued 453,943 and 3,030,618 shares, respectively, of common stock in connection with 2023 convertible senior note settlements.

During 2021 and 2020, the Company also received 68,905 and 15,714 shares, respectively, from the partial unwind of capped calls resulting from the settlement of its 2023 convertible senior notes.

The receipt of the 68,905 and 15,714 shares reduced the number of shares of common stock outstanding.

See Note 6 for further details.

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

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

Pursuant to the automatic annual increase, 3,424,416 additional shares were reserved under the 2014 Plan on January 1, 2022.

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Options granted 156 180.75

Options assumed (2)

Options exercised ( 389 ) 19.03

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stock options and the fair market value of the Company’s common stock of $ 137.32 per share as of December 31, 2021 for all in-the-money stock options outstanding.

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

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

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RSUs vested and released ( 1,097 ) 69.06

RSUs forfeited ( 147 ) 53.44

RSUs forfeited or cancelled ( 844 ) 170.59

Outstanding as of December 31, 2021 2,560 125.65

During the third quarter of 2021, the Company granted 0.7 million RSU awards conditional upon the close of the Merger.

The Company cancelled these grants on September 30, 2021, the termination date of the Merger.

In October 2021, the Company subsequently granted 0.7 million RSU awards to its employees.

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

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Employee Stock Purchase Plan

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

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

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

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

The 2014 ESPP became effective on April 3, 2014.

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

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

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

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

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

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

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

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

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

Pursuant to the automatic annual increase, 684,883 additional shares were reserved under the 2014 ESPP on January 1, 2022.

During 2021 and 2020, 120,992 and 168,737 shares were purchased by employees under the 2014 ESPP at a weighted average price of $ 127.36 and $ 67.97 per share, respectively.

Stock-Based Compensation

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Total stock-based compensation $ 108,805 $ 64,747 $ 42,065

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

As of December 31, 2021, unrecognized stock-based compensation expense by award type and their expected weighted-average recognition periods are summarized in the following table (in thousands, except years).

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

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

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

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

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

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

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

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

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

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

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Accordingly, the expected dividend yield is zero.

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

The weighted average assumptions used to value stock options and purchase rights under the 2014 ESPP granted during the years ended December 31, 2021, 2020 and 2019 were as follows:

Stock Options

Year Ended December 31,

2021 2020 (1)

Expected term (years) 6.0 5.7 6.1

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Net Loss Per Share

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

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

As the Company had net losses for the years ended December 31, 2021, 2020 and 2019, all potentially issuable shares of common stock were determined to be anti-dilutive.

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Convertible senior notes (1)

6,663 910 1,619

Total 11,205 5,432 6,521

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

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

(1) The convertible senior notes were calculated under the if-converted method for 2021 due to the adoption of ASU 2020-06 and under the treasury stock method for 2020 and 2019.

Prior to the adoption of ASU 2020-06, the Company used the treasury stock method for calculating any potential dilutive effect of the conversion spread of its convertible senior notes.

The conversion spread had a dilutive impact for the 2023 convertible senior notes during the years ended December 31, 2020 and 2019 since the average market price of the Company’s common stock during the period exceeded the initial conversion price of $ 40.82 per share.

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

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

After the adoption of ASU 2020-06, the Company used the if-converted method for calculating any potential dilutive effect of the convertible senior notes for the year ended December 31, 2021.

Under this method, the Company calculates diluted earnings per share under both the cash and share settlement assumptions to determine which is more dilutive.

If share settlement is more dilutive, the Company calculates diluted earnings per share assuming that all of the convertible senior notes were converted solely into shares of common stock at the beginning of the reporting period.

The potential impact upon the conversion of the convertible senior notes was excluded from the calculation of diluted net loss per share for the year ended December 31, 2021 because the effect would have been anti-dilutive.

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

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International ( 4,429 ) ( 280 ) 892

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

Loss before income taxes $ ( 64,285 ) $ ( 44,583 ) $ ( 4,448 )

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

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Foreign ( 11,345 ) ( 178 ) —

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

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

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

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

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

Total (benefit from) income taxes - Deferred ( 11,345 ) ( 3,087 ) —

Total (benefit from) provision for income taxes $ ( 11,285 ) $ ( 2,453 ) $ 104

The Company recorded a deferred income tax benefit during 2021 principally due to a restructuring of its Australian subsidiary organization which allowed for the step-up in tax basis of certain intangible assets, and net operating loss carryover increases for current year losses, against which no valuation allowance was recorded.

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

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

Year Ended December 31,

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Section 162(m) 7,543 6,472 5,623

Non-deductible expense 1,944 276 11,529

Non-deductible expenses 1,361 1,944 276

Research and development credit ( 1,181 ) ( 837 ) ( 860 )

Stock-based compensation ( 25,241 ) ( 23,800 ) ( 16,619 )

Tax benefit from acquisition ( 2,495 ) — —

Tax benefit from acquisition/reorganizations ( 5,877 ) ( 2,495 ) —

Foreign taxes ( 4,760 ) 118 ( 10 )

Other 20 533 ( 119 )

Change in valuation allowance 30,088 25,319 12,812

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

Total (benefit from) provision for income taxes $ ( 11,285 ) $ ( 2,453 ) $ 104

The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2021 and 2020 related to the following (in thousands):

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Allowance for doubtful accounts 712 766

Amortized intangibles 872 —

Deferred revenue 1,351 782

1 unchanged sentence

Long-term lease liabilities 13,618 1,418

Intangibles — 88

Gross deferred tax assets 166,668 107,986

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

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

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

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

Based on the weight of the available evidence, which includes the Company’s historical operating losses, lack of taxable income and the accumulated deficit for the year ended December 31, 2021, the Company has provided a valuation allowance against its U.S.

net deferred tax assets.

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

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

valuation allowance.

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

However, the Company has recorded net foreign deferred tax assets associated with its U.K.

and Australia operations totaling $ 6.9 million.

The net change in the valuation allowance for the years ended December 31, 2021 and 2020 was an increase of $ 70.7 million and a decrease of $ 8.8 million, respectively.

The increase in the valuation allowance in the current year was primarily attributed to the Company's adoption of ASU 2020-06 resulting in the reversal of previously recognized deferred taxes related to the convertible debt option.

In addition, the net operating loss for the current year contributed to the increase in the valuation allowance.

As of December 31, 2021, the Company had net operating loss carryforwards for federal, state and foreign income tax purposes of $ 495.3 million, $ 306.8 million and $ 18.8 million, respectively, available to reduce future income subject to income taxes.

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The federal research credit carryforwards will begin to expire in 2022 and the California state research credits can be carried forward indefinitely.

The Internal Revenue Code (“IRC”) of 1986, as amended, imposes restrictions on the utilization of net operating losses in the event of an “ownership change” of a corporation.

Accordingly, a company’s ability to use net operating losses may be limited as prescribed under the IRC Section 382.

Events that may cause limitations in the amount of the net operating losses that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50 % over a three-year period.

Utilization of federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC Section 382 and similar state provisions.

The Internal Revenue Code (“IRC”) of 1986, as amended, imposes restrictions on the utilization of net operating losses and credits in the event of an “ownership change” of a corporation.

Accordingly, a company’s ability to use net operating losses and credits may be subject to substantial limitation as prescribed under the IRC Sections 382 and 383 and similar state provisions.

Events that may cause limitations in the amount of the

net operating losses and credits that the Company may use in any one year include, but are not limited to, a cumulative ownership change of more than 50 % over a three-year period.

In the event the Company has changes in ownership, net operating losses and research and development credit carryforwards, which are fully reserved by the deferred tax asset valuation allowance, could be limited and may expire unutilized.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminates the option to deduct research and development expenditures currently and requires taxpayers to capitalize and amortize them over five years pursuant to IRC Section 174.

Although Congress is considering legislation that would defer the amortization requirement to later years, it is not certain that the provision will be repealed or otherwise modified.

If the requirement is not modified, it will reduce the Company’s net operating losses beginning in 2022.

Given the Company’s carryover attributes, this is not expected to have a material impact on the consolidated financial statements.

Subsequent to year end, the Company completed a reorganization of its Australian entities, the ultimate result of which was to repatriate the ownership of certain intellectual property to the United States.

As a result, the Company will increase its deferred tax assets and its valuation allowance during the first quarter of 2022 by approximately $ 2.1 million with no net impact on its earnings.

Unrecognized Tax Benefits

5 unchanged sentences

Gross decreases — prior year tax positions — — ( 7,215 )

Settlements with tax authorities ( 284 ) — —

Unrecognized benefit — end of period $ 7,643 $ 6,076 $ 4,471

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

As of December 31, 2021 and 2020, the Company had $ 0.0 million and $ 0.3 million, respectively, of total unrecognized tax benefits, if recognized, would have an impact on its effective tax rate.

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

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federal and state tax authorities.

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

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

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

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

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

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

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

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

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

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

Hosting, Telecommunication Usage and Maintenance Services

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

The Company had outstanding operating lease obligations of $ 64.0 million as of December 31, 2021.

See Note 13 for further details.

As of December 31, 2021, the Company also 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

The Company has 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.

The Company is also committed to make future payments under maintenance service contracts for certain data center equipment.

As of December 31, 2021, future minimum payments under these arrangements were as follows in thousands):

Year Ending December 31, Hosting Services Telecommunication Usage Services Equipment Maintenance Services

Year Ending December 31, Hosting Services Telecommunication Usage Services

2022 $ 1,342 $ 7,151

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The Company is still in dispute with the FCC regarding whether the Company is liable for USF contributions related to the period from 2003 through 2007.

As of December 31, 2020, the Company had accrued $ 0.9 million in respect of the remaining disputed assessments, including interest and penalties, for the period of 2003 through 2007.

As of December 31, 2021, the Company had accrued $ 0.1 million in interest related to the disputed assessments for the period of 2003 through 2007.

State and Local Taxes and Surcharges

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

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

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

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

As of December 31, 2021 and 2020, the Company had total accrued liabilities of $ 1.0 million and $ 1.1 million, respectively, for such contingent sales taxes and surcharges that were not being collected from its clients but may be imposed by various taxing authorities, of which $ 0.2 million and $ 0.2 million, respectively, were included in current “Sales tax liabilities” on the consolidated balance sheets, and the remaining were included in non-current “Sales tax liabilities” on the consolidated balance sheets.

The Company’s estimate of the probable loss incurred under this contingency is based on its analysis of the source location of its usage-based fees and the regulations and rules in each tax jurisdiction.

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In management’s opinion, resolution of these matters is not expected to have a material impact on the Company’s consolidated results of operations, cash flows, or its financial position.

However, due to the uncertain nature of legal matters, an unfavorable resolution of a matter could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

However, due to the uncertain nature of legal

matters, an unfavorable resolution of a matter could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

The Company expenses legal fees as incurred.

1 unchanged sentence

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

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

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

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

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

Geographical Information

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The benefits are paid in a lump sum amount upon retirement from the Company.

Total defined benefit liability was $ 0.6 million and $ 0.4 million as of December 31, 2020 and 2019, respectively.

Total defined benefit liability was $ 0.6 million as of each of December 31, 2021 and 2020.

Total retirement expense for this plan was $ 0.2 million, $ 0.1 million, and $ 0.1 million for the years ended December 31, 2021, 2020, and 2019, respectively.

1 unchanged sentence

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

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

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

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

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

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

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

The Company has elected the practical expedient to not separate lease and non-lease components for real estate operating leases.

The Company's Bishop Ranch Lease commenced on February 1, 2021, has a lease term of 10 years, and has a total commitment over its term of $ 46.4 million, which was the primary component of the increase in operating lease costs, operating lease right-of-use assets and operating lease liabilities for the year ended December 31, 2021.

The components of lease expenses were as follows (in thousands):

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2022 $ 11,383 $ —

Total future minimum lease payment 9,800 628

2023 10,633 —

Thereafter 22,858

Total future minimum lease payments 63,953 —

imputed interest ( 7,039 ) —

Total $ 56,914 $ —

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

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

As of December 31, 2021, the Company entered into an additional data center operating lease that had not yet commenced, representing a total commitment of $ 0.2 million with a one year term.

This data center lease is expected to commence on March 1, 2022.

The Company also entered into an additional facility operating lease that commenced in January 2022 with a lease term of three years , representing a total commitment over its term of $ 0.3 million.

Inference Solutions

1 unchanged sentence

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

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

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

The fair value of the contingent earn out consideration is estimated to be $ 23.7 million as of December 31, 2021.

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

1 unchanged sentence

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

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

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

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

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered final.

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

Property and equipment acquired 124

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

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

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

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

In connection with this acquisition, the Company incurred approximately $ 0.3 million and $ 2.9 million of acquisition costs in 2021 and 2020, respectively, which have been expensed as incurred and included in general and administrative expense in the consolidated statements of operations and comprehensive loss.

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

Virtual Observer

3 unchanged sentences

McGrail, dated January 15, 2020.

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

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

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

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

The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered final.

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

Tangible assets acquired 200

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

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

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

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

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

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

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

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

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

Selected Quarterly Financial Data (Unaudited)

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Total operating expenses 105,814 106,182 93,581 89,165 73,987 67,367 65,568 60,007

Income (loss) from operations 2,665 ( 1,785 ) ( 8,229 ) ( 4,956 ) 3,032 472 85 ( 322 )

Other income (expense), net:

(Loss) income from operations ( 11,979 ) ( 18,991 ) ( 14,194 ) ( 11,086 ) 2,665 ( 1,785 ) ( 8,229 ) ( 4,956 )

Other (expense) income, net:

Interest expense ( 2,024 ) ( 1,947 ) ( 2,118 ) ( 1,938 ) ( 9,481 ) ( 9,649 ) ( 5,734 ) ( 3,484 )

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

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

Total other income (expense), net ( 9,867 ) ( 9,300 ) ( 10,699 ) ( 2,412 ) ( 2,122 ) ( 2,026 ) ( 1,916 ) ( 1,651 )

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

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

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

Net income (loss) per share:

Other (expense) and interest income ( 43 ) 213 ( 353 ) 175 501 631 829 1,072

Total other (expense) income, net ( 2,067 ) ( 1,734 ) ( 2,471 ) ( 1,763 ) ( 9,867 ) ( 9,300 ) ( 10,699 ) ( 2,412 )

Loss before income taxes ( 14,046 ) ( 20,725 ) ( 16,665 ) ( 12,849 ) ( 7,202 ) ( 11,085 ) ( 18,928 ) ( 7,368 )

(Benefit from) provision for income taxes ( 10,445 ) ( 188 ) ( 135 ) ( 517 ) 8 346 ( 2,876 ) 69

Net loss $ ( 3,601 ) $ ( 20,537 ) $ ( 16,530 ) $ ( 12,332 ) $ ( 7,210 ) $ ( 11,431 ) $ ( 16,052 ) $ ( 7,437 )

Net loss per share:

Basic $ ( 0.05 ) $ ( 0.30 ) $ ( 0.25 ) $ ( 0.18 ) $ ( 0.11 ) $ ( 0.17 ) $ ( 0.25 ) $ ( 0.12 )

Diluted $ ( 0.05 ) $ ( 0.30 ) $ ( 0.25 ) $ ( 0.18 ) $ ( 0.11 ) $ ( 0.17 ) $ ( 0.25 ) $ ( 0.12 )

Shares used in computing net income (loss) per share:

Shares used in computing net loss per share:

Basic 68,207 67,800 67,292 66,721 66,133 65,460 63,282 61,705

32 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data