Freshworks Inc. 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Page No. Report of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 65 Consolidated Balance Sheets 66 Consolidated Statements of Operations 68 Consolidated Statements of Comprehensive Loss 69 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) 70 Consolidated Statements of Cash Flows 72 Notes to Consolidated Financial Statements 74 64 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Freshworks Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Freshworks Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ DELOITTE & TOUCHE LLP San Jose, California February 23, 2022 We have served as the Company's auditor since 2018. 65 Table of Contents Consolidated Financial Statements FRESHWORKS INC. CONSOLIDATED BALANCE SHEETS (in thousands) December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 747,861 $ 95,382 Marketable securities 575,679 142,733 Accounts receivable, net 51,756 34,270 Deferred contract acquisition costs 14,640 9,167 Prepaid expenses and other current assets 31,440 30,852 Total current assets 1,421,376 312,404 Property and equipment, net 21,478 20,784 Deferred contract acquisition costs, noncurrent 15,007 9,106 Intangible assets, net 1,894 6,223 Goodwill 6,181 6,181 Deferred tax assets 6,284 4,393 Other assets 10,592 8,333 Total assets $ 1,482,812 $ 367,424 Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $ 6,321 $ 3,710 Accrued liabilities 55,829 35,608 Deferred revenue 160,173 104,184 Income tax payable 1,023 8,740 Total current liabilities 223,346 152,242 Other liabilities 21,427 16,827 Total liabilities 244,773 169,069 Commitments and contingencies (Note 9) Redeemable convertible preferred stock: Redeemable convertible preferred stock, $ 0.0001 par value; zero and 154,055,430 shares authorized as of December 31, 2021 and 2020, respectively; zero and 153,937,730 shares issued and outstanding as of December 31, 2021 and 2020; aggregate liquidation preference of zero and $ 326,559 as of December 31, 2021 and 2020, respectively — 2,895,096 Stockholders' equity (deficit): Preferred stock, $ 0.00001 par value per share; 10,000,000 and zero shares authorized as of December 31, 2021 and 2020, respectively; zero shares issued and outstanding as of December 31, 2021 and 2020 — — Common stock, $ 0.00001 par value; zero and 285,000,000 shares authorized as of December 31, 2021 and 2020, respectively; zero and 77,619,030 shares issued and outstanding as of December 31, 2021 and 2020, respectively — 1 Class A common stock, $ 0.00001 par value per share; 1,000,000,000 and zero shares authorized as of December 31, 2021 and 2020, respectively; 50,554,821 and zero shares issued and outstanding as of December 31, 2021 and 2020, respectively — — Class B common stock, $ 0.00001 par value per share; 350,000,000 and zero shares authorized as of December 31, 2021 and 2020, respectively; 222,739,562 and zero shares issued and outstanding as of December 31, 2021 and 2020, respectively 3 — 66 Table of Contents FRESHWORKS INC. CONSOLIDATED BALANCE SHEETS (in thousands) December 31, 2021 2020 Additional paid-in capital 4,509,724 — Accumulated other comprehensive (loss) income ( 747 ) 411 Accumulated deficit ( 3,270,941 ) ( 2,697,153 ) Total stockholders' equity (deficit) 1,238,039 ( 2,696,741 ) Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) $ 1,482,812 $ 367,424 The accompanying notes are an integral part of these consolidated financial statements. 67 Table of Contents FRESHWORKS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Year Ended December 31, 2021 2020 2019 Revenue $ 371,022 $ 249,659 $ 172,377 Cost of revenue 78,030 52,492 36,462 Gross profit 292,992 197,167 135,915 Operating expense: Research and development 120,407 69,210 38,559 Sales and marketing 260,345 133,277 111,115 General and administrative 117,022 50,792 15,911 Total operating expenses 497,774 253,279 165,585 Loss from operations ( 204,782 ) ( 56,112 ) ( 29,670 ) Interest and other income, net 23,303 2,833 2,180 Loss before income taxes ( 181,479 ) ( 53,279 ) ( 27,490 ) Provision for income taxes 10,516 4,015 3,635 Net loss ( 191,995 ) ( 57,294 ) ( 31,125 ) Accretion of redeemable convertible preferred stock ( 2,646,662 ) ( 1,560,524 ) ( 553,339 ) Deemed dividend distribution — — ( 40,071 ) Net loss attributable to common stockholders $ ( 2,838,657 ) $ ( 1,617,818 ) $ ( 624,535 ) Net loss per share attributable to common stockholders - basic and diluted $ ( 21.73 ) $ ( 21.03 ) $ ( 8.21 ) Weighted-average shares used in computing net loss per share attributable to common stockholders - basic and diluted 130,652 76,945 76,029 The accompanying notes are an integral part of these consolidated financial statements. 68 Table of Contents FRESHWORKS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Year Ended December 31, 2021 2020 2019 Net loss $ ( 191,995 ) $ ( 57,294 ) $ ( 31,125 ) Other comprehensive loss: Adjustment for the adoption of ASU 2016-01 — — ( 981 ) Unrealized (loss) gain on marketable securities ( 1,158 ) 272 ( 21 ) Comprehensive loss $ ( 193,153 ) $ ( 57,022 ) $ ( 32,127 ) The accompanying notes are an integral part of these consolidated financial statements. 69 Table of Contents FRESHWORKS INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (in thousands) Redeemable Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders' (Deficit) Equity Shares Amount Shares Amount Balances as of January 1, 2019 142,662 $ 631,413 74,263 $ 1 $ — $ 1,141 $ ( 540,340 ) $ ( 539,198 ) Adjustment for the adoption of ASU 2016-01 — — — — — ( 981 ) 981 — Issuance of Series H redeemable convertible, preferred stock, net issuance costs of $ 181 11,276 149,820 — — — — — — Sale of redeemable convertible preferred stock (Note 11) 7,517 59,929 — — — — — — Deemed contribution (Note 11) — — — — — — 40,071 40,071 Repurchase of redeemable convertible preferred stock (Note 11) ( 7,517 ) ( 59,929 ) — — — — — — Accretion of redeemable convertible preferred — 553,339 — — ( 962 ) — ( 552,377 ) ( 553,339 ) Deemed dividend distribution (Note 11) — — — — — — ( 40,071 ) ( 40,071 ) Issuance of common stock upon exercise of stock options — — 2,558 — 689 — — 689 Stock-based compensation — — — — 273 — — 273 Unrealized loss on marketable securities — — — — — ( 21 ) — ( 21 ) Net loss — — — — — — ( 31,125 ) ( 31,125 ) Balances as of December 31, 2019 153,938 1,334,572 76,821 1 — 139 ( 1,122,861 ) ( 1,122,721 ) Accretion of redeemable convertible preferred stock — 1,560,524 — — ( 43,526 ) — ( 1,516,998 ) ( 1,560,524 ) Issuance of common stock upon exercise of stock options — — 798 — 246 — — 246 Stock-based compensation — — — — 43,280 — — 43,280 Unrealized gain on marketable securities — — — — — 272 — 272 Net loss — — — — — — ( 57,294 ) ( 57,294 ) Balances as of December 31, 2020 153,938 $ 2,895,096 77,619 $ 1 $ — $ 411 $ ( 2,697,153 ) $ ( 2,696,741 ) 70 Table of Contents Redeemable Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders' (Deficit) Equity Shares Amount Shares Amount Balances as of December 31, 2020 153,938 $ 2,895,096 77,619 $ 1 $ — $ 411 $ ( 2,697,153 ) $ ( 2,696,741 ) Accretion of redeemable convertible preferred stock — 2,646,662 — — ( 2,264,869 ) — ( 381,793 ) ( 2,646,662 ) Conversion of redeemable convertible preferred stock into common stock upon initial public offering ( 153,938 ) ( 5,541,758 ) 153,938 2 5,541,756 — — 5,541,758 Issuance of common stock upon initial public offering, net of underwriting discount and offering expenses — — 31,350 — 1,062,058 — — 1,062,058 Issuance of common stock upon exercise of stock options — — 537 — 94 — — 94 Vesting of restricted stock units — — 9,850 — ( 3,343 ) — — ( 3,343 ) Stock-based compensation — — — — 174,028 — — 174,028 Unrealized loss on marketable securities — — — — — ( 1,158 ) — ( 1,158 ) Net loss — — — — — — ( 191,995 ) ( 191,995 ) Balances as of December 31, 2021 — $ — 273,294 $ 3 $ 4,509,724 $ ( 747 ) $ ( 3,270,941 ) $ 1,238,039 The accompanying notes are an integral part of these consolidated financial statements. 71 Table of Contents FRESHWORKS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 2019 Cash Flows Operating Activities: Net loss $ ( 191,995 ) $ ( 57,294 ) $ ( 31,125 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 13,294 11,169 6,260 Amortization of deferred contract acquisition costs 12,844 7,681 4,038 Stock-based compensation 173,443 43,280 273 Premium (discount) amortization on marketable securities 1,757 1,227 ( 194 ) Gain realized on sale of marketable securities and non-marketable equity investments ( 23,836 ) ( 132 ) ( 316 ) Change in fair value of equity securities ( 132 ) ( 107 ) ( 266 ) Deferred income taxes ( 1,907 ) ( 2,360 ) ( 939 ) Other ( 28 ) 143 386 Changes in operating assets and liabilities: Accounts receivable ( 17,509 ) ( 9,932 ) ( 9,366 ) Deferred contract acquisition costs ( 24,218 ) ( 14,344 ) ( 9,579 ) Prepaid expenses and other assets ( 5,942 ) ( 8,165 ) ( 11,340 ) Accounts payable 1,986 53 2,665 Accrued and other liabilities 17,714 24,867 13,902 Deferred revenue 55,989 36,444 27,437 Net cash provided by (used in) operating activities 11,460 32,530 ( 8,164 ) Cash Flows from Investing Activities: Purchases of property and equipment ( 5,565 ) ( 4,383 ) ( 11,505 ) Proceeds from sale of property and equipment 620 — — Capitalized internal-use software ( 3,552 ) ( 4,631 ) ( 3,323 ) Sale of non-marketable equity investment 23,979 — — Purchases of marketable securities ( 686,078 ) ( 115,689 ) ( 176,575 ) Sales of marketable securities 131,170 18,658 24,707 Maturities and redemptions of marketable securities 119,130 101,445 23,719 Acquired intangible assets — ( 1,750 ) — Business combination, net of cash acquired — ( 5,075 ) ( 5,972 ) Net cash used in investing activities ( 420,296 ) ( 11,425 ) ( 148,949 ) Cash Flows from Financing Activities: Proceeds from initial public offering, net of underwriting discounts 1,069,348 — — Proceeds from issuance of Series H redeemable convertible preferred stock, net of issuance costs — — 149,820 Sale of redeemable convertible preferred stock — — 100,000 Repurchase of redeemable convertible preferred stock — — ( 100,000 ) Proceeds from exercise of stock options 94 246 689 Payment of deferred offering costs ( 6,830 ) — — Payment of withholding taxes on net share settlement of equity awards ( 3,343 ) — — Payment of acquisition-related liabilities ( 900 ) ( 2,155 ) ( 277 ) Net cash provided by (used in) financing activities 1,058,369 ( 1,909 ) 150,232 Net increase (decrease) in cash, cash equivalents and restricted cash 649,533 19,196 ( 6,881 ) Cash, cash equivalents and restricted cash, beginning of period 98,331 79,135 86,016 Cash, cash equivalents and restricted cash, end of period $ 747,864 $ 98,331 $ 79,135 72 Table of Contents Year Ended December 31, 2021 2020 2019 Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets: Cash and cash equivalents $ 747,861 $ 95,382 $ 74,999 Restricted cash included in prepaid expenses and other current assets — 1,930 3,114 Restricted cash included in other assets 3 1,019 1,022 Total cash, cash equivalents and restricted cash $ 747,864 $ 98,331 $ 79,135 Supplemental cash flow information: Cash paid for taxes $ 10,458 $ 5,075 $ 3,461 Non-cash investing and financing activities: Purchased property and equipment included in accrued expenses $ 492 $ 62 $ 1,393 Property and equipment acquired through tenant improvement allowance $ — $ 322 $ 1,524 Deferred purchase consideration for acquisition $ — $ 900 $ 2,883 Accretion of redeemable convertible preferred stock $ 2,646,662 $ 1,560,524 $ 553,339 Conversion of redeemable convertible preferred stock into common stock upon initial public offering $ 5,541,758 $ — $ — The accompanying notes are an integral part of these consolidated financial statements. 73 Table of Contents FRESHWORKS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business Freshworks Inc. (Freshworks, or the Company) is a software development company that provides modern software-as-a-service (SaaS) products that are designed with the user in mind. The Company was incorporated in Delaware in 2010 and is headquartered in San Mateo, California, and has foreign subsidiaries located in India, Australia, the United Kingdom, Ireland, Germany, France, the Netherlands, and Singapore. Initial Public Offering In September 2021, the Company completed its initial public offering (IPO), in which it issued and sold 31,350,000 shares of its newly authorized Class A common stock at $ 36.00 per share, which included 2,850,000 shares issued upon the exercise of the underwriters’ option to purchase additional shares. The Company received net proceeds of approximately $ 1.1 billion from the IPO, after deducting underwriters’ discounts. As of December 31, 2021, deferred offering costs totaling $ 7.3 million were reclassified to stockholders' equity (deficit) as a reduction of the net proceeds from the IPO. Pursuant to the Company's amended and restated certificate of incorporation, all shares of common stock then outstanding were reclassified as Class B common stock prior to the IPO. Upon completion of the IPO, the majority of shares of Class B common stock then outstanding were automatically converted to Class A common stock on a one -to-one basis, unless an option to remain as Class B common stock was elected by the holder. In addition, all shares of redeemable convertible preferred stock then outstanding were converted into 153,937,730 shares of common stock on a one -to-one basis and then reclassified into Class B common stock. See Note 10 for additional details. As detailed in Note 11— Stockholders' Equity and Stock-Based Compensation , under the 2011 Stock Plan, the Company granted employees restricted stock units (RSUs) with both a service and a liquidity performance condition. Upon the Company's IPO in September 2021, the liquidity event condition was met for all RSUs. RSUs that had already met the service condition at that date were entitled to one share of Class B common stock for each vested RSU. On November 4, 2021, as part of an early lockup agreement with the underwriters during the IPO, the Company issued a total of 9.9 million shares of common stock underlying the RSUs to its employees. Stock Split In September 2021, the Company completed a 10 -for-one forward stock split of the Company’s authorized, issued and outstanding stock. All share and per share information included in the accompanying consolidated financial statements and notes thereto has been adjusted on a retrospective basis to reflect this stock split. 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Foreign Currency Remeasurement and Transactions The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Accordingly, each foreign subsidiary remeasures monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenues and expenses are remeasured at the exchange rates in effect on the day the transaction occurred, except for those expenses related to non-monetary assets and liabilities, which are remeasured at historical exchange rates. Remeasurement adjustments are recognized in interest and other income, net in the consolidated statements of operations, and have not been material for the years ended December 31, 2021, 2020, and 2019. 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, disclosure of contingent assets and liabilities at the 74 Table of Contents date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods. Significant items subject to such estimates and assumptions include, but are not limited to, the following: • determination of standalone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations; • allowance for doubtful accounts; • expected benefit period of deferred contract acquisition costs; • capitalization of internal-use software development costs; • fair value of acquired intangible assets and goodwill; • useful lives of long-lived assets; • valuation of deferred tax assets; • valuation of employee defined benefit plan; and • fair value of share-based awards, including performance-based awards. Risk and Uncertainties Due to the COVID-19 pandemic, the Company has temporarily closed its headquarters in San Mateo, California, and other offices around the world, required its employees to work remotely from home, and implemented travel restrictions, all of which have caused significant disruption in how the Company operates its business. At the same time, the operations of its partners and customers have also been disrupted. While the duration and extent of the COVID-19 pandemic depends largely on future developments that cannot be accurately predicted at this time, such as the extent of and effectiveness of containment actions and developed vaccines, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. Additionally, inflationary pressures and a global labor shortage are currently impacting the pace of global recovery. In particular, the conditions caused by this pandemic could adversely affect demand for the Company’s products and services, lead to longer sales cycles, reduce the value or duration of subscriptions, negatively impact collections of accounts receivable, reduce expected spending from new customers, cause some of the existing customers to go out of business, limit the potential to generate additional business with new customers due to travel restrictions imposed, and affect contraction or attrition rates of the Company’s customers, all of which could adversely affect the Company’s business, results of operations, and financial condition. While government authorities are adjusting COVID-19 related restrictions, we continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders, including in response to outbreaks and variants. The Company is not aware of any specific event or circumstances related to COVID-19 or other estimates that would require it to update estimates or judgments or adjust the carrying value of its assets or liabilities. Actual results could differ from those estimates and any such differences may be material to the consolidated financial statements. Segment Information The Company operates in a single operating segment. The Chief Executive Officer (CEO) is the chief operating decision maker of the Company and makes operating decisions, assesses financial performance, and allocates resources based upon discrete financial information at a consolidated level. Revenue Recognition The Company derives revenue from subscription fees and related professional services. The Company sells subscriptions for its cloud-based solutions directly to customers and indirectly through channel partners through arrangements that are non-cancelable and non-refundable. The Company’s subscription arrangements do not provide customers with the right to take possession of the software supporting the solutions and, as a result, are accounted for as service arrangements. The Company records revenue net of sales or value-added taxes. On occasion, the Company sells subscriptions to third-party resellers. The price at which subscriptions are sold to the reseller is typically discounted, as compared to the price at which the Company would sell to an end customer, in order to enable the reseller to realize a margin on the eventual sale to the end customer. As pricing to the reseller is fixed, and the 75 Table of Contents Company lacks visibility into the pricing provided by the reseller to the end customer, reseller revenue is recorded net of any reseller margin. Subscription Revenue Subscription revenue is primarily comprised of fees paid by the Company’s customers for accessing its cloud-based software during the term of the arrangement. Cloud-based services allow customers to use the Company’s multi-tenant software without requiring them to take possession of the software. Given that access to the cloud-based software represents a series of distinct services that comprise a single performance obligation that is satisfied over time, subscription revenue is recognized ratably over the contract term beginning on the commencement date of each contract, which is the date that the cloud-based software is made available to customers. Professional Services Revenue Professional services revenue is comprised of fees charged for services ranging from product configuration, data migration, systems integration, and training. The Company recognizes professional services revenues as services are performed. Customers with Multiple Performance Obligations Some of the Company’s contracts with customers contain both subscriptions and professional services. For these contracts, the Company accounts for individual performance obligations separately. The transaction price is allocated to the separate performance obligations on the basis of relative SSP. The Company determines SSP by taking into consideration historical selling price of these performance obligations in similar transactions, as well as current pricing practices and other observable inputs including, but not limited to, customer size and geography. As the Company’s go-to-market strategies evolve, it may modify its pricing practices in the future, which could result in changes to SSP. Cost of Revenue Cost of revenue consists primarily of personnel-related expenses (primarily including salaries, related benefits, and stock-based compensation) for employees associated with the Company’s cloud-based infrastructure, payment gateway fees, voice, product support, and professional service organizations, as well as costs incurred by the Company for third-party hosting capabilities. Cost of revenue also includes third-party license fees, amortization of acquired intangibles, amortization of capitalized internal-use software, and allocation of general overhead expenses such as facilities and information technology. Research and Development Research and development costs are expensed as incurred and consist primarily of personnel-related expenses (primarily including salaries, related benefits, and stock-based compensation) for the Company’s product development employees. Research and development expenses also include non-personnel-related expenses such as third-party services for product development and consulting expenses, depreciation expense related to equipment used in research and development activities, and allocation of the Company’s general overhead expenses. Advertising Costs Advertising costs are charged to sales and marketing expense in the consolidated statements of operations as incurred. The Company recognized $ 41.2 million, $ 31.1 million, and $ 31.3 million for the years ended December 31, 2021 , 2020, and 2019, respectively. Stock-Based Compensation The Company issues stock options and restricted stock units (RSUs) to employees, consultants, and directors, and stock purchase rights granted under the Employee Stock Purchase Plan (ESPP) to employees based on the estimated fair value on the date of the grant. For stock options and ESPP, the fair value is estimated using the Black-Scholes option-pricing model, and stock-based compensation expense is recognized in the consolidated statements of operations using the straight line attribution method. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected stock price volatility of the Company's common stock, risk-free interest rates, and the expected dividend yield of the Company's common stock. The assumptions used to 76 Table of Contents determine the fair value of the option awards represent the Company's best estimates. These estimates involve inherent uncertainties and the application of the Company's judgement. The fair value of RSUs is based on the closing market price of its Class A common stock on the date of the grant. The Company recognizes stock-based compensation on a straight-line basis over the requisite service period, which is the vesting period of the respective awards. Forfeitures are accounted for when they occur. Prior to the IPO, the fair market value of the Company's common stock on the date of the grant was determined based on independent third-party valuations as there was no public market, and there was no stock-based compensation expense recognized from the RSUs as the liquidity event-related performance condition was not probable. Upon completion of the IPO, the performance condition became probable, and the Company began to recognize stock-based compensation expense. For the performance-based award granted to the CEO with both a service-based vesting condition and a market condition (as discussed further in Note 11), the Company determined the fair value of the award by using the Monte Carlo simulation model. Since both vesting conditions have to be met for each tranche of the award to ultimately vest, the associated stock-based compensation expense is recognized over the longer of the derived service period or the requisite service period, using the accelerated attribution method. Provided that the CEO remains employed by the Company in his current position, stock-based compensation expense is recognized over the requisite service period, regardless of whether the stock price goals are achieved. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2021 and 2020, the Company has recorded a full valuation allowance against its U.S. deferred tax assets. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is more likely than not of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Cash and Cash Equivalents Cash and cash equivalents consist of deposits held at financial institutions, money market funds, as well as highly liquid investments with an original maturity of three months or less when purchased. Cash and cash equivalents are recorded at cost, which approximates fair value. Marketable Securities Marketable securities consist primarily of debt securities such as corporate bonds, commercial paper, U.S. treasury securities, and U.S. government agency securities. These securities are classified as available-for-sale securities at the time of purchase as they represent funds readily available for current operations, and the Company also has the ability and intent to liquidate them at any time to meet its operating cash needs, if necessary. All available-for-sale debt securities are recorded at their estimated fair value, with changes in fair value recognized as unrealized gains or losses in accumulated other comprehensive income. For any security in an unrealized loss position, the Company evaluates it to assess whether the associated unrealized loss is considered other than temporary. Impairments are considered other-than-temporary if they are related to a deterioration in credit risk or if it is likely that the Company will sell the security before the recovery of its cost basis. Realized gains and losses and declines in value determined to be other than temporary are determined based on the specific identification method and are reported in interest and other income, net in the consolidated statements of operations. There was no impairment recorded for the years ended December 31, 2021, 2020, and 2019. Marketable securities also include mutual funds comprised of certain term bonds. These mutual funds meet certain criteria for equity investments in accordance with ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. Under this guidance, the Company measures these mutual funds at their estimated fair value, with changes in fair value recognized in interest and other income, net in the consolidated statements of operations. 77 Table of Contents Non-Marketable Equity Securities The Company owns interests in non-marketable equity investments, which consist of minority equity interests in privately held companies. The Company does not have significant influence over these investments, which do not have readily determinable fair values. Under ASU 2016-01, the Company has elected the measurement alternative to carry them at cost, less any impairment charges. Accounts Receivable and Allowance for Doubtful Accounts Trade accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance is based on the Company’s assessment of the collectability of accounts and is recorded as an offset to revenue and deferred revenue. The Company regularly reviews the adequacy of the allowance by considering the age of each outstanding invoice and the collection history. As of December 31, 2021 and 2020, the Company's allowance for doubtful accounts was $ 6.0 million and $ 6.4 million, respectively. Concentrations of Credit Risk Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, and accounts receivable. The Company’s cash and cash equivalents and marketable securities are generally held with large financial institutions and are in excess of the federally insured limits provided on such deposits. In addition, the Company has cash and cash equivalents held in international bank accounts, which are denominated primarily in Euros, British Pounds, Indian Rupees, and Australian Dollars. There were no customers that individually exceeded 10% of the Company’s revenue for the years ended December 31, 2021, 2020, and 2019 or that represented 10% or more of the Company’s consolidated accounts receivable balance as of December 31, 2021 and 2020. Deferred Contract Acquisition Costs Deferred contract acquisition costs are incremental costs that are associated with acquiring customer contracts and consist primarily of sales commissions and the associated payroll taxes and certain referral fees paid to independent third-parties. The costs incurred upon the execution of initial and expansion contracts are primarily deferred and amortized over an expected benefit period of three years. The expected benefit period is determined by taking into consideration the Company’s contracts with customers, technology life cycle and other factors. The Company considers the expected benefit period to exceed the initial contract term for certain costs because of anticipated renewals and because sales commission rates for renewal contracts are not commensurate with sales commissions for initial contracts. The Company includes amortization of deferred commissions in sales and marketing expense in its consolidated statements of operations. There was no impairment loss in relation to the incremental selling costs capitalized for the years ended December 31, 2021, 2020, and 2019. The Company has elected to apply the practical expedient under Accounting Standards Codification (ASC) No. 340-40—Other Assets and Deferred Costs to account for costs incurred in obtaining a contract with the expected benefit period of one year or less as commission expenses, which are included in sales and marketing expense in its consolidated statements of operations. Property and Equipment, net Property and equipment, net, including capitalized internally-developed software, is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets as follows: Estimated Useful Life Computers 3 years Capitalized internal-use software 3 years Office equipment, furniture and fixtures 5 years Motor vehicles 5 years Leasehold improvements Lesser of lease term or 5 years Expenditures for maintenance and repairs are charged to expense as incurred. 78 Table of Contents Capitalized Internal-Use Software The Company capitalizes costs incurred in its software development projects as part of property and equipment during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Once the development project is available for general release, capitalization ceases, and the Company estimates the useful life of the asset and begins amortization. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally three years . The Company also capitalizes certain costs related to its enterprise cloud computing services and certain projects for internal use incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Business Combinations The Company applies a screen test to determine whether a transaction is more akin to an asset acquisition or a business combination. If this screen test indicates that substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the transaction is accounted for as an asset acquisition. In a business combination, the purchase consideration is allocated to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated respective fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable, and consequently, actual results may differ from estimates. Long-Lived Assets (Including Goodwill and Intangible Assets) Long-lived assets with finite lives include property and equipment, capitalized internal-use software, and acquired intangible assets. The Company evaluates long-lived assets, including acquired intangible assets and capitalized internal-use software, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds these estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group. Goodwill is not amortized but rather is tested for impairment at least annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Goodwill impairment is recognized when the quantitative assessment results in the carrying value of the reporting unit exceeding its fair value, in which case an impairment charge in the amount of such excess is recorded to goodwill, limited to the amount of goodwill. The Company did no t recognize any impairment of goodwill during the years ended December 31, 2021, 2020, and 2019. Deferred Revenue Deferred revenue consists of customer billings in advance of revenue being recognized from the Company’s subscription and professional services arrangements. Customers are invoiced for subscription services arrangements in advance for monthly, quarterly, semi-annual and annual subscription plans. The Company’s payment terms generally provide that customers pay the invoiced portion of the total arrangement fee either in advance or within 30 days from the invoice date. Comprehensive Loss Comprehensive loss is comprised of two components—net loss and other comprehensive (loss) income. Other comprehensive (loss) income includes unrealized gains or losses on available-for-sale debt securities recognized during the period. 79 Table of Contents The following tables shows the change in unrealized gains or losses within accumulated other comprehensive (loss) income: December 31, 2021 2020 2019 Beginning balance $ 411 $ 139 $ 1,141 Add: Unrealized (losses) gains on available-for-sale debt securities ( 1,152 ) 405 — Less: Adjustment for the adoption of ASU 2016-01 — — ( 981 ) Less: Reclassification of unrealized gains to interest and other income, net, in the consolidated statements of operations ( 6 ) ( 133 ) ( 21 ) Net impact to other comprehensive (loss) income in current period ( 1,158 ) 272 ( 1,002 ) Ending balance $ ( 747 ) $ 411 $ 139 Net Loss per Share Attributable to Common Stockholders Basic and diluted net loss per share attributable to common stockholders are presented in conformity with the two-class method required for participating securities. Under the two-class method, net income is attributed to common stockholders and participating securities based on their participation rights. Prior to the IPO, the Company considered all series of its redeemable convertible preferred stock to be participating securities. Net loss attributable to common stockholders was not allocated to the redeemable convertible preferred stock as the holders of the redeemable convertible preferred stock were not contractually obligated to share in the losses of the Company. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the number of weighted-average shares of common stock outstanding during the reporting period. Prior to the IPO, the net loss attributable to common stockholders was adjusted for accretion of the carrying value of redeemable convertible preferred stock and deemed dividend distribution. Since the Company has reported net losses for all periods presented, all potentially dilutive securities are considered antidilutive, and accordingly, diluted net loss per share is the same as basic net loss per share. Defined Benefit Plan Employees in India are entitled to benefits under the Gratuity Act, a defined benefit retirement plan covering eligible employees. The plan requires employers to provide for a lump-sum payment to eligible employees at retirement, death, and incapacitation or on termination of employment, of an amount based on the respective employee’s salary and tenure of employment. Employees in India are also entitled to a defined benefit plan with benefits based on an employee’s accumulated leave balance and salary. Both plans are unfunded arrangements. Current service costs are accrued in the period to which they relate. The benefit obligations are calculated by a qualified actuary using the projected unit credit method and the unfunded position is recognized as a liability in the consolidated balance sheets. In measuring the defined benefit obligations, the Company uses a discount rate at the reporting date based on yields of local government treasury bills denominated in the same currency in which the benefits are expected to be paid, with maturities approximating the terms of the Company’s obligations. Since the plan is unfunded, no annual contributions are required to be made as per applicable regulations. Disclosures required under ASC 715—Compensation—Retirement Benefits, have been omitted because the Company has deemed them immaterial to its consolidated financial statements. The benefit plans had a plan benefit obligation of $ 7.4 million and $ 5.6 million as of December 31, 2021 and 2020, respectively, included in other liabilities in the consolidated balance sheets. Leases The Company accounts for its existing leases of office facilities as operating leases. Certain facility lease agreements contain rent holidays, allowances and rent escalation provisions. For leases that contain rent escalation or rent concession provisions, the Company records the total rent expense during the lease term on a straight-line basis over the term of the lease. The difference between the amount of rent paid and the straight-line rent expense is recorded as deferred rent, with its current and long-term portions classified in accrued liabilities and other liabilities, respectively, in the consolidated balance sheets. Recent Accounting Pronouncements New accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) under its ASC or ASU and adopted by the Company as of the specified effective date. 80 Table of Contents As an emerging growth company, the Jumpstart Our Business Startups Act (the JOBS Act) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use the adoption dates applicable to private companies. As a result, the Company’s financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. Recently Adopted Accounting Pronouncements In August 2018, the FASB issued ASU 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. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted the requirements of ASU 2018-15 as of January 1, 2021 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Accounting Pronouncements Not Yet Adopted In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets as right-of-use (ROU) assets with corresponding lease liabilities and eliminates certain real estate-specific provisions. Under the standard, lease expenses will continue to be recorded over the lease term in the consolidated statements of operations in a manner similar to the current standard. Certain practical expedients are available for lessees to elect upon adopting the new standard. This standard is effective for the Company on January 1, 2022, and early adoption is permitted. The Company plans to adopt Topic 842 on a modified basis using the optional transition method, and accordingly, will not restate comparative periods. Amounts and related disclosures for fiscal 2021 will continue to be presented in accordance with ASC 840, Leases. Amounts and disclosures for fiscal 2022 will be presented under ASC 84 2. The Company expects adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases in the range of approximately $ 23.0 million to $ 25.0 million, and $ 28.0 million to $ 30.0 million, respectively, as of January 1, 2022. Additionally, the adoption of this standard will have no impact to the Company's consolidated income statements and cash flows. In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets by requiring an allowance to be recorded as an offset to the amortized cost of such assets. The Company is required to adopt this standard on or before January 1, 2023. The Company elected to early adopt ASU 2016-13 effective January 1, 2022 using the modified retrospective approach. The standard primarily impacts our financial assets measured at amortized cost and available-for-sale debt securities. The adoption of this standard will not have a material impact on the Company's consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The standard eliminates certain exceptions related to the approach for intraperiod tax allocation and the methodology for calculating income taxes in an interim period. The standard also simplifies aspects of accounting for franchise taxes and enacted changes in tax or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis for goodwill. The guidance will become effective for the Company on January 1, 2022; early adoption is permitted. The adoption of this standard will not have a material impact on the Company's consolidated financial statements. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 will become effective for public entities for fiscal years beginning after December 15, 2022, to be applied prospectively to business combinations occurring on or after the effective date of the ASU, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard. 3. Revenue From Contracts with Customers Revenue The Company derives revenue from subscription fees and related professional services. The Company sells subscriptions for its cloud-based solutions directly to customers and indirectly through channel partners through arrangements that are non-cancelable and non-refundable. The Company’s subscription arrangements do not provide customers with the right to take 81 Table of Contents possession of the software supporting the solutions and, as a result, are accounted for as service arrangements. The Company records revenue net of sales or value-added taxes. Disaggregation of Revenues The following table summarizes revenue by the Company’s service offerings (in thousands): Year Ended December 31, 2021 2020 2019 Subscription services $ 360,506 $ 242,879 $ 168,682 Professional services 10,516 6,780 3,695 Total revenue $ 371,022 $ 249,659 $ 172,377 See Note 14 for revenue by geographic location. Deferred Revenue and Remaining Performance Obligations Deferred revenue consists of customer billings in advance of revenue being recognized from the Company’s subscription and professional services arrangements. The following table summarizes the changes in the balance of deferred revenue during the periods (in thousands): December 31, 2021 2020 2019 Balance at beginning of the year $ 104,184 $ 67,540 $ 39,739 Add: Billings during the year 427,011 286,303 200,178 Less: Revenue recognized during the year ( 371,022 ) ( 249,659 ) ( 172,377 ) Balance at end of the year $ 160,173 $ 104,184 $ 67,540 Revenue recognized during the years ended December 31, 2021, 2020, and 2019 from amounts included in deferred revenue at the beginning of these periods was $ 103.8 million, $ 67.5 million, and $ 39.7 million, respectively. The aggregate balance of remaining performance obligations as of December 31, 2021 was $ 230.8 million. The Company expects to recognize $ 178.4 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Deferred Contract Acquisition Costs The change in the balance of deferred contract acquisition costs during the periods presented is as follows (in thousands): December 31, 2021 2020 2019 Balance at beginning of the year $ 18,273 $ 11,610 $ 6,069 Add: Contract costs capitalized during the year 24,218 14,344 9,579 Less: Amortization of contract costs during the year ( 12,844 ) ( 7,681 ) ( 4,038 ) Balance at end of the year $ 29,647 $ 18,273 $ 11,610 82 Table of Contents 4. Cash Equivalents and Marketable Securities Cash equivalents and available-for-sale debt securities consisted of the following as of December 31, 2021 and 2020 (in thousands): December 31, 2021 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Cash equivalents: Money market funds $ 684,485 $ — $ — $ 684,485 U.S. treasury securities 22,000 — — 22,000 U.S. government agency securities 4,286 — ( 1 ) 4,285 Corporate debt securities 15,998 — — 15,998 Total cash equivalents 726,769 — ( 1 ) 726,768 Debt securities: U.S. treasury securities 442,715 2 ( 432 ) 442,285 U.S. government agency securities 75,725 — ( 159 ) 75,566 Corporate debt securities 54,335 17 ( 175 ) 54,177 Total debt securities 572,775 19 ( 766 ) 572,028 Total cash equivalents and debt securities $ 1,299,544 $ 19 $ ( 767 ) $ 1,298,796 December 31, 2020 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Cash equivalents: Money market funds $ 56,474 $ — $ — $ 56,474 Debt Securities: U.S. treasury securities 50,087 136 — 50,223 Corporate debt securities 85,413 265 ( 5 ) 85,673 Asset-backed securities 3,247 15 — 3,262 Total debt securities 138,747 416 ( 5 ) 139,158 Total cash equivalents and debt securities $ 195,221 $ 416 $ ( 5 ) $ 195,632 As of December 31, 2021 and 2020, there were no securities that have been in a continuous unrealized loss position for 12 months or longer. The amortized cost and fair value of the available-for-sale debt securities based on contractual maturities are as follows (in thousands): December 31, 2021 Amortized Cost Fair Value Due within one year $ 392,629 $ 392,412 Due after one year but within five years 180,146 179,616 Total $ 572,775 $ 572,028 In addition to available-for-sale debt securities, marketable securities also include term bond mutual funds, which are measured at fair value. As of December 31, 2021 and 2020, the fair value of the term bond mutual funds was $ 3.7 million and $ 3.6 million, respectively. The change in fair value of the term bond mutual funds is recorded in interest and other income, net in the consolidated statements of operations. The following table summarizes the realized and unrealized gains recognized in the consolidated 83 Table of Contents statements of operations for the term bond mutual funds during the years ended December 31, 2021, 2020, and 2019 (in thousands): Year Ended December 31, 2021 2020 2019 Net gains recognized on marketable equity investments $ 132 $ 107 $ 582 Less: Net gains recognized on sale of marketable equity investments — — ( 316 ) Unrealized gains at the end of the period $ 132 $ 107 $ 266 Non-Marketable Equity Securities Non-marketable equity securities represent the Company’s interest in privately held entities which have no readily determinable fair values. The Company carries these investments at cost, less impairment, and reports them under other assets in the consolidated balance sheets. As of December 31, 2021 and 2020, the Company had non-marketable equity securities of $ 0.4 million and $ 0.5 million, respectively. In September 2021, the Company sold its interest in a privately held entity for proceeds totaling $ 24.0 million, resulting in a gain of $ 23.8 million, which was recorded in interest and other income, net, in the consolidated statements of operations. 5. Fair Value Measurements The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 —Inputs are observable and reflect quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 —Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly. Level 3 —Inputs that are unobservable. Money market funds and U.S. treasury securities are classified within Level 1 because they are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Other debt securities and investments are classified within Level 2 if the investments are valued using model driven valuations which use observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Available-for-sale debt securities are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models. In connection with the acquisition of Natero, Inc., the Company recognized a liability on the acquisition date for the estimated fair value of the contingent consideration based on the probability of achieving certain milestones pursuant to the acquisition agreement. The fair value measurement of the contingent consideration is based on significant unobservable inputs and management judgment; therefore, it is categorized under Level 3 at the balance sheet date in the table below. The Company does not have any assets or liabilities subject to fair value remeasurement on a nonrecurring basis as of December 31, 2021 and 2020. 84 Table of Contents Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table represents the fair value hierarchy for the Company’s financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020 (in thousands): December 31, 2021 Fair Value Measured Using Level 1 Level 2 Level 3 Total Financial assets: Cash equivalents: Money market funds $ 684,485 $ — $ — $ 684,485 U.S. treasury securities 22,000 — — 22,000 U.S. government agency securities — 4,285 — 4,285 Corporate debt securities — 15,998 — 15,998 Marketable securities: U.S. treasury securities 442,285 — — 442,285 U.S. government agency securities — 75,566 — 75,566 Corporate debt securities — 54,177 — 54,177 Term bond mutual funds — 3,651 — 3,651 Total financial assets $ 1,148,770 $ 153,677 $ — $ 1,302,447 Financial liabilities: Acquisition-related contingent consideration $ — $ — $ 800 $ 800 December 31, 2020 Fair Value Measured Using Level 1 Level 2 Level 3 Total Financial assets: Cash equivalents: Money market funds $ 56,474 $ — $ — $ 56,474 Marketable securities: U.S. treasury securities 50,223 — — 50,223 Corporate debt securities — 85,673 — 85,673 Asset-backed securities — 3,262 — 3,262 Term bond mutual funds — 3,575 — 3,575 Total financial assets $ 106,697 $ 92,510 $ — $ 199,207 Financial liabilities: Acquisition-related contingent consideration $ — $ — $ 775 $ 775 The following table represents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis, using Level 3 significant unobservable inputs (in thousands): December 31, 2021 2020 Beginning balance $ 775 $ 1,950 Additions during the period — — Payments during the period — ( 1,200 ) Change in estimated fair value 25 25 Ending balance $ 800 $ 775 85 Table of Contents 6. Balance Sheet Components Property and Equipment, net The following table summarizes property and equipment, net as of December 31, 2021 and 2020 (in thousands): December 31, 2021 2020 Computers $ 13,041 $ 9,249 Capitalized internal-use software 14,178 10,041 Office equipment 3,375 2,770 Furniture and fixtures 8,395 9,472 Motor vehicles 1,421 2,423 Leasehold improvements 4,274 4,274 Construction in progress — 322 Total property and equipment 44,684 38,551 Less: accumulated depreciation and amortization ( 23,206 ) ( 17,767 ) Property and equipment, net $ 21,478 $ 20,784 Capitalization of costs associated with internal-use software was $ 4.1 million and $ 4.6 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, the net carrying value of capitalized internal-use software was $ 8.3 million and $ 6.7 million, respectively. Depreciation expense and amortization of internal-use software for the years ended December 31, 2021, 2020, and 2019 totaled $ 9.0 million, $ 6.9 million, and $ 4.9 million, respectively. Accrued Liabilities The following table summarizes accrued liabilities as of December 31, 2021 and 2020 (in thousands): December 31, 2021 2020 Accrued compensation $ 17,261 $ 8,983 Acquisition-related liabilities 800 1,942 Accrued third-party cloud infrastructure expenses 2,785 1,572 Accrued reseller commissions 5,870 3,999 Accrued advertising and marketing expenses 6,022 2,412 Advanced payments from customers 3,260 2,815 Accrued taxes 10,777 8,645 Other accrued expenses 9,054 5,240 Total accrued liabilities $ 55,829 $ 35,608 7. Business Combinations and Asset Purchase AnsweriQ Inc. (AIQ) In January 2020, the Company acquired all issued and outstanding shares of AIQ, a provider of machine learning and artificial intelligence self-service tools. The acquisition date cash consideration paid was $ 5.7 million. The Company acquired $ 4.0 million of developed technology with an estimated useful life of two years , and $ 1.7 million of goodwill which is primarily attributed to the assembled workforce. Infiverve Technologies Private Ltd. and Infiverve Technologies Pte. Ltd. (collectively known as Flint) In March 2020, the Company entered into an asset purchase agreement with Flint, an IT orchestration and cloud management platform, to complement Freshservice’s IT service management and IT operations management product capabilities, for a total consideration of $ 2.0 million in cash. The transaction was accounted for as an asset acquisition as the developed technology was the only asset acquired. 86 Table of Contents None of the above transactions had a material impact on the Company’s consolidated financial statements; therefore, historical and proforma disclosures have not been presented. 8. Goodwill and Intangible Assets, Net The carrying value of goodwill was $ 6.2 million as of December 31, 2021 and 2020. Acquired intangibles consist of developed technology and customer relationships and are amortized on a straight-line basis over their estimated useful lives. The following tables summarize acquired intangible assets as of December 31, 2021 and 2020 (amounts in thousands): December 31, 2021 Gross Amount Accumulated Amortization Net Carrying Value Weighted Average Remaining Useful Life (in years) Developed technology $ 10,496 $ ( 9,147 ) $ 1,349 0.9 Customer relationships 1,600 ( 1,055 ) 545 1.4 Total $ 12,096 $ ( 10,202 ) $ 1,894 December 31, 2020 Gross Amount Accumulated Amortization Net Carrying Value Weighted Average Remaining Useful Life (in years) Developed technology $ 10,496 $ ( 5,218 ) $ 5,278 1.5 Customer relationships 1,600 ( 655 ) 945 2.4 Total $ 12,096 $ ( 5,873 ) $ 6,223 Total amortization of acquired intangible assets was $ 4.3 million, $ 4.3 million and $ 1.4 million for the years ended December 31, 2021, 2020, and 2019, respectively. The Company recorded amortization of developed technology of $ 3.9 million, $ 3.9 million, and $ 1.1 million in cost of revenue and customer relationships of $ 0.4 million, $ 0.4 million, and $ 0.3 million in sales and marketing expenses in each of the respective periods in the consolidated statements of operations. Expected future amortization expense related to acquired intangible assets is as follows (in thousands): Year Ending December 31, Amortization Expense 2022 $ 1,591 2023 303 Total $ 1,894 9. Commitments and Contingencies Operating Leases The Company leases office space under non-cancelable operating lease agreements, which expire on various dates through September 2028. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into the determination of lease payments. The Company maintains an uncollateralized letter of credit for the lease, which is renewed on an annual basis. In September 2018, the Company entered into a lease agreement for its corporate headquarters located in San Mateo, California, which it occupied in January 2019. This lease covers approximately 22,000 square feet of office space at a monthly base rent of $ 113,246 , increasing approximately 3 % annually. The lease expires in July 2026, with an option to extend the lease for another five years , subject to certain requirements. The total commitment is $ 10.5 million with a tenant improvement allowance of $ 1.5 million. Deferred rent was $ 4.6 million and $ 5.1 million as of December 31, 2021 and 2020, respectively, of which $ 3.8 million and $ 4.6 million was classified in other liabilities in the consolidated balance sheets in each of the two periods, respectively. 87 Table of Contents Rent expense for operating leases for the years ended December 31, 2021, 2020, and 2019 was $ 9.7 million, $ 10.2 million, and $ 7.1 million, respectively. Future minimum lease payments under non-cancelable operating leases as of December 31, 2021, are as follows (in thousands): Year ending December 31, Operating Leases 2022 $ 6,954 2023 6,790 2024 6,642 2025 5,976 2026 3,579 Thereafter 4,304 Total minimum future payments $ 34,245 Other Contractual Commitments The Company's other contractual commitments primarily consist of third-party cloud infrastructure agreements and service subscription arrangements used to support operations at the enterprise level. Future minimum payments under the Company’s non-cancelable purchase commitments as of December 31, 2021 are presented in the table below (in thousands): Year ending December 31, Contractual Commitments 2022 $ 26,953 2023 22,958 2024 1,658 Total $ 51,569 Litigation and Loss Contingencies From time to time, the Company may be subject to other legal proceedings, claims, investigations, and government inquiries (collectively, Legal Proceedings) in the ordinary course of business. It may receive claims from third parties asserting, among other things, infringement of their intellectual property rights, defamation, labor and employment rights, privacy, and contractual rights. There are no currently pending Legal Proceedings that the Company believes will have a material adverse impact on the business or consolidated financial statements. Indemnifications In the ordinary course of business, the Company enters into contractual arrangements under which the Company agrees to provide indemnification of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including losses arising out of intellectual property infringement claims made by third parties, if the Company has violated applicable laws, if the Company is negligent or commits acts of willful misconduct, and other liabilities with respect to its products and services and its business. In these circumstances, payment is typically conditional on the other party making a claim pursuant to the procedures specified in the particular contract. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in its consolidated financial statements. 10. Redeemable Convertible Preferred Stock Immediately prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into 153,937,730 shares of common stock on a one -to-one basis and then reclassified into Class B common stock, and their carrying value of $ 5.6 billion was reclassified into stockholders' equity (deficit). As of December 31, 2021, there were no shares of redeemable convertible preferred stock issued and outstanding. As of December 31, 2020, there were 154,055,430 authorized shares and 153,937,730 issued and outstanding shares of redeemable convertible preferred stock with aggregate liquidation preference of $ 326.6 million. 88 Table of Contents The following table summarizes the Company’s redeemable convertible preferred stock as of December 31, 2020 (in thousands, except per share amounts): December 31, 2020 Shares Authorized Shares Outstanding Original Issue Price Liquidation Preference Carrying Value Series A 21,428 21,311 $ 0.05 $ 1,059 $ 397,172 Series B 36,229 36,229 0.14 5,000 675,223 Series C 15,307 15,307 0.46 7,000 285,280 Series D 30,663 30,663 1.01 31,000 571,476 Series E 21,292 21,292 2.35 50,000 396,927 Series F 8,709 8,709 3.16 27,500 162,439 Series G 9,151 9,151 6.01 55,000 172,344 Series H 11,276 11,276 13.30 150,000 234,235 Total 154,055 153,938 $ 326,559 $ 2,895,096 Preferred Stock Transactions In January 2020, an investor, also a member of the Board of Directors of the Company (the Board) at that time, entered into a secondary transaction to sell 26,210 shares of redeemable convertible Series A preferred stock, 1,314,830 shares of redeemable convertible Series B preferred stock, and 448,110 shares of redeemable convertible Series C preferred stock to a new investor for a total price in excess of the fair value of the shares. The sale was facilitated by the Company and deemed compensatory to the seller. The amount paid by the investor to acquire the shares was $ 25.5 million, while the fair value of the shares on the transaction date was $ 14.7 million. The excess value of $ 10.8 million was recognized as stock-based compensation expense by the Company in general and administrative expense in its consolidated statements of operations. See Note 11 for a discussion of stock-based compensation recognized from the secondary transaction involving the repurchases of redeemable convertible preferred stock (as described above) and common stock from the Company’s founders and employees. 11. Stockholders' Equity and Stock Based Compensation Preferred Stock In connection with the IPO, the Company’s amended and restated certificate of incorporation became effective, which authorized the issuance of 10,000,000 shares of undesignated preferred stock with a par value of $ 0.00001 per share with rights and preferences, including voting rights, designated from time to time by the board of directors. Common Stock The Company has two classes of common stock: Class A common stock and Class B common stock. In connection with the IPO, the Company’s amended and restated certificate of incorporation authorized the issuance of 1,000,000,000 shares of Class A common stock and 350,000,000 shares of Class B common stock. The shares of Class A common stock and Class B common stock are identical, except with respect to voting, conversion, and transfer rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes. Class A and Class B common stock have a par value of $ 0.00001 per share, and are referred to as common stock throughout these notes to the consolidated financial statements, unless otherwise noted. Holders of common stock are entitled to receive any dividends as may be declared from time to time by the board of directors. Shares of Class B common stock may be converted to Class A common stock at any time at the option of the stockholder. Shares of Class B common stock automatically convert to Class A common stock upon the following: (1) sale or transfer of such share of Class B common stock, except for certain permitted transfers as described in our amended and restated certificate of incorporation; (2) the death of such Class B common stockholder (or nine months after the date of death if the stockholder is our founder); and (3) on the final conversion date, defined as the earlier of (a) the last trading day of the fiscal year following the seventh anniversary of the IPO; or (b) the date specified by a vote of the holders of a majority of the outstanding shares of Class B common stock, voting as a single class. 89 Table of Contents Shares of common stock reserved for future issuance were as follows (in thousands): December 31, 2021 2020 Redeemable convertible preferred stock — 153,938 2011 Stock Plan: Options and RSUs outstanding 48,749 36,024 Shares reserved for future award issuances — 9,981 2021 Equity Incentive Plan: RSUs outstanding 429 — Shares reserved for future award issuances 36,019 — 2021 Employee Stock Purchase Plan 6,500 — Total shares of common stock reserved for issuance 91,697 199,943 Equity Incentive Plans In 2011, the Company adopted the 2011 Stock Plan (the 2011 Plan) pursuant to which the Board may grant incentive stock options to purchase shares of the Company’s common stock, non-statutory stock options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock and RSUs. The 2011 Plan was terminated in September 2021 in connection with the IPO but continues to govern the terms of outstanding awards that were granted prior to its termination. With the establishment of the 2021 Equity Incentive Plan (the 2021 Plan) as further discussed below, upon the expiration, forfeiture, cancellation, or reacquisition of any shares of Class B common stock underlying outstanding stock-based awards granted under the 2011 Plan, an equal number of shares of Class A common stock will become available for grant under the 2021 Plan. In August 2021, the Board adopted the 2021 Plan, which became effective upon the IPO. Upon adoption, the 2021 Plan began with a reserve of 35,000,000 shares of Class A common stock for future issuance, with (i) an automatic increase occurring on January 1 of each year by 5 % of the aggregate number of shares of common stock of all classes issued and outstanding on December 31 of the preceding calendar year, or (ii) a lesser number of shares determined by the Board prior to January 1 of each year. The reserve is reduced by the number of shares granted, and increased by the number of shares subject to stock options or other stock awards that would have otherwise returned to the 2011 Plan, up to a maximum of 51,178,920 shares, as well as the net number of shares withheld from the release of RSUs. As of December 31, 2021, the Company has granted 431,886 shares from the 2021 Plan, and a total of 1,439,884 shares comprising of cancellations from the 2011 Plan and withholding of net shares recirculated back to the reserve, resulting in 36,018,956 shares available for future issuance. 2021 Employee Stock Purchase Plan In August 2021, the Board adopted the ESPP, which became effective upon the Company’s IPO. Initially, 6,500,000 Class A shares of common stock have been reserved for future issuance under the ESPP, with an automatic increase to such reserve on January 1 of each year. The price at which Class A common stock is purchased under the ESPP is equal to 85 % of the fair market value of a share of the Company’s Class A common stock on the first or last day of the offering period, whichever is lower. The ESPP provides an offering period of 24 months, with four purchase periods that are generally six months long ending on May 15 and November 15 of each year, except for the first purchase period, which began upon the completion of the IPO on September 22, 2021 and will end on May 13, 2022, with contributions from employees beginning on October 1, 2021. As of December 31, 2021, the Company has withheld $ 4.2 million of contributions from its employees, and no shares have been purchased under the ESPP. During the year ended December 31, 2021, the Company recognized $ 3.5 million of stock-based compensation expense related to the ESPP. Determination of Fair Value of the ESPP The Company estimates the fair value of the ESPP using the Black-Scholes option-pricing model, which requires certain complex valuation assumption inputs such as expected term, expected stock price volatility, risk-free interest rate and dividend 90 Table of Contents yield. The fair value of each of the four purchase periods is estimated separately. The following table summarizes the range of valuation assumptions used in estimating the fair value of the ESPP during the period: Year Ended December 31, Valuation Assumption Inputs 2021 Expected term (in years) 0.6 - 2.1 Stock price volatility 47.7 % - 58.5 % Risk-free interest rate 0.06 % - 0.29 % Dividend yield 0.00 % Expected term— The expected term is estimated based on the exercise term of the ESPP, which is the length of time from the grant date to the date on which the stock is purchased by the employees. Stock price volatility— Since the Company's common stock lacks sufficient trading history, the stock price volatility over the expected term is estimated based on the average historical volatility of comparable companies with similar characteristics to those of the Company. Risk-free interest rate— The risk-free interest rate is based on the yield of the U.S. Treasury debt securities commensurate with the expected term of the ESPP. Dividend yield— Since the Company has never paid and has no intention to pay cash dividends on its common stock, the dividend yield is zero. Fair value of underlying stock— The fair value of Company's common stock underlying the ESPP is determined by the closing market price of its Class A common stock on the date that the Company began withholding the contributions from its employees, which was October 1, 2021. Stock Options Stock options are granted with an exercise price equal to the stock’s fair market value at the date of grant, have 10-year contractual terms, and vest over a four-year period. Stock option activity during the year ended December 31, 2021 is as follows (in thousands, except per share data): Share Information: Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (1) Balance as of December 31, 2020 2,096 $ 0.23 4.1 $ 33,947 Stock options granted — $ — Stock options exercised ( 537 ) $ 0.18 Stock options cancelled / forfeited / expired ( 211 ) $ 0.07 Balance as of December 31, 2021 1,348 $ 0.27 3.6 $ 35,020 (1) Aggregate intrinsic value for stock options represents the difference between the exercise price and the per share fair value of the Company’s common stock as of the end of the period, multiplied by the number of stock options outstanding, exercisable, or vested. (2) The ending balance as of December 31, 2021 represents options that were fully vested and exercisable. Total intrinsic value of options exercised during the years ended December 31, 2021, 2020, and 2019 was $ 14.0 million, $ 9.8 million, and $ 9.5 million, respectively. Restricted Stock Units RSUs are granted at fair market value at the date of the grant and vest over a four-year period. 91 Table of Contents RSU activity during the year ended December 31, 2021 is as follows (in thousands, except per share data): Share Information: Number of Shares Weighted-Average Grant Date Fair Value Unvested, as of December 31, 2020 33,928 $ 5.41 Granted 26,808 $ 22.02 Vested ( 9,928 ) $ 5.17 Forfeited ( 2,978 ) $ 9.81 Unvested, as of December 31, 2021 47,830 $ 14.47 Performance-Based Awards In May 2019, the Board approved a grant of 166,390 shares of performance-based RSUs (PRSUs) to the Company’s CEO. The vesting of these PRSUs is contingent upon the satisfaction of all three of the following: (i) the achievement of certain revenue related milestones on or before December 31, 2019, (ii) vesting over the requisite service period in accordance with the Plan, and (iii) a liquidity event. The revenue-related milestone was met as of December 31, 2019, and the liquidity event condition was met upon the completion of the IPO as described in Note 1— Initial Public Offering . As of December 31, 2021, the time-based vesting was the only condition yet to be satisfied over the remaining requisite service period, and the number of shares to vest subject to this condition is insignificant. In September 2021, the Board approved a grant of 6,000,000 PRSUs to the Company's CEO with a time-based service condition beginning January 1, 2022, and a market condition involving five separate stock price targets ranging from $ 70.00 to $ 200.00 per share for each of the five vesting tranches (CEO Performance Award). These stock price targets will be measured based on the average closing price over a consecutive 60 -trading day period, beginning on the first trading day after the expiration of the final lock-up period in February 2022. The vesting of the CEO Performance Award is contingent upon the completion of the requisite service through January 1, 2029 and the achievement of the specified stock price target in each tranche on or before January 1, 2029. The stock price targets are not required to be achieved within the service period of each tranche, and accordingly, multiple tranches can vest at the same date if the specified stock price targets are achieved after December 31, 2025. The CEO Performance Award had a total grant date fair value of $ 131.0 million. The fair value of the CEO Performance Award was determined at grant date by using the Monte Carlo simulation model with the following valuation assumptions: Year Ended December 31, Valuation Assumption Inputs 2021 Measurement period (in years) 7.0 Stock price volatility 60.0 % Risk-free interest rate 1.12 % Dividend yield — % Measurement period— This is the period over which simulated stock prices of the Company are used to evaluate the possibility of achieving the specified stock price targets (as described above). Stock price volatility— Since the Company's common stock lacks sufficient trading history, the stock price volatility over the measurement period is estimated based on the average historical volatility of comparable companies with similar characteristics to those of the Company. Risk-free interest rate— The risk-free interest rate is based on the yield of the U.S. Treasury debt securities commensurate with the measurement period. Dividend yield— Since the Company has never paid and has no intention to pay cash dividends on its common stock, the dividend yield is zero. Fair value of underlying stock— The fair value of Company's common stock underlying the CEO Performance Award on is based on an independent third-party valuation as there was no public market on the date of the grant. For the year ended December 31, 2021, the Company recognized $ 9.0 million of stock-based compensation expense associated with performance-based awards described above, of which $ 8.4 million was related to the CEO Performance Award. 92 Table of Contents Stock-Based Compensation For the year ended December 31, 2021, stock-based compensation expense of $ 173.4 million included a cumulative charge associated with certain RSUs for which the service-based vesting condition has been satisfied upon the completion of the liquidity event, as further described in Note 1— Initial Public Offering. During the year ended December 31, 2020, stock-based compensation included expenses recognized from employee stock-based awards, and the excess value of $ 43.2 million paid to repurchase shares in a secondary transaction. The excess value was comprised of $ 10.8 million recorded in general and administrative expense for the repurchase of redeemable convertible preferred stock (as described in Note 10), and $ 32.4 million for the repurchases of shares of common stock from the Company’s founders and a number of employees, of which $ 16.5 million and $ 15.9 million were recorded in general and administrative expense and research and development, respectively. Total stock-based compensation expense recorded for the years ended December 31, 2021, 2020 , and 2019 was as follows (in thousands): Year Ended December 31, 2021 2020 2019 Equity awards: Cost of revenue $ 5,604 $ — $ 13 Research and development 45,162 8 151 Sales and marketing 53,169 7 104 General and administrative 69,508 29 5 Total employee awards 173,443 44 273 Secondary transaction — 43,236 — Stock-based compensation, net of amounts capitalized 173,443 43,280 273 Capitalized stock-based compensation 585 — — Total stock-based compensation expense $ 174,028 $ 43,280 $ 273 Stock-based compensation expense recorded to research and development in the consolidated statements of operations excludes amounts that were capitalized for internal-use software for the year ended December 31, 2021. As of December 31, 2021, unrecognized stock-based compensation expense related to unvested stock-based awards was as follows (amount in thousands): December 31, 2021 Unrecognized Stock-Based Compensation Weighted-Average Period to Recognize Expense (in years) RSUs $ 574,916 3.6 ESPP 19,928 1.2 Total unrecognized stock-based compensation expense $ 594,844 12. Net Loss Per Share Basic net loss per share attributable to common stockholders is computed by dividing the net loss by the number of weighted-average outstanding common shares. Diluted net loss per share attributable to common stockholders is determined by giving effect to all potential common equivalents during the reporting period, unless including them yields an antidilutive result. The Company considers its redeemable convertible preferred stock, stock options and restricted stock units as potential common equivalents, but excluded them from the computation of diluted net loss per share attributable to common stockholders in the periods presented, as their effect was antidilutive. The rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, except with respect to voting, conversion, and transfer rights. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis to each class of common stock and the resulting basic and diluted 93 Table of Contents net loss per share attributable to common stockholders are the same for both Class A and Class B common stock on both an individual and combined basis. The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data): Year Ended December 31, 2021 2020 2019 Numerator: Net loss $ ( 191,995 ) $ ( 57,294 ) $ ( 31,125 ) Accretion of redeemable convertible preferred stock ( 2,646,662 ) ( 1,560,524 ) ( 553,339 ) Deemed dividend distribution — — ( 40,071 ) Net loss attributable to Class A and Class B common stockholders - basic and diluted $ ( 2,838,657 ) $ ( 1,617,818 ) $ ( 624,535 ) Denominator: Weighted-average shares used in computing net loss per share attributable to Class A and Class B common stockholders - basic and diluted 130,652 76,945 76,029 Net loss per share attributable to Class A and Class B common stockholders - basic and diluted $ ( 21.73 ) $ ( 21.03 ) $ ( 8.21 ) The following table summarizes the potential common equivalents that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented (in thousands): Year Ended December 31, 2021 2020 2019 Redeemable convertible preferred stock — 153,938 153,938 Stock options 1,348 2,096 2,898 RSUs 47,830 33,928 22,602 ESPP 160 — — Total 49,338 189,962 179,438 13. Income Taxes The Company’s net loss before provision for income taxes for the years ended December 31, 2021, 2020, and 2019 was as follows (in thousands): Year Ended December 31, 2021 2020 2019 Domestic $ ( 211,844 ) $ ( 69,102 ) $ ( 40,616 ) Foreign 30,365 15,823 13,126 Total $ ( 181,479 ) $ ( 53,279 ) $ ( 27,490 ) The components of the provision for income taxes for the years ended December 31, 2021, 2020, and 2019 were as follows (in thousands): Year Ended December 31, 2021 2020 2019 Current: Domestic $ 2,876 $ ( 12 ) $ 11 Foreign 9,547 6,387 4,563 Deferred: Domestic — — ( 194 ) Foreign ( 1,907 ) ( 2,360 ) ( 745 ) Total provision for income taxes $ 10,516 $ 4,015 $ 3,635 94 Table of Contents The following is a reconciliation of the federal statutory income tax rate to the Company’s effective tax rate for the years ended December 31, 2021, 2020, and 2019: Year Ended December 31, 2021 2020 2019 Federal income tax 21.0 % 21.0 % 21.0 % State taxes, net of federal benefit — — 3.2 Stock-based compensation 2.1 ( 17.1 ) ( 0.2 ) Change in valuation allowance ( 25.4 ) ( 11.8 ) ( 32.8 ) Earnings from foreign subsidiaries ( 0.5 ) ( 1.3 ) ( 3.9 ) Other items ( 3.0 ) 1.6 ( 0.5 ) Total provision for income taxes ( 5.8 ) % ( 7.6 ) % ( 13.2 ) % The components of the Company’s net deferred tax assets as of December 31, 2021 and 2020, were as follows (in thousands): December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 78,077 $ 36,702 Foreign tax credit carryforwards 4,955 4,955 Stock-based compensation 9,643 — Accruals and Reserves 6,584 5,433 Depreciation and amortization 1,633 354 Allowance for uncollectible accounts 66 1,383 Total deferred tax assets 100,958 48,827 Less: valuation allowance ( 89,903 ) ( 41,111 ) Deferred tax assets, net of valuation allowance 11,055 7,716 Deferred tax liabilities: Commissions ( 4,771 ) ( 3,323 ) Net deferred tax assets $ 6,284 $ 4,393 The Company regularly reviews its deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing taxable temporary differences and tax planning strategies. The Company’s judgment regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute the business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the Company’s income tax provision would increase or decrease in the period in which the assessment is changed. The Company’s valuation allowance increased by $ 48.8 million and $ 9.0 million during the years ended December 31, 2021 and 2020, respectively. The Company has not provided U.S. income taxes and foreign withholding taxes on undistributed earnings of foreign subsidiaries because the Company intends to permanently reinvest such earnings outside the U.S. Net Operating Loss and Credit Carryforwards As of December 31, 2021, the Company has U.S. federal net operating loss carryforwards of approximately $ 345.7 million, of which $ 10.7 million are subject to limitation under Internal Revenue Code Section 382 (IRC Section 382). The net operating loss carryforwards for all the states in the United States is $ 94.0 million as of December 31, 2021. The federal net operating loss carryforwards that were generated prior to the 2018 tax year will begin to expire in 2030 if not utilized. For net operating loss carryforwards arising in tax years beginning after December 31, 2017, the Tax Act limits the Company’s ability to utilize carryforwards to 80% of taxable income, however, these operating losses may be carried forward indefinitely. The state net operating loss carryforwards will begin to expire in 2032 if not utilized. The Company has foreign tax credits of $ 5.0 million that will expire in 2027 if not utilized. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of IRC Section 382 and similar state provisions. The annual limitation may result in the inability to fully 95 Table of Contents offset future annual taxable income and could result in the expiration of net operating loss carryforwards before utilization. The Company continually reviews the impact to net operating losses of any ownership changes. Unrecognized Tax Benefits The Company has adopted authoritative guidance which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in the Company’s income tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company recognizes financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has no likelihood of being realized upon ultimate settlement with the relevant tax authority. As of December 31, 2021, the Company had gross unrecognized tax benefits of $ 2.2 million, all of which would affect income tax expense, if recognized, after consideration of valuation allowance. The Company did no t have any unrecognized tax benefits with a significant impact on its financial statements as of December 31, 2020 and 2019. The following table presents a reconciliation of the beginning and ending amount of the unrecognized tax benefits (in thousands): Year Ended December 31, 2021 Unrecognized gross tax benefits at the beginning of the period $ — Increases related to prior year tax positions 1,269 Decreases related to prior year tax positions — Reversal of prior year unrecognized tax benefits — Increases in current year unrecognized benefits 958 Unrecognized gross tax benefits at the end of the period $ 2,227 The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Accrued interest of $ 0.5 million has been recorded as of December 31, 2021. The Company's major tax jurisdictions are India and the U.S. and also files income tax returns in other various U.S. states and international jurisdictions. Carryover attributes beginning December 31, 2008, remain open to adjustment by the United States and state authorities. The U.S. federal, state, and foreign jurisdictions have statutes of limitations that generally range from three to five years. Due to the Company’s net losses, substantially all of its federal and state income tax returns are subject to examination for federal and state purposes since inception. As of December 31, 2021, Freshworks Inc., Freshworks India and Freshworks, GmbH are currently under examinations in India and Germany. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. As the outcome of the Company's tax audits are resolved in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future. 14. Geographic Information The following table summarizes revenue by geographic location (in thousands): Year Ended December 31, 2021 2020 2019 North America $ 160,224 $ 111,644 $ 79,805 Europe, Middle East and Africa 152,542 98,992 65,038 Asia Pacific 49,933 33,445 23,528 Other 8,323 5,578 4,006 Total revenue $ 371,022 $ 249,659 $ 172,377 96 Table of Contents The following table summarizes long-lived assets by geographic information (in thousands): December 31, 2021 2020 North America $ 13,780 $ 16,796 Europe, Middle East and Africa 578 606 Asia Pacific 9,015 9,605 Total long-lived assets $ 23,373 $ 27,007 15. Subsequent Events On February 14, 2022, the final lock-up period following the IPO expired, and the Company issued an aggregate of 9.3 million shares of its common stock, net of shares withheld for taxes, as settlement of all RSUs that had met time-based service condition. 97 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.