What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-04 · 203 added, 219 removed, 296 unchanged (59% of the section changed)

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You should review the disclosure under Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments.

Unless the context requires otherwise, references in this Annual Report on Form 10-K to the “Company”, “Procore,” “we,” “us” and “our” refer to Procore Technologies, Inc.

and its consolidated subsidiaries.

A discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019 has been reported previously in our final prospectus dated May 19, 2021 filed with the SEC on May 21, 2021 pursuant to Rule 424(b)(4) (File No.

333-236789) of the Securities Act, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

A discussion of our financial condition and results of operations for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021 is presented below.

A discussion of our financial condition and results of operations for the fiscal year ended December 31, 2021 compared to the year ended December 31, 2020 has been reported previously under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K filed with the SEC on March 4, 2022.

Our mission is to connect everyone in construction on a global platform.

We are a leading provider of cloud-based construction management software, and are helping transform one of the oldest, largest, and least digitized industries in the world.

We focus exclusively on construction, connecting and empowering the industry’s key stakeholders, such as owners, general contractors, specialty contractors, architects, and engineers, to collaborate from any location, on any internet-connected device.

We focus exclusively on connecting and empowering the construction industry’s key stakeholders, such as owners, general contractors, specialty contractors, architects, and engineers, to collaborate and access our capabilities from any location, on any internet-connected device.

Our platform is modernizing and digitizing construction management by enabling real-time access to critical project information, simplifying complex workflows, and facilitating seamless communication among key stakeholders, all of which we believe positions us to serve as the system of record for the construction industry.

Adoption of our platform helps customers increase productivity and efficiency, reduce rework and costly delays, improve safety and compliance, and enhance financial transparency and accountability.

We are also developing other programs and services, such as our materials financing program, to address related challenges faced by the construction industry’s key stakeholders.

Adoption of our products, services, and platform helps our customers increase productivity and efficiency, reduce rework and costly delays, improve safety and compliance, and enhance financial transparency and accountability.

In short, we build the software for the people that build the world.

We serve customers ranging from small businesses managing a couple million dollars of annual construction volume to global enterprises managing billions of dollars of annual construction volume.

We serve customers ranging from small businesses managing a few million dollars of annual construction volume to global enterprises managing billions of dollars of annual construction volume.

Our core customers are owners, general contractors, and specialty contractors operating across the commercial, residential, industrial, and infrastructure segments of the construction industry.

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We generate substantially all of our revenue from subscriptions to access our products and have an unlimited user model that is designed to facilitate adoption and maximize usage of our platform by all project stakeholders.

We sell our products on a subscription basis for a fixed fee with pricing generally based on the number and mix of products and the annual construction volume contracted to run on our platform.

We primarily sell our products on a subscription basis for a fixed fee with pricing generally based on the number and mix of products and the annual construction volume contracted to run on our platform.

As our customers subscribe to additional products or increase the annual construction volume contracted to run on our platform, we generate more revenue.

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Subscriptions to access our products include customer support and allow for unlimited users as we do not charge a per-seat or per-user fee.

Customers can invite all project participants to engage with our platform as part of a project team.

This includes the customer’s employees and its collaborators, who are other project participants who engage with our platform but do not pay us for such use.

Customers can invite all project participants to engage with our platform as part of a project team, including customers’ employees and collaborators, who are other project participants who engage with our platform but do not pay us for such use.

Further, multiple stakeholders can be customers on the same project and retain access to project information for the duration of their subscription.

Recent Developments

On May 24, 2021, we completed our IPO, in which we issued and sold 10,410,000 shares of our common stock at a price of $67.00 per share, including 940,000 shares of common stock pursuant to the exercise in full of the underwriters’ option to purchase additional shares.

We received net proceeds of $665.1 million, after deducting underwriting discounts and commissions.

In connection with the IPO, all outstanding shares of convertible preferred stock were automatically converted into an aggregate of 85,331,278 shares of our common stock on a one-for-one basis.

On October 21, 2021, the Company completed the acquisition of all outstanding equity of LaborChart , a labor management solution that facilitates labor scheduling, forecasting, office-to-field communications, certification tracking, data management, and labor analysis.

The purchase consideration to acquire LaborChart was $76.2 million, subject to customary adjustments for working capital, transaction expenses, cash, indebtedness, and the determination of any consideration for post-combination services .

On November 2, 2021, the Company completed the acquisition of all outstanding equity of Levelset, a lien rights management company.

Levelset also has a materials finance business that offers customers deferred payment terms on their purchases of construction materials.

The materials finance business is currently immaterial, but may grow in the future.

Pursuant to the merger agreement, the purchase consideration to acquire Levelset was $484.1 million, which consisted of $426.1 million in cash, subject to customary adjustments for working capital, transaction expenses, cash, indebtedness, and the determination of any consideration for post-combination services, and $58.0 million in shares of Procore common stock.

Certain Factors Affecting Our Performance

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We are highly focused on continuing to acquire new customers to support our long-term growth.

We intend to efficiently drive new customer acquisitions by continuing to invest across our sales and marketing engine to engage our prospective customers, increase brand awareness, and drive adoption of our products and platform.

The number of customers on our platform has increased from 8,506 as of December 31, 2019, to 10,166 as of December 31, 2020, to 12,193 as of December 31, 2021, reflecting a consistent year-over-year growth rate of 20% in both 2020 and 2021.

All customer counts aforementioned exclude the customers acquired from Levelset, LaborChart, and Esticom, as they are on non-standard legacy contracts.

Levelset, LaborChart, and Esticom customers will be included in our customer and ARR metrics when they are renewed onto standard Procore annual contracts.

Levelset has more than 3,000 customers as of December 31, 2021.

We added 2,295 net new customers in 2022, including 189 customers from LaborChart when it was integrated into the sales process in the third quarter of 2022.

The number of customers on our platform has increased from 10,166 as of December 31, 2020, to 12,193 as of December 31, 2021, to 14,488 as of December 31, 2022, reflecting year-over-year growth rates of 20% in 2021 and 19% in 2022.

All customer counts aforementioned exclude customers acquired from Levelset and Esticom which have not yet been renewed onto standard Procore annual contracts.

Remaining Levelset and Esticom legacy customers will be included in our customer metrics once they are renewed onto standard Procore annual contracts or upon integration of the sales process.

We define ARR at the end of a particular period as the annualized dollar value of our subscriptions from customers as of such period end date.

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ARR at the end of a particular period includes the annualized dollar value of subscriptions for which the term has not ended, and subscriptions for which we are negotiating a subscription renewal.

ARR should be viewed independently of revenue and does not represent our GAAP revenue on an annualized basis.

ARR should be viewed independently of revenue determined in accordance with accounting principles generally accepted in the U.S.

(“GAAP” or “U.S.

GAAP”) and does not represent our GAAP revenue on an annualized basis.

ARR is not intended to be a replacement or forecast of revenue.

Our ability to continue to grow our business and serve the broader needs of the construction industry depends on acquiring new customers, customers purchasing new products, renewing and expanding their use of existing products, and maintaining or increasing the price of our existing products.

Continued Technology Innovation and Expansion of Our Platform

We use a gross retention rate to measure our ability to retain our customers.

Our gross retention rate reflects only customer losses and does not reflect customer expansion or contraction.

We believe our high gross retention rates demonstrate that we serve a vital role in our customers’ operations, as the vast majority of our customers continue to use our products and platform and renew their subscriptions.

To calculate our gross retention rate at the end of a particular period, we first calculate the ARR from the cohort of active customers at the end of the period 12 months prior to the end of the period selected.

We then calculate the value of ARR from any customers whose subscriptions terminated and were not renewed during the 12 months preceding the end of the period selected, which we refer to as churn.

We then divide (a) the total prior period ARR minus churn by (b) the total prior period ARR to calculate the gross retention rate.

Our gross retention rate was 95% as of December 31, 2022 and 2021.

Our ability to continue to grow our business and serve the broader needs of the construction industry depends on acquiring new customers, customers purchasing new products or signing up for new services, customers renewing and expanding their use of existing products and services, and maintaining or increasing the price of our existing products and services.

Continued Technology Innovation and Strategic Expansion of Our Products and Services

We plan to continue to invest in technology innovation and product development to enhance the capabilities of our platform.

Additional features and products will also enable customers and collaborators to manage new workflows on our platform and allow us to attract a broader set of stakeholders.

We have introduced new products developed in-house and through our acquisitions of Zimfly, Inc., Honest Buildings, Construction BI, LLC, Esticom, LaborChart, and Levelset.

We have introduced new products and services developed in-house and through our acquisitions of Zimfly, Inc., Honest Buildings, Construction BI, LLC, Esticom, LaborChart, and Levelset.

In connection with our acquisition of Levelset, we assumed, and continue to develop, a materials financing program for our customers.

Purchasers of construction materials, typically specialty contractors, generally pay their materials suppliers on 30-day payment terms but typically do not recoup their costs for such materials for 60 to 120 days after they submit invoices for those materials to the general contractors.

This disconnect between payment terms set by suppliers and when specialty contractors receive payment for those materials can pose risk and uncertainty to specialty contractors and their ability to manage their cash flow.

Our materials financing program facilitates the purchase of construction materials from fulfillment partners (our suppliers) on behalf of our customers, allowing such customers to pay us for the materials on deferred payment terms.

We typically charge an origination fee upon purchase of the materials and a weekly finance charge until receipt of deferred payment in full.

We use internal data where available on the performance and payment history of other project participants (like the property owner and general contractor) who are involved in the construction project to help determine whether to provide materials financing for a given project, and we secure such financing with mechanic’s lien rights.

In circumstances of customer non-payment, our lien rights help enforce payment collections from property owners, lenders, and general contractors who are involved in such project, which in turn strengthens the collectability of amounts we finance for our customers.

We are currently using capital from our balance sheet for our materials financing program.

Ultimately, we anticipate partnering with a capital provider at the appropriate time to dedicate the financing needed to scale this program.

Until that time,

we may use up to approximately 10% of our current cash , cash equivalents, and marketable securities position to support the program.

We intend to continue to invest in building additional products, financial offerings, features, and functionality that expand our capabilities and facilitate the extension of our platform.

We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive product and market expansion, such as our recent acquisitions of LaborChart and Levelset in October and November 2021, respectively.

The acquisitions closed in the fourth fiscal quarter, and therefore the financial results post-acquisition of LaborChart and Levelset are included in the accompanying financial statements.

In addition, we expect that expenses, both in dollars and as a percentage of total revenues, may increase from the current or historical periods.

Our future success is dependent on our ability to successfully develop or acquire, market, and sell existing and new products to both new and existing customers.

We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive product and market expansion.

Our acquisitions of LaborChart and Levelset closed in the fourth fiscal quarter of 2021, and, as such, expenses, both in dollars and as a percentage of total revenues, increased and may continue to increase from historical periods.

Our future success is dependent on our ability to successfully develop or acquire, market, and sell existing and new products and services to both new and existing customers.

International Growth

We see international expansion as a major, and largely greenfield, opportunity for growth as we look to capture a larger part of the worldwide construction market.

We have started to grow our presence internationally with the opening of sales and marketing offices in Sydney, Australia and Vancouver and Toronto, Canada in 2017, London, England in 2018 and Mexico City, Mexico in 2019.

We have also developed focused sales and marketing efforts in Singapore, the United Arab Emirates, France, and Germany in 2021, where we do not yet maintain office locations.

We have started to grow our presence internationally with the opening of sales and marketing offices in Sydney, Australia and Vancouver and Toronto, Canada in 2017;

London, England in 2018;

Mexico City, Mexico in 2019;

and Singapore, Republic of Singapore;

Paris, France;

Dublin, Ireland;

and Dubai, UAE in 2022.

We have also developed focused sales and marketing efforts in Germany, where we do not yet maintain an office location.

As a result of our international efforts, we support multiple languages and currencies.

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revenue based on the billing location of each subscription.

Furthermore, we believe global demand for our products will continue to increase as we expand our international sales and marketing efforts, and the awareness of our products and platform grows.

However, our ability to conduct our operations internationally will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal, tax and regulatory systems, alternative dispute systems, and commercial markets.

Fluctuations in foreign currencies may positively or negatively impact the amount of revenue that we report for our foreign subsidiaries upon the translation of these amounts into U.S.

Furthermore, we believe global demand for our products, services, and platform will continue to increase as we expand our international sales and marketing efforts, and the awareness of our products, services, and platform grows.

However, our ability to conduct our operations internationally will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, currencies, cultures, customs, legal, tax and regulatory systems, alternative dispute systems, and commercial markets.

We have made, and plan to continue to make, significant investments in existing and select additional international markets.

While these investments may adversely affect our operating results in the near term, we believe they will contribute to our long-term growth.

COVID-19 Update

The ongoing COVID-19 pandemic has caused general business disruption worldwide beginning in January 2020.

Some local governments temporarily closed construction jobsites or imposed restrictions on construction activity, such as limiting the number of workers allowed on site.

Construction teams had to learn to navigate pandemic safety protocols on jobsites and coordinate already complex construction processes with increasingly distributed workforces.

Owners had to reconfigure existing buildings to improve safety and consider new distancing requirements in project designs, all amid increased materials and labor costs.

We believe that the COVID-19 pandemic has begun to change the way construction stakeholders operate by pushing them to adopt digital solutions that enable distanced, distributed workforces.

The impact of the COVID-19 pandemic and its effects on the construction industry continue to evolve, and the impact on our financial condition and results of operations remains uncertain.

Furthermore, the COVID-19 pandemic has spurred changes in the way we work as we move to a more hybrid workforce.

We are currently planning for a number of our employees to return to in-person offices in 2022;

however, our plans may change if the number of COVID-19 cases rises where our offices are located or if there is an increase in new variants, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners.

The full extent to which the COVID-19 pandemic, including any new variants, may directly or indirectly impact our business, results of operations, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted.

See the section titled “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on our business and financial results.

Macroeconomic Factors and COVID-19 Update

Macroeconomic factors such as rising inflation, rising interest rates, volatility in capital markets, and fluctuations in foreign exchange rates, may impact our operating expenses, customers’ spending, and cash flows.

We do not currently believe that these macroeconomic factors have had a material impact on our business;

however, as they develop, we continue to monitor the ways in which such factors may directly or indirectly impact our business, results of operations, and financial condition.

See the section titled “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of this Annual Report on Form 10-K for further discussion.

The COVID-19 pandemic has caused and continues to cause business disruption worldwide.

Governments and businesses have taken unprecedented measures, including restrictions on business operations, temporary closures, and other mandates that have, at times, caused significant disruption in global financial markets and disrupted our customers’ workflow and payment cycles.

The full extent to which the COVID-19 pandemic, including any new variants and the measures taken by governments and businesses in response, may directly or indirectly impact our business, results of operations, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted.

Components of Results of Operations

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Cost of Revenue

Cost of revenue primarily consists of customer support personnel-related compensation expenses, including salaries, bonuses, benefits, payroll taxes, and stock-based compensation expense, third-party hosting costs, software license fees, amortization of capitalized software development costs, amortization of acquired technology intangible assets, and allocated overhead.

Cost of revenue primarily consists of personnel-related compensation expenses for our customer support team, including salaries, benefits, stock-based compensation, payroll taxes, commissions, and bonuses.

Cost of revenue also includes third-party hosting costs, software license fees, amortization of acquired technology intangible assets, amortization of capitalized software development costs related to our platform, and allocated overhead.

We expect our cost of revenue to increase on an absolute dollar basis as our revenue and acquisition activities increase.

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Capitalized software development costs are amortized on a straight-line basis over the developed software’s estimated useful life of two years and the amortization is recorded in cost of revenue.

We incurred significant additional cost of revenue expenses starting the second quarter of 2021 as a result of stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effective date of the registration statement for our IPO.

In addition, subsequent to our IPO, we have incurred higher employer payroll taxes related to employee stock transactions.

We anticipate additional stock-based compensation expense and employer payroll tax related

to employee stock transactions going forward.

In addition, we recorded and will continue to record significant amortization of acquired developed technology intangible assets as a result of the recent acquisitions in the fourth quarter of 2021 .

Subsequent to our IPO in 2021, we have incurred higher cost of revenue expenses as a result of stock-based compensation expense associated with restricted stock units (“RSUs”) where the performance condition was satisfied upon the effective date of the registration statement for our IPO, and higher employer payroll taxes related to employee stock transactions.

We anticipate additional stock-based compensation expense and employer payroll tax related to employee stock transactions going forward.

In addition, we recorded and will continue to record significant amortization of acquired developed technology intangible assets as a result of our acquisitions of Levelset and LaborChart in the fourth quarter of 2021.

Operating Expenses

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For each of these categories of expense, personnel-related compensation expenses are the most significant component, which include salaries, stock-based compensation, commissions, benefits, payroll taxes, and bonuses.

To support the growth of our business, we also increased our headcount in each of these categories both organically and, to a lesser extent, through our acquisitions.

We incurred significant additional operating expenses starting the second quarter of 2021 as a result of stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effective date of the registration statement for our IPO.

In addition, subsequent to our IPO, we have incurred higher employer payroll taxes related to employee stock transactions.

To support the growth of our business, we also increased our headcount in each of these categories, including, to a limited extent, through our previous acquisitions.

Subsequent to our IPO in 2021, we have incurred higher operating expenses as a result of stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effective date of the registration statement for our IPO, and higher employer payroll taxes related to employee stock transactions.

We anticipate additional stock-based compensation expense and employer payroll tax related to employee stock transactions going forward.

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Research and development expenses primarily consist of personnel-related compensation expenses for our engineering, product, and design teams, contractor costs to supplement our staff levels, consulting services, amortization of certain acquired intangible assets used in research and development activities, and allocated overhead.

We expect research and development expenses to increase on an absolute dollar basis and vary from period to period as a percentage of revenue for the foreseeable future as we continue to invest in headcount to build, enhance, maintain, and scale our products and platform.

We expect research and development

expenses to increase on an absolute dollar basis and vary from period to period as a percentage of revenue for the foreseeable future as we continue to invest in headcount to build, enhance, maintain, and scale our products , services, and platform.

General and Administrative

General and administrative expenses primarily consist of personnel-related compensation expenses for our finance, human resources, executive, information technology, legal, and other administrative functions.

General and administrative expenses primarily consist of personnel-related compensation expenses for our finance, information technology, executive, human resources, legal, and other administrative functions.

Additionally, general and administrative expenses include non-personnel-related expenses, such as professional fees for audit, legal, tax, and other external consulting services, including acquisition-related transaction expenses, costs associated with operating as a public company, including insurance costs, professional services, investor relations, and other compliance costs, property and use taxes, licenses, travel and entertainment costs, and allocated overhead.

We expect to increase the size of our general and administrative functions to support the growth of our business, including our international expansion.

Interest Expense, Net

Interest expense, net consists primarily of interest expense associated with our finance leases and undrawn fees associated with our Credit Facility, which is partially offset by interest income from money market funds.

We expect general and administrative expenses to increase on an absolute dollar basis and vary from period to period as a percentage of revenue, as we continue to increase the size of our general and administrative functions to support the growth of our business, including our international expansion.

Interest Income

Interest income consists primarily of interest income earned on our marketable securities, money market funds, and cash savings accounts.

Interest income also includes accretion of discounts, net of amortization of premiums, related to our available-for-sale marketable debt securities.

Interest Expense

Interest expense consists primarily of costs associated with our finance leases and undrawn fees associated with our former credit agreement (the “Credit Facility”), terminated as of April 29, 2022, which was provided by Silicon Valley Bank.

Change in Fair Value of Series I Redeemable Convertible Preferred Stock Warrant Liability

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Other (Expense) Income, Net

Other (expense) income, net primarily consists of gain or loss on foreign currency transactions and miscellaneous other income.

(Benefit from) Provision for Income Taxes

(Benefit from) provision for income taxes consists primarily of income taxes of U.S.

state franchise taxes and certain foreign jurisdictions in which we conduct business, net of the release of valuation allowance as a result of deferred tax liabilities from acquisitions that are an available source of income to realize our deferred tax assets.

Other (expense) income, net primarily consists of gains or losses on foreign currency transactions, unrealized gains or losses on equity securities, and miscellaneous other income and expenses.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists primarily of income taxes of U.S.

state franchise taxes and certain foreign jurisdictions in which we conduct business, net of the release of valuation allowance as a result of deferred tax liabilities from acquisitions that were an available source of income to realize our deferred tax assets.

As we expand our international operations, we expect to incur increased foreign tax expenses.

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deferred tax assets.

valuation allowance includes NOL carryforwards, and tax credits related primarily to research and development for our operations in the United States.

valuation allowance includes NOL carryforwards and tax credits related primarily to research and development for our operations in the U.S.

valuation allowance is primarily comprised of NOL carryforwards.

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Loss from operations

Interest expense, net

Interest income

Interest expense

Change in fair value of Series I redeemable

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Other (expense) income, net

Loss before (benefit from) provision for income taxes

(Benefit from) provision for income taxes

Loss before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Year Ended December 31,

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Loss from operations

Interest expense, net

Interest income

Interest expense

Change in fair value of Series I redeemable

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Other (expense) income, net

Loss before (benefit from) provision for income taxes

(Benefit from) provision for income taxes

Loss before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Includes stock-based compensation expense as follows:

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In 2022, our revenue increased by $205.4 million, or 40%, compared to 2021, which is primarily due to expansion within our existing customers and revenue from new customers added during the year.

The acquisition of Levelset in November 2021 contributed $4.2 million in revenue in 2021.

Revenue from our other acquisitions in 2021 was not material.

Our acquisition of Levelset in the fourth quarter of 2021 contributed $31.6 million of revenue in 2022.

The increase in revenue from existing customers includes the net benefit of a full year of subscription revenue in 2022 from customers that were new in 2021 and continued their subscriptions in 2022, and customers that expanded their subscriptions in 2022 through the purchase of additional construction volume or products, as well as price increases.

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Cost of revenue

The increase in cost of revenue in 2021 was primarily attributable to an increase of $14.1 million in personnel-related expenses, including an increase of $6.4 million in stock-based compensation expense and $5.5 million in salaries and wages driven by headcount and merit increases.

Stock-based compensation expense increased primarily due to RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO.

The increase in cost of revenue was also attributable to a $4.5 million increase in third-party cloud hosting and related services as we grow our customer base, a $4.2 million increase in amortization of acquired developed technology intangible assets related to recent acquisitions, and a $1.5 million increase in amortization of capitalized software.

The increase in cost of revenue in 2022 was primarily attributable to an increase of $ 18.4 million in personnel-related expenses, including an increase of $ 19.3 million in salaries and wages driven by headcount and merit increases, partially offset by a decrease of $ 0.8 million in stock-based compensation expense.

Stock-based compensation expense was higher in 2021 primarily due to a cumulative catch-up expense recorded for RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO in May 2021.

The increase in cost of revenue was also attributable to a $ 14.9 million increase in amortization of acquired developed technology intangible assets related to recent acquisitions, and a $ 9.7 million increase in third-party cloud hosting and related services as we grow our customer base.

We increased our cost of revenue headcount by 28 % since December 31, 2021 in order to support the growth of our business.

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Sales and marketing

The increase in sales and marketing expenses during 2021 was primarily attributable to an increase of $92.0 million in personnel-related expenses, including an increase of $55.4 million in stock-based compensation expense, a $23.1 million increase in salaries and wages driven by headcount and merit increases, and a $2.1 million increase in employer payroll tax related to employee stock transactions.

Stock-based compensation expense increased primarily due to RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO.

The increase in sales and marketing expenses was also attributable to a $9.6 million increase in professional fees primarily for contractors to supplement our staff levels, a $9.1 million increase in marketing events and expenses, a $2.0 million increase in travel-related costs, and a $1.9 million increase in amortization of acquired customer relationship intangible assets related to recent acquisitions.

The increase in sales and marketing expenses during 2022 was primarily attributable to an increase of $ 77.2 million in personnel-related expenses, including an increase of $ 92.9 million in salaries and wages driven by headcount and merit increases, partially offset by a decrease of $ 15.4 million in stock-based compensation expense.

The increase in sales and marketing expenses was also attributable to a $ 9.9 million increase in marketing events and expenses, an $ 8.8 million increase in amortization of acquired customer relationship intangible assets related to recent acquisitions, an $ 8.2 million increase in travel-related costs, and a $3.4 million increase in computer software expenses.

We increased our sales and marketing headcount by 31 % since December 31, 2021 in order to continue to drive customer growth.

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Research and development

The increase in research and development expenses during 2021 was primarily attributable to an increase of $102.0 million in personnel-related expenses, including an increase of $72.1 million in stock-based compensation expense, a $25.3 million increase in salaries and wages driven by headcount and merit increases, and a $2.5 million increase in employer payroll tax related to employee stock transactions.

Stock-based compensation expense increased primarily due to RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO.

The increase in research and development expenses was also attributable to a $5.5 million increase in professional fees primarily for contractors to supplement our staff levels, and a $2.0 million increase in amortization of acquired developed technology intangible assets.

We increased our research and development headcount by 60% since December 31, 2020 in order to continue to build, enhance, maintain, and scale our products and platform.

The increase in research and development expenses during 2022 was primarily attributable to an increase of $ 21.7 million in personnel-related expenses, including an increase of $ 43.6 million in salaries and wages driven by headcount and merit increases, partially offset by a decrease of $ 21.8 million in stock-based compensation expense.

The increase in research and development expenses was also attributable to a $4.7 million increase in computer software expenses, and a $ 3.0 million increase in professional fees primarily for contractors to supplement our staff levels.

We increased our research and development headcount by 13 % since December 31, 2021 in order to continue to build, enhance, maintain, and scale our products, services, and platform.

Year Ended December 31,

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General and administrative

The increase in general and administrative expenses during 2021 was primarily due to an increase of $61.1 million in personnel-related expenses, including an increase of $49.3 million in stock-based compensation expense and an $8.9 million increase in salaries and wages driven by headcount and merit increases.

Stock-based compensation expense increased primarily due to RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO.

The increase in general and administrative expenses was also attributable to a $10.2 million increase in non-acquisition related professional fees primarily for contractors and consultants to supplement our staff levels, a $6.7 million increase in acquisition-related expenses primarily as a result of acquisitions in the fourth quarter of 2021, a $3.1 million increase in insurance related costs associated with operating as a public company, and a $1.6 million increase in travel-related costs.

The increase in general and administrative expenses during 2022 was primarily due to a $6.1 million increase in professional fees primarily for accounting, tax, and legal services and a $3.5 million increase in computer software expenses.

The increase in general and administrative expenses was also attributable to an increase of $0.6 million in personnel-related expenses, including an increase of $26.9 million in salaries and wages driven by headcount and merit increases, partially offset by a decrease of $26.3 million in stock-based compensation expense.

We increased our general and administrative headcount by 18% since December 31, 2021 in order to continue to support the growth of our business.

Interest Expense, Net, Change in Fair Value of Series I Redeemable Convertible Preferred Stock Warrant Liability, Other (Expense) Income, Net, and Benefit from Income Taxes

Interest Income, Interest Expense, Other Expense, Net, and Provision for (Benefit from) Income Taxes

Year Ended December 31,

(dollars in thousands)

Interest expense, net

Change in fair value of Series I redeemable

convertible preferred stock warrant liability

Other (expense) income, net

Benefit from income taxes

Interest income

Interest expense

Other expense, net

Provision for (benefit from) income taxes

* Percentage not meaningful

In 2020, we recognized an expense of $37.0 million related to an increase in the fair value of warrants to purchase Series I redeemable convertible preferred stock which were remeasured to fair value each period.

The warrants were exercised in December 2020, at which time remeasurement ceased.

The loss recognized was primarily due to the increase in the fair value of the Series I redeemable convertible preferred stock from the issuance date through December 2020.

The change in other (expense) income, net during 2021 was primarily due to foreign currency losses related to changes in Australian and Canadian dollar exchange rates.

The change in benefit from income taxes during 2021 was primarily due to income tax benefits related to the release of a portion of our valuation allowance as a result of deferred tax liabilities recorded related to the acquisitions of Levelset and LaborChart that are available sources of income to realize our deferred tax assets .

In 2022, our interest income increased due to interest earned as a result of our purchases of marketable securities starting in the third quarter of 2022 and an increase in interest rates on our money market funds and cash savings accounts.

Our marketable securities generated $4.0 million in interest income and accretion income in excess of amortization of premiums during the year ended December 31, 2022.

The increase in other expense, net during 2022 was primarily due to foreign currency losses related to changes in Australian and Canadian dollar exchange rates.

The benefit from income taxes during 2021 was primarily due to income tax benefits related to the release of a portion of our valuation allowance as a result of deferred tax liabilities recorded related to the acquisitions of Levelset and LaborChart that are available sources of income to realize our deferred tax assets .

Non-GAAP Financial Measures

In addition to our results determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we believe certain non-GAAP measures, as described below, are useful in evaluating our operating performance.

In addition to our results determined in accordance with U.S.

GAAP, we believe certain non-GAAP measures, as described below, are useful in evaluating our operating performance.

We use this non-GAAP financial information, collectively, to evaluate our ongoing operations as well as for internal planning and forecasting purposes.

We believe that non-GAAP financial information, when taken collectively, is helpful to investors because it provides consistency and comparability with past financial performance, and may assist in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results.

The non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies.

The non-GAAP financial information is presented for supplemental informational purposes only.

Non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP.

There are limitations in using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP, non-GAAP financial measures may be different from similarly-titled non-GAAP measures used by other companies since other companies may calculate such non-GAAP financial measures differently, and non-GAAP financial measures exclude expenses that may have a material impact on our reported financial results.

The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.

A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.

Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Investors should not rely on any single financial measure to evaluate our business.

Non-GAAP Gross Profit, Non-GAAP Gross Margin, Non-GAAP Operating Expenses, Non-GAAP Loss from Operations, and Non-GAAP Operating Margin

We define these non-GAAP financial measures as the respective GAAP measures, excluding stock-based compensation expense, amortization of acquired intangible assets, employer payroll tax related to employee stock transactions, acquisition-related expenses, and restructuring-related charges.

We excluded acquisition-related expenses for the first time during 2021 and have retrospectively adjusted comparable periods.

Stock-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of the compensation provided to our employees.

Because of varying available valuation methodologies, subjective assumptions, and the variety of equity instruments that can impact a company’s non-cash expenses, we believe that providing non-GAAP financial measures that exclude stock-based compensation expense allow for meaningful comparisons between our operating results from period to period.

The expense related to amortization of acquired intangible assets is dependent upon estimates and assumptions, which can vary significantly and are unique to each asset acquired;

therefore, we believe that non-GAAP measures that adjust for the amortization of acquired intangible assets provide investors a consistent basis for comparison across accounting periods.

The amount of employer payroll tax-related items on employee stock transactions is dependent on RSU settlements, option exercises, related stock price, and other factors that are beyond our control and that do not correlate to the operation of our business.

When evaluating the performance of our business and making operating plans, we do not consider these items (for example, when considering the impact of equity award grants, the Company places a greater emphasis on overall stockholder dilution than the accounting charges associated with such grants).

Acquisition-related expenses include external and incremental transaction costs, such as legal and due diligence costs, and retention payments.

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Refer to Note 19 in the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K regarding the 2020 restructuring event.

The following tables present reconciliations of our GAAP financial measures to our non-GAAP financial measures as of the periods presented:

Overall, we believe it is useful to exclude these expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results period-over-period and to those of peer companies.

The following tables present reconciliations of our GAAP financial measures to our non-GAAP financial measures for the periods presented:

Reconciliation of gross profit and gross margin to non-GAAP gross profit and non-GAAP gross margin:

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Stock-based compensation expense

Amortization of acquired intangible assets

Amortization of acquired technology intangible assets

Employer payroll tax on employee stock transactions

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Liquidity and Capital Resources

Historically, we financed our operations principally through private placements of our equity securities.

Prior to our IPO, we financed our operations principally through private placements of our equity securities.

In May 2021, we received $665.1 million in net proceeds from our IPO.

As of December 31, 2021, our principal sources of liquidity are cash and cash equivalents of $589.2 million, which were held in checking accounts, savings accounts, and highly liquid money market funds.

A portion of the cash and cash equivalents were used to complete the acquisitions of LaborChart and Levelset during the fourth quarter of 2021, and Indus.ai, Inc.

(“Indus”) in the second quarter of 2021.

The preliminary purchase consideration to acquire Levelset was $484.1 million, of which $426.1 million was paid in cash on the acquisition date of November 2, 2021.

The preliminary purchase consideration to acquire LaborChart was $76.2 million, all of which was paid in cash on the acquisition date of October 21, 2021.

The purchase consideration to acquire Indus was $24.3 million, of which $20.3 million was paid in cash on the acquisition date of May 3, 2021.

We also have our Credit Facility that may be used for general corporate purposes and is available until the Credit Facility’s maturity on May 7, 2022.

As of December 31, 2021, $75.0 million, less $6.5 million in outstanding letters of credit, was available to be drawn under the Credit Facility.

Levelset also has a materials finance business that finances customers’ purchases of construction materials and offers customers deferred payment terms.

The materials finance business is currently immaterial, but is expected to grow in the future, which may impact our liquidity.

As of December 31, 2022, our principal sources of liquidity are cash, cash equivalents, and marketable securities totaling $582.2 million, which were held in checking accounts, savings accounts, money market funds, U.S.

treasury securities, commercial paper, corporate notes and obligations, and time deposits.

Our investments in marketable securities are exposed to interest rate risk;

however, due to the short-term nature of our investments, we do not anticipate being exposed to material risks due to changes in interest rates.

On April 29, 2022, we terminated our Credit Facility.

Upon termination of the Credit Facility, our outstanding letters of credit, issued by Silicon Valley Bank, remain outstanding on an unsecured basis, without any requirement to set aside restricted cash.

Our cash sources primarily consist of cash generated from sales to our customers, proceeds from employees through stock option exercises and our employee stock purchase plan (“ESPP”), and interest income on our marketable securities and savings account balances.

Our cash requirements are primarily for operating expenses, which include personnel-related costs, purchase obligations primarily for hosting and software license and other services, lease obligations, and capital expenditures for our employees and offices.

We also fund investments which help drive our strategic business growth through acquisitions and investments in equity securities and limited partnership funds.

We also have a materials financing program that finances our customers’ purchases of construction materials on deferred payment terms.

We are currently using capital from our balance sheet for our materials financing program.

Ultimately, we anticipate partnering with a capital provider at the appropriate time to dedicate the financing needed to scale this program.

Until that time, we may use up to approximately 10% of our current cash, cash equivalents, and marketable securities position to support the program.

As of December 31, 2022, we had receivables for amounts financed for customers, net of the related allowance for expected credit losses, of $11.5 million on our consolidated balance sheet.

We expect this business to grow in the future, which may impact our liquidity.

In the next 12 months, we have contractual commitments consisting of operating lease obligations of $9.9 million, finance lease obligations of $3.8 million, and non-cancelable purchase commitments of $19.5 million, as disclosed in Note 6 and Note 12 of the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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

While we have generated positive cash flows from operations in recent years, we have generated losses from operations in the past as reflected in our accumulated deficit of $662.2 million as of December 31, 2021.

We may not achieve profitability in the foreseeable future due to the investments we intend to make and may require additional capital resources to execute strategic initiatives to grow our business.

In addition, in the next 12 months, we have contractual commitments of $1.2 million for an operating lease that had not yet commenced as of December 31, 2022, and purchase commitments of $22.5 million for an agreement we renewed and executed in January 2023.

We believe our existing cash, cash equivalents, and marketable securities will be sufficient to meet our needs for at least the next 12 months.

While we have begun to generate positive cash flows from operations in recent years, we have continued to generate losses from operations, as reflected in our accumulated deficit of $949.1 million as of December 31, 2022.

We may not achieve profitability in the foreseeable future and may require additional capital resources to execute strategic initiatives to grow our business.

This assessment is a forward-looking statement and involves risks and uncertainties.

Beyond the next 12 months, we have contractual commitments that we are reasonably likely to incur consisting of operating lease obligations of $46.8 million, finance lease obligations of $64.0 million, and non-cancelable purchase commitments of $21.8 million, as disclosed in Note 4 and Note 10 of the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Our additional future capital requirements will depend on many factors, including our revenue growth rate, new customer acquisition and subscription renewal activity, timing of billing activities, our ability to integrate the companies or technologies we acquire and realize strategic and financial benefits from our investments and acquisitions, the timing and extent of spending to support further sales and marketing and research and development efforts, general and administrative expenses to support our growth, including international expansion, and the ongoing impact of the COVID-19 pandemic.

Beyond the next 12 months, we have contractual commitments that we are reasonably likely to incur consisting of operating lease obligations of $41.8 million, finance lease obligations of $60.3 million, and non-cancelable purchase commitments of $28.8 million, as disclosed in Note 6

and Note 12 of the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

In addition, beyond the next 12 months, we have contractual commitments of $1.5 million for an operating lease that had not yet commenced as of December 31, 2022, and purchase commitments of $22.5 million for an agreement we renewed and executed in January 2023.

Our additional future capital requirements will depend on many factors, including our revenue growth rate, new customer acquisition and subscription renewal activity, timing of billing activities, our ability to integrate the companies or technologies we acquire and realize strategic and financial benefits from our investments and acquisitions, other strategic transactions or investments we may enter into, the timing and extent of spending to support further sales and marketing and research and development efforts, general and administrative expenses to support our growth, including international expansion, the timing and extent of amounts financed and customer repayments under our materials financing program, and inflation.

We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights.

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(in thousands)

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Net cash used in investing activities

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Our primary uses of cash from operating activities are for personnel expenses, marketing expenses, hosting and software license expenses, and overhead.

Net cash provided by operating activities was $36.7 million in 2021 which resulted from a net loss of $265.2 million, adjusted for non-cash charges of $247.9 million and a net cash inflow of $54.0 million from changes in operating expenses and liabilities.

Net cash provided by operating activities was $12.6 million in 2022, which resulted from a net loss of $286.9 million, adjusted for non-cash charges of $237.8 million and a net cash inflow of $61.7 million from changes in operating assets and liabilities.

The $61.7 million of net cash inflows provided as a result of changes in our operating assets and liabilities primarily reflected the following:

a $97.0 million increase in deferred revenue primarily due to the growth of our business and timing of billings;

a $38.2 million increase in accrued expenses and other liabilities primarily due to timing of payroll and cash payments to our vendors, and accrued employee stock purchase plan (“ESPP”) contributions;

a $4.0 million increase in accounts payable primarily due to timing of cash payments to our vendors.

a $34.6 million increase in accrued expenses and other liabilities primarily due to personnel-related expenses and timing of cash payments to our vendors.

These changes in our operating assets and liabilities were partially offset by the following:

a $34.2 million increase in accounts receivable primarily due to timing of billings and cash receipts from customers;

a $16.7 million increase in prepaid expenses and other assets primarily due to cash retention payments made to certain Levelset employees at the close of the acquisition which are subject to vest based on future service, further described in Note 5 of our audited consolidated financial statements, and timing of cash payments to our vendors;

a $35.8 million increase in accounts receivable primarily due to timing of billings and cash receipts from customers from the growth of our business;

a $22.0 million increase in deferred contract cost assets related to commissions as a result of additional customer contracts closed during the period;

a $5.7 million decrease in operating lease liabilities related to lease payments.

Net cash provided by operating activities was $21.9 million in 2020, which resulted from a net loss of $96.2 million, adjusted for non-cash charges of $114.9 million and net cash inflow of $3.1 million from changes in operating assets and liabilities.

an $8.9 million decrease in operating lease liabilities related to lease payments;

a $3.8 million increase in prepaid expenses and other assets primarily due to timing of cash payments to our vendors.

Net cash provided by operating activities was $36.7 million in 2021, which resulted from a net loss of $265.2 million, adjusted for non-cash charges of $247.9 million and a net cash inflow of $54.0 million from changes in operating expenses and liabilities.

The $54.0 million of net cash inflows provided as a result of changes in our operating assets and liabilities primarily reflected the following:

a $78.7 million increase in deferred revenue primarily due to the growth of our business and timing of billings;

a $38.2 million increase in accrued expenses and other liabilities primarily due to timing of payroll and cash payments to our vendors, and accrued ESPP contributions;

a $4.0 million increase in accounts payable primarily due to timing of cash payments to our vendors.

These changes in our operating assets and liabilities were partially offset by the following:

a $34.2 million increase in accounts receivable primarily due to timing of billings and cash receipts from customers;

a $16.7 million increase in prepaid expenses and other assets primarily due to cash retention payments made to certain Levelset employees at the close of the acquisition which are subject to vest based on future service, further described in Note 7 of our audited consolidated financial statements, and timing of cash payments to our vendors;

a $10.2 million increase in deferred contract cost assets related to commissions as a result of additional customer contracts closed during the period;

a $5.7 million decrease in operating lease liabilities related to lease payments.

a $6.2 million increase in prepaid expenses and other assets primarily due to timing of cash payments to our vendors;

a $5.4 million decrease in accrued expenses and other liabilities primarily due to timing of cash payments to our vendors and timing of payroll.

Investing Activities

Net cash used in investing activities of $541.8 million in 2021 consisted of the acquisitions of Levelset, LaborChart and Indus, net of cash acquired, of $509.8 million , capitalized software development costs of $15.2 million, purchases of property, plant, and equipment of $12.4 million, and strategic investments of $4.3 million.

Net cash used in investing activities of $33.5 million in 2020 consisted of the acquisition of Esticom and Avata Intelligence Inc.

(“Avata”), net of cash acquired, of $14.5 million, capitalized software development costs of $11.8 million, and purchases of property and equipment of $7.2 million primarily related to improvements to our leased office spaces and computer equipment purchases.

Net cash used in investing activities of $340.5 million in 2022 consisted of purchases of marketable securities of $369.2 million, capitalized software development costs of $ 33.6 million, originations for materials financing of $ 23.5 million, purchases of property and equipment of $ 15.8 million, and purchases of strategic investments of $ 4.0 million, partially offset by $85.6 million of maturities of marketable securities, $ 18.7 million of customer repayments for materials financing, and $ 1.3 million in cash receipts from the settlement of post-close working capital adjustments related to our acquisitions of Levelset and LaborChart in the fourth quarter of 2021.

Net cash used in investing activities of $541.8 million in 2021 consisted of the acquisitions of Levelset, LaborChart, and Indus.ai Inc.

(“Indus”), net of cash acquired, of $509.8 million, capitalized software development costs of $15.2 million, purchases of property and equipment of $12.4 million, and purchases of strategic investments of $4.3 million.

Financing Activities

Net cash provided by financing activities was $711.8 million in 2021, which primarily consisted of $665.1 million in net proceeds from our IPO, $43.1 million in proceeds from stock option exercises, and $9.5 million in proceeds from ESPP partially offset by $3.9 million in payments of deferred offering costs and $1.5 million in payments on our finance lease obligations.

Net cash provided by financing activities of $272.1 million in 2020 primarily consisted of the proceeds of $189.8 million from the issuance of our Series I redeemable convertible preferred stock and preferred stock warrant, proceeds from the exercise of the Series I redeemable convertible preferred stock warrant of $55.0 million, and proceeds from stock option exercises of $31.2 million, partially offset by payments of offering costs of $2.3 million in connection with the anticipated sale of our common stock .

Net cash provided by financing activities was $38.7 million in 2022, which primarily consisted of $22.4 million in proceeds from stock option exercises and $22.1 million in proceeds from our ESPP, partially offset by $3.9 million in deferred payments related to our acquisition of Indus in 2021, and $1.7 million in payments on our finance lease obligations.

Net cash provided by financing activities was $711.8 million in 2021, which primarily consisted of $665.1 million in net proceeds from our IPO, $43.1 million in proceeds from stock option exercises, and $9.5 million in proceeds from our ESPP partially offset by $3.9 million in payments of deferred offering costs and $1.5 million in payments on our finance lease obligations.

Credit Facility

Our Credit Facility provides for debt financing of up to $75.0 million to be used for general corporate purposes, including the financing of working capital requirements, and is secured by a blanket lien on the Company’s assets.

The Credit Facility has a maturity date of May 7, 2022, and carries a fee of 0.225% applied to unused balances and an interest rate equal to the Wall Street Journal prime rate plus 1.25% applied to all amounts outstanding, with a floor of 3.25%.

The Credit Facility contains financial covenants that require us to maintain minimum annual recurring revenue, as defined in the loan and security agreement, and a liquidity ratio, if the Credit Facility is drawn, of at least 1.25 to 1.00.

The Credit Facility also contains restrictions on our ability to dispose of our business or property, engage in changes in business, merge with or acquire another business, incur indebtedness, encumber the collateral securing the Credit Facility, pay dividends, make distributions or payments to stockholders or redeem, retire, or repurchase any capital stock, or make any restricted investments.

As of December 31 , 2021, no amounts had been drawn down under the Credit Facility, and we were in compliance with all covenants.

The Credit Facility also provides us with the ability to issue standby letters of credit for up to $15.0 million, which if issued reduce the amount available for borrowing under the Credit Facility.

Our Credit Facility provided for debt financing of up to $75.0 million to be used for general corporate purposes, including the financing of working capital requirements, and was secured by a blanket lien on our assets, until it was terminated on April 29, 2022, prior to its maturity date on May 7, 2022.

As of December 31, 2022, we had issued letters of credit totaling $6.5 million to secure various U.S.

and Australia leased office facilities.

We may need to secure our leases with restricted cash in the future if the Credit Facility is not renewed at maturity.

Upon termination of the Credit Facility, our current letters of credit, issued by Silicon Valley Bank, remain outstanding on an unsecured basis, without any requirement to set aside restricted cash.

Remaining Performance Obligations

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We expect remaining performance obligations to change from period to period primarily due to the size, timing, and duration of new customer contracts and customer renewals.

Remaining performance obligations are also impacted by acquisitions

Critical Accounting Policies and Estimates

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These estimates are developed based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

Critical accounting estimates are accounting estimates where the nature of the estimates are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimates on financial condition or operating performance is material.

Critical accounting estimates are accounting estimates where the nature of the estimates is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and the impact of the estimates on financial condition or operating performance is material.

The critical accounting policies and estimates, assumptions, and judgments that we believe have the most significant impact on our audited consolidated financial statements are described below.

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Our subscriptions include access to our products and customer support over the subscription period.

Access to the products and customer support represent a series of distinct services as we fulfill our obligation to the customer and the customer receives and consumes the benefits of the products and support over the subscription term.

Access to the products and customer support represents a series of distinct services as we fulfill our obligation to the customer and the customer receives and consumes the benefits of the products and support over the subscription term.

The series of distinct services represents a single performance obligation.

We recognize revenue ratably over the term of the subscription beginning on the date that service is made available to the customer.

Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental and recoverable costs of obtaining a contract with a customer if we expect the benefit of those costs to be one year or longer.

We have determined that sales commissions and bonuses paid for new contracts, including certain incremental sales to existing customers, meet the requirements to be capitalized as contract acquisition costs.

The contract cost assets are deferred and then recognized on a straight-line basis over the expected period of benefit, which we estimate to be four years, which may exceed the term of the initial contract if commissions expected to be paid upon renewal are not commensurate with that of the original contract.

Judgment is required to determine the expected period of benefit, which is based on estimates of customer lives and product technology life.

Business Combinations

We account for business combinations using the acquisition method of accounting.

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated 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.

Accounting for business combinations requires us to make estimates primarily relating to the valuation of intangible assets.

Intangible assets consist primarily of acquired developed technology and acquired customer relationships.

Valuations of acquired intangible assets require us to make judgments about the selection of valuation methodologies and also significant estimates and assumptions, including, but not limited to, (1) the estimated level of effort and related costs of reproducing or replacing the assets acquired, (2) future expected cash flows from using the acquired customer relationships and technology, including future expected revenue, the rate of customer non-renewals of subscriptions, and operating expenses to deliver such expected revenue, (3) discount rates, (4) estimated royalty rate specifically used to value the acquired technology, and (5) selection of comparable companies.

Fair value estimates are based on the assumptions management believes a market participant would use in valuing the asset or liability.

Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.

Stock-Based Compensation

Stock-based compensation expense related to stock awards is recognized based on the fair value of the awards granted.

The fair value of RSUs and restricted stock awards (“RSAs”) is based on the estimated fair value of our common stock on the grant date.

The fair value of RSUs and restricted stock awards (“RSAs”) is based on the estimated fair value of the Company’s common stock on the grant date.

The fair value of each option award and ESPP purchase right is estimated on the grant date using the Black-Scholes option pricing model.

The primary input in determining the fair value of the stock- based awards is the value of our common stock.

Prior to becoming publicly traded, the valuation of our common stock required estimates which involve inherent uncertainties and the application of management’s judgment, as described below.

The determination of the grant date fair value using the Black-Scholes option-pricing model is affected by the estimated fair value of our common stock as well as volatility, expected term, dividend yield, and risk-free rate.

These assumptions represent management’s best estimates and if different assumptions had been used, our stock-based compensation expense could have been materially different.

The primary input in determining the fair value of the stock- based awards is the value of the Company’s common stock.

The determination of the grant date fair value using the Black-Scholes option-pricing model is affected by volatility, expected term, dividend yield, and risk-free rate.

These assumptions represent management’s best

estimates and if different assumptions had been used, our stock-based compensation expense could have been materially different .

For awards that vest solely based on continued service, the grant date fair value is recognized as compensation expense on a straight-line basis over the requisite service period of the awards, which is generally four years.

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We account for forfeitures as they occur instead of estimating the number of awards expected to be forfeited.

Prior to our IPO, w e ha d granted RSUs to certain employees and non-employee consultants that contain ed both liquidity- and service-based vesting conditions.

Prior to our IPO, we had granted RSUs to certain employees and non-employee consultants that contained both liquidity- and service-based vesting conditions.

Upon the effective date of the registration statement for our IPO in May 2021, the liquidity-based condition for all RSUs granted was satisfied and we recognized a cumulative catch-up stock-based compensation adjustment of $115.3 million in our consolidated statement of operations and comprehensive loss for the portion of the service period satisfied from the grant date through the effective date of the registration statement.

All RSUs granted subsequent to the IPO vest based on continued service, which is generally over four years.

Substantially all RSUs granted subsequent to the IPO vest based on continued service, which is generally over four years.

As of December 31, 2022, the total unrecognized stock-based compensation cost for all RSUs outstanding at that date was $399.3 million, which is expected to be recognized over a weighted-average vesting period of 2.5 years.

As of December 31, 2022, the total unrecognized stock-based compensation cost for unvested stock options was $ 1.8 million, which is expected to be recognized over a weighted-average period of 0.4 years.

We issued 199,670 RSAs to certain key employees in connection with the acquisition of Levelset in November 2021 that vest based on their continued service over a two-year period.

The fair value of the RSAs issued was $95.05 per share which was the closing trading stock price of our common stock on the acquisition date.

These shares are released from restriction quarterly over a two-year period assuming the continued service of the employees.

As of December 31, 2022, 99,833 shares have vested.

During 2022 and 2021, we recognized stock-based compensation expense of $ 9.5 million and $1.6 million, respectively, relating to these shares.

We issued RSAs to certain employees in connection with the acquisition of Honest Buildings in July 2019.

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These shares were released from restriction 50% on the first anniversary and 50% on the second anniversary of the acquisition date based on the continued service of the key employees.

As of December 31, 2021, all of the RSAs have vested.

During 2021 and 2020, we recognized stock-based compensation expense of $1.6 million and $2.7 million, respectively, relating to these RSAs.

We issued 199,670 RSAs to certain Levelset employees in connection with the acquisition of Levelset in November 2021 that vest based on their continued service over a two-year period.

The fair value of the RSAs issued was $95.05 per share which was the closing trading stock price of our common stock on the acquisition date.

These shares are released from restriction quarterly over a two-year period assuming the continued service of the employees.

As of December 31, 2021, no shares have vested.

During 2021, we recognized stock-based compensation expense of $1.6 million relating to these shares.

We issued 166,370 shares of common stock in connection with the ESPP in November 2021.

As of December 31, 2021, all of the RSAs were fully vested.

During 2021, we recognized stock-based compensation expense of $1.6 million relating to these RSAs.

We issued 551,753 and 166,370 shares of common stock in connection with the ESPP in 2022 and 2021, respectively.

Employee payroll contributions used to purchase these shares were reclassified to stockholders’ equity on the purchase date.

Stock-based compensation expense related to the ESPP is recognized on a straight-line basis over the offering period.

During 2021, we recognized stock-based compensation expense of $8.5 million relating to the ESPP.

Common Stock Valuations

Subsequent to the completion of our IPO in May 2021, the fair value of our common stock is determined based on the trading price of our common stock.

Prior to the IPO, given our common stock was not publicly traded, our board of directors exercised significant judgment in determining the fair value of our common stock with input from management, based on several objective and subjective factors.

Factors considered by our board of directors include:

our historical performance, financial condition, and prospects at the approximate time of grant of stock awards;

the value of companies that we considered peers based on several factors, including similarity to us with respect to industry, business model, profitability, stage of growth, and financial risk;

recent sales of our redeemable convertible preferred stock and private stock sale transactions;

the economic and competitive environment, including the industry in which we operate;

the rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock;

the likelihood of achieving a liquidity event, such as an IPO or sale of all or a portion of the company;

the lack of an active market for our common stock;

third-party valuations completed near the time of the grant.

Since our inception, we have prepared valuations in a manner consistent with the method outlined in the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately- Held-Company Equity Securities Issued as Compensation.

For each valuation performed since 2016, we estimated the valuation of our common stock based on values implied by recent transactions in our stock in close proximity to the valuation date, if any, and based on a Probability Weighted Expected Return Method (“PWERM”) valuation model.

The valuations for each of these methods closely reconciled to each other.

In estimating the valuation of our common stock using the PWERM, we calculated our equity value considering various exit scenarios including IPO and sale transactions, and staying private.

Our equity value in an IPO scenario was determined using the Guideline Public Company Method.

Under the Guideline Public Company Method we analyzed the equity value compared to trailing and forecast revenues multiples of our Guideline Public Companies in the software and technology industry and then applied those multiples to our 12 months trailing and projected revenue, as of the estimated liquidity, or exit, date.

Our equity value in the sale transactions scenario was determined using the Recent Transaction Method.

Under the Recent Transaction Method, we analyzed trailing and forecasted revenue multiples implied by recent acquisitions of companies similar to our business and then applied those multiples to our 12 months trailing and projected revenue, as of the estimated liquidity, or exit, date.

Judgment is required on the selection of comparable companies, transactions, and the selection of the multiples.

The selection of the multiples included judgments of our relative growth prospects, margin, and risks compared to the guideline companies.

In addition, we are required to estimate our forecast revenues at the time of the exit event.

We allocated the overall equity value implied by each of these scenarios to our common stock to estimate a per share value of our common stock.

The fair value of our common stock in a stay private scenario was determined using an income approach and market approach.

Under the income approach, we forecast discrete cash flows over several years and a terminal value for a residual period beyond the discrete forecast period, which we discount at our estimated weighted-average cost of capital to estimate our enterprise value.

Under the market approach, we estimated revenue multiples based on comparable guideline companies and applied these revenue multiples to our trailing 12 months and forecasted revenue.

Judgment is required in estimating our future cash flows, discount rates, comparable companies, and multiples.

We allocated the equity value implied by these valuation models in the private company scenario to our common stock using an option pricing model.

Each of the above valuations was prepared on a minority, non-marketable interest basis.

After determining a per share equity value for each scenario, we discounted the per share value for the estimated timing of the exit and then assigned a probability to each scenario to determine a probability weighted per share value of our common stock.

Lastly, we applied a discount for lack of marketability as our stock is not publicly traded.

Judgment is required on estimating the timing and exit event probabilities and discount for lack of marketability.

JOBS Act Accounting Election

The JOBS Act, permits an “emerging growth company” such as us to delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We intend to rely on other exemptions provided by the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

We will remain an emerging growth company until the earliest to occur of:

(1) the last day of our first fiscal year in which we have total annual revenues of more than $1.07 billion;

(2) the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates;

(3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period;

and (4) the last day of the fiscal year ending after the fifth anniversary of our IPO.

During 2022 and 2021, we recognized stock-based compensation expense of $ 15.0 million and $8.5 million, respectively, relating to the ESPP.

Business Combinations

We account for business combinations using the acquisition method of accounting.

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated 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.

Accounting for business combinations requires us to make estimates primarily relating to the valuation of intangible assets.

Intangible assets consist primarily of acquired developed technology and acquired customer relationships.

Fair value estimates are based on the assumptions management believes a market participant would use in valuing the asset or liability.

JOBS Act Accounting Election and Emerging Growth Company Status

Effective as of December 31, 2022, we are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

Prior to losing our status as an emerging growth company, the JOBS Act permitted us to delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We had irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore, we were subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We had previously intended to rely on other exemptions provided by the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404.

We can no longer take advantage of these exemptions because we are no longer an emerging growth company.

Recent Accounting Pronouncements

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

What changed 10-K

Item 7. Management’s Discussion and Analysis