BLACKLINE, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K) – marketscreener.com

February 26, 2022

 The following discussion of our financial condition and results of operations should be read together with the financial statements and the related notes set forth in Item 8, "Financial Statements and Supplementary Data." The following discussion also contains forward-looking statements that involve a number of risks and uncertainties. See Part I, "Special Note Regarding Forward-Looking Statements" for a discussion of the forward-looking statements contained below and Part I, Item 1A, "Risk Factors" for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements.  This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for fiscal 2021 and fiscal 2020. For the comparison of fiscal 2020 and fiscal 2019, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 25, 2021.                                        39 --------------------------------------------------------------------------------                                      Overview  We have created a comprehensive cloud-based software platform designed to transform and modernize accounting and finance operations for organizations of all types and sizes. Our secure, scalable platform supports critical accounting processes such as the financial close, account reconciliations, intercompany accounting, and controls assurance. By introducing software to automate these processes and to enable them to function continuously, we empower our customers to improve the integrity of their financial reporting, increase efficiency in their accounting and finance processes and enhance real-time visibility into their operations.

At December 31, 2021, we had 328,389 individual users across 3,825 customers. Additionally, we continue to build strategic relationships with technology vendors, professional services firms, business process outsourcers, and resellers.

We are a holding company and conduct our operations through our wholly-owned subsidiary, BlackLine Systems, Inc. ("BlackLine Systems"). BlackLine Systems funded its business with investments from our founder and cash flows from operations until September 3, 2013. On September 3, 2013, we acquired BlackLine Systems, and Silver Lake Sumeru and Iconiq acquired a controlling interest in us, which we refer to as the "2013 Acquisition." The 2013 Acquisition was accounted for as a business combination under accounting principles generally accepted in the United States ("GAAP") and resulted in a change in accounting basis as of the date of the 2013 Acquisition. Our cloud-based products include Account Reconciliations, Transaction Matching, Task Management, Journal Entry, Variance Analysis, Consolidation Integrity Manager, Compliance, Cash Application, Credit & Risk Management, Collections Management, Disputes & Deductions, Team & Task Management, AR Intelligence, Intercompany Workflow, Intercompany Processing, and Netting and Settlement. These products are offered to customers as scalable solutions that support critical accounting processes, such as the financial close, account reconciliations, cash application, intercompany accounting, and compliance. We derived approximately 94% of our revenue from subscriptions to our cloud-based software platform and approximately 6% from professional services for the year ended December 31, 2021. The majority of subscriptions are sold through one-year non-cancellable contracts, with a growing percentage of subscriptions sold through three-year contracts. We price our subscriptions based on a number of factors, primarily the number of users having access to the products and the number of products purchased by the customer. Subscription revenue is recognized ratably over the term of the customer contract. The first year of subscription fees are typically payable within 30 days after execution of a contract, and thereafter upon renewal. Professional services consist of implementation and consulting services. Although our platform is ready to use immediately after a new customer has access to it, we typically help customers implement our solutions. We also provide consulting services to help customers optimize the use of our products. We charge customers for our consulting services on a time-and-materials basis and we recognize that revenue as services are performed. A limited number of our customers are provided professional services for a fixed fee, which is initially recorded as deferred revenue and recognized on a proportional-performance basis as the services are performed. We typically invoice customers annually in advance for subscriptions. We also invoice fixed fee implementation in advance and professional services on a time-and-materials basis for professional services. We record amounts invoiced for portions of annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our consolidated balance sheet. We sell our solutions primarily through our direct sales force, which leverages our relationships with technology vendors, professional services firms and business process outsourcers. In particular, our solution integrates with SAP's ERP solutions. In the fourth quarter of 2018, SAP became part of the reseller channel that we use in the ordinary course of business such that SAP has the ability to resell our solutions, as an SAP solution-extension ("SolEx"), for which we receive a percentage of the revenues. In the first quarter of 2022, we entered into an agreement with Google Cloud in which the two companies will collaborate on joint selling and go-to-market activities and bring enhanced automation solutions for finance and accounting to new and existing customers. Our ability to maximize the lifetime value of our customer relationships will depend, in part, on the willingness of customers to purchase additional user licenses and products from us. We rely on our sales and customer success teams to support and grow our existing customers by maintaining high customer satisfaction and educating customers on the value all our products provide. 40 -------------------------------------------------------------------------------- The length of our sales cycle depends on the size of a potential customer and contract, as well as the type of solution or product being purchased. The sales cycle for our global enterprise customers is generally longer than that of our mid-market customers. In addition, the length of the sales cycle tends to increase for larger contracts and for more complex, strategic products like Intercompany Hub. As we continue to focus on increasing our average contract size and selling more strategic products, we expect our sales cycle to lengthen and become less predictable, which could cause variability in our results for any particular period. We have historically signed a high percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter of each year and usually during the last month of the quarter. This can be attributed to buying patterns typical in the software industry. As the terms of most of our customer agreements are measured in full year increments, agreements initially entered into during the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years. This seasonality is reflected in our revenues, though the impact to overall annual or quarterly revenues is minimal due to the fact that we recognize subscription revenue ratably over the term of the customer contract. For the years ended December 31, 2021, 2020, and 2019, we had revenues totaling $425.7 million, $351.7 million, and $289.0 million, respectively, and we incurred net losses attributable to BlackLine, Inc. of $115.2 million, $46.9 million, and $32.5 million, respectively.

COVID-19 Update

In December 2019, the emergence of a novel coronavirus, or COVID-19, was reported and in March 2020, the World Health Organization characterized COVID-19 as a pandemic. We responded to the pandemic by creating an executive task force to monitor the COVID-19 situation daily, immediately restricted non-essential travel and enabled work-from-home protocols. Shortly thereafter, and in line with guidance provided by government agencies and international organizations, we restricted all travel, mandated a work-from-home policy across our global workforce, and moved all in-person customer-facing events to virtual formats. We expect these restrictions to stay in effect during the first half of 2022. We also responded with COVID-19 customer-relief programs to help our community of global accounting and finance professionals in these challenging times. We have offered free access to our entire training library. We also offered the Task Management and Reporting modules complimentary for six months to existing customers to enable a more effective remote close. In addition, we announced complimentary coaching sessions with our existing customers. We have been recognized by The Stevie International Business Awards and the CEO World Awards for our commitment to helping ensure business continuity and fostering well-being for both customers and employees in response to, and throughout the COVID-19 pandemic. We have continued to see purchasing decisions being deferred due to COVID-19 and a reduction on new business pipeline and large deals. We further expect delays in deals arising out of our SAP partnership, all which will impact our customers and prospects, and our financial results for fiscal 2022. We have also seen a decrease in travel-related expenses and advertising and trade show expenses. The broader implications of the global emergence of COVID-19 on our business, operating results, and overall financial performance remain uncertain and depend on certain developments, including the duration and spread of the virus and any current and subsequent variants of the virus, the impact on our customers and our sales cycles, the impact on our partners and employees, and the impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. We are conducting business as usual with certain limitations to employee travel, employee work locations, and marketing events, among other modifications. We have observed other companies taking precautionary and preemptive actions to address COVID-19, and the effects it has had and is expected to have on business and the economy. During the year ended December 31, 2021, certain new and existing customers halted or decreased investment in infrastructure, and we observed certain of our current and potential customers take actions to reduce operating expenses and moderate cash flows, including by delaying sales and requesting extended billing and payment terms. The risk of a cybersecurity incident occurring has increased since the start of the pandemic as more companies and individuals are working remotely and through less secure network connections. As a result, we have increased our investments in network security to help mitigate against such an incident. We cannot provide assurances that our preventative efforts will be successful. We will continue to actively monitor the COVID-19 pandemic 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. 41 --------------------------------------------------------------------------------

Acquisition of Rimilia

  On October 2, 2020, we completed the acquisition (the "Rimilia Acquisition") of Rimilia Holdings Ltd. ("Rimilia") for consideration of $120.0 million payable at the closing of the acquisition with additional cash payments of up to $30.0 million payable upon certain earnout conditions being met. We funded the Rimilia Acquisition on September 30, 2020 with existing cash on-hand, in advance of the closing. See Note 5, "Business Combinations," of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding consideration paid for this acquisition.  The acquisition extends our capabilities into accounts receivable automation through enabling cash application and collection solutions, and accelerating our larger, long-term plan for transforming and modernizing finance and accounting. This acquisition was not a significant acquisition under Regulation S-X.

Acquisition of FourQ

  On January 26, 2022, we completed the acquisition (the "FourQ Acquisition") of FourQ Systems, Inc. ("FourQ") for consideration of $165.0 million payable at the closing of the acquisition with additional payments of up to $75.0 million over the next three years subject to certain financial performance milestones. The fair value estimate of contingent consideration is in the early stages of analysis. The purchase price is also subject to certain post-closing purchase price adjustments, including working capital adjustments. We funded the FourQ Acquisition with existing cash on-hand.  With the FourQ Acquisition, we seek to enhance our existing intercompany accounting automation capabilities by driving end-to-end automation of traditionally manual intercompany accounting processes and further accelerating our larger, long-term plan for transforming and modernizing finance and accounting. This acquisition was not a significant acquisition under Regulation S-X.                                    Key Metrics  We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make strategic decisions. Each of the metrics below exclude the impact of on-premise software.                                                           Year Ended

December 31,

2021 2020 2019 Dollar-based net revenue retention rate 109 % 106 % 110 % Number of customers 3,825 3,433 3,024 Number of users 328,389 291,873 267,621 Dollar-based net revenue retention rate. We believe that dollar-based net revenue retention rate is an important metric to measure the long-term value of customer agreements and our ability to retain and grow our relationships with existing customers over time. We calculate dollar-based net revenue retention rate as the implied monthly subscription and support revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription and support revenue one year prior to the date of calculation for that same customer base. This calculation does not reflect implied monthly subscription and support revenue for new customers added during the one-year period but does include the effect of customers who terminated during the period. We define implied monthly subscription and support revenue as the total amount of minimum subscription and support revenue contractually committed to, under each of our customer agreements over the entire term of the agreement, divided by the number of months in the term of the agreement. At December 31, 2021, our dollar-based net revenue retention rate increased primarily due to higher net growth in existing customer accounts. Our ability to maximize the lifetime value of our customer relationships will depend, in part, on the willingness of the customer to purchase additional user licenses and products from us. We rely on our customer success and sales teams to support and grow our existing customers by maintaining high customer satisfaction and educating the customer on the value all our products provide. Number of customers. We believe that our ability to expand our customer base is an indicator of our market penetration and the growth of our business. We define a customer as an entity with an active subscription agreement as of the measurement date. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced as a separate entity is treated as a separate customer. However, where an existing customer requests its invoice be divided for the sole purpose of restructuring its internal billing arrangement without 42 -------------------------------------------------------------------------------- any incremental increase in revenue, such customer continues to be treated as a single customer. For the years ended December 31, 2021, 2020 and 2019, no single customer accounted for more than 10% of our total revenues. Number of users. Since our customers generally pay fees based on the number of users of our platform within their organization, we believe the total number of users is an indicator of the growth of our business. We are also beginning to sell an increasing number of non-user based strategic products, such as Transaction Matching, Cash Application, and Intercompany Hub. Key Components of our Results of Operations

Revenues

Subscription and support. The majority of subscriptions are sold through one-year non-cancellable contracts and a growing percentage of subscriptions are sold through three-year contracts. Fees are based on a number of factors, including the solutions subscribed to by the customer and the number of users having access to the solutions. The first year of subscription fees are typically payable within 30 days after execution of a contract, and thereafter upon renewal. We initially record the subscription fees as deferred revenue and recognize revenue ratably over the term of the contract. At any time during the subscription period, customers may increase their number of users and add products. Additional fees are payable for the remainder of the initial or renewed contract term. Customers may only reduce their number of users or subscription to products upon renewal of their arrangement. Revenues from subscriptions to our cloud-based software platform composed approximately 94% of our revenues for the year ended December 31, 2021. Subscription and support revenues also include revenues associated with sales of on-premise software licenses and related support, but we no longer develop any new applications or functionality for our legacy on-premise software, and anticipate that this component of our revenues will continue to decline relative to total revenue. Professional services. We offer our customers implementation and consulting services. Although our platform is ready to use immediately after a new customer has access to it, we typically help customers implement our solutions. We also provide consulting and training services to help customers optimize the use of our products. These services are considered distinct performance obligations. Professional services do not result in significant customization of the subscription service. We apply the practical expedient to recognize professional services revenue when we have the right to invoice based on time and materials incurred. A limited number of our customers are provided professional services for a fixed fee, which is initially recorded as deferred revenue and recognized on a proportional-performance basis as the services are performed. Professional services revenues composed approximately 6% of our revenues for the year ended December 31, 2021.

For a description of our revenue accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates.”

Cost of Revenues

  Subscription and support cost of revenues.  Subscription and support cost of revenues primarily consists of amortization of acquired developed technology costs, salaries, benefits and stock-based compensation associated with our hosting operations and support personnel, data center costs related to hosting our cloud-based software, and amortization of capitalized internal-use software costs. We also allocate a portion of overhead to subscription and support cost of revenues.  Professional services costs of revenues.  Costs associated with providing professional services primarily consist of salaries, benefits and stock-based compensation associated with our implementation personnel. These costs are expensed as incurred when the services are performed. We also allocate a portion of overhead to professional services cost of revenues.

Operating Expenses

Sales and marketing. Sales and marketing expenses consist primarily of personnel costs of our sales and marketing employees, including salaries, sales commissions and incentives, benefits and stock-based compensation expense, travel and related costs, commissions paid in connection with our strategic relationships,

43 -------------------------------------------------------------------------------- outside consulting fees, marketing programs, including lead generation, costs of our annual conference, advertising, and trade shows, other event expenses, and allocated overhead costs. Sales and marketing expenses also include amortization of customer relationship intangible assets. We defer sales and partner commissions and amortize them over an estimated period of benefit of five years. We expect the annual trend in sales and marketing expenses to continue to increase as we expand our direct sales teams and increase sales through our strategic relationships and resellers. Research and development. Research and development expenses consist primarily of salaries, benefits and stock-based compensation associated with our engineering, product and quality assurance personnel and allocated overhead costs. Research and development expenses also include the cost of third-party contractors. Other than internal-use software development costs that qualify for capitalization, research and development costs are expensed as incurred. We expect research and development costs to increase as we develop new solutions and make improvements to our existing platform. General and administrative. General and administrative expenses consist primarily of salaries, benefits and stock-based compensation associated with our executive, finance, legal, human resources, compliance, and other administrative personnel, accounting, auditing and legal professional services fees, recruitment costs, other corporate-related expenses, transaction-related costs, and allocated overhead costs. General and administrative expenses also include amortization of a covenant not to compete and trade name intangible assets, and the change in fair value of contingent consideration. We expect that general and administrative expenses will increase as we incur the costs of compliance associated with being a publicly-traded company, including legal, audit and consulting fees.

Interest Income

Interest income primarily consists of earnings on our cash and cash equivalents and our marketable securities.

Interest Expense

Interest expense consists primarily of interest expense associated with our Convertible Senior Notes (the “Notes”) issued in August 2019.

Provision for (Benefit from) Income Taxes

  We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. We use the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using tax rates expected to be in effect during the years in which the bases differences are expected to reverse.  We record a valuation allowance against our deferred tax assets to the extent that realization of the deferred tax assets, including consideration of our deferred tax liabilities, is not more likely than not. For the year ended December 31, 2021, for both federal and state income taxes, we have recorded a valuation allowance against our deferred tax assets because of our cumulative operating losses since inception, as we believe that the realization of the deferred tax assets is currently not more likely than not. We have also recorded a valuation allowance against certain foreign deferred tax assets.                                          44 --------------------------------------------------------------------------------                            Non-GAAP Financial Measures  In addition to our results determined in accordance with GAAP, we believe the non-GAAP measures below are useful to us and our investors in evaluating our business. These non-GAAP financial measures are useful because they provide consistency and comparability with our past performance, facilitate period-to-period comparisons of operations and facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.                                                                                Year Ended December 31,                                                                               2021                 2020                                                                         (in thousands, except percentages) GAAP gross profit                                                       $    327,835           $ 282,765 GAAP gross margin                                                               77.0   %            80.4  % GAAP net loss attributable to BlackLine, Inc.                           $   (115,161)          $ (46,911)                                                                                  Year Ended December 31,                                                                              2021                 2020                                                                         (in thousands, except percentages) Non-GAAP gross profit                                                   $   338,930           $ 290,853 Non-GAAP gross margin                                                          79.6   %            82.7  % Non-GAAP net income attributable to BlackLine, Inc.                     $    36,535           $  46,100   Non-GAAP Gross Profit and Non-GAAP Gross Margin. Non-GAAP gross profit is defined as GAAP revenues less GAAP cost of revenue adjusted for the amortization of acquired developed technology and stock-based compensation. Non-GAAP gross margin is defined as non-GAAP gross profit divided by GAAP revenues. We believe that presenting non-GAAP gross margin is useful to investors as it eliminates the impact of certain non-cash expenses and allows a direct comparison of gross margin between periods.  Non-GAAP Net Income (loss) attributable to BlackLine. Non-GAAP net income (loss) attributable to BlackLine is defined as GAAP net loss attributable to BlackLine adjusted for the impact of the provision for (benefit from) income taxes related to acquisitions, amortization of intangible assets, stock-based compensation, the amortization of debt discount and issuance costs from our convertible notes, the change in the fair value of contingent consideration, transaction-related costs, legal settlement gains, loss on extinguishment of convertible senior notes, and the adjustment to the value of the redeemable non-controlling interest to the redemption amount. We believe that presenting non-GAAP net income (loss) attributable to BlackLine is useful to investors as it eliminates the impact of items that have been impacted by the Company's acquisitions and other related costs in order to allow a direct comparison of net loss between all periods presented.                                        45 --------------------------------------------------------------------------------

Reconciliation of Non-GAAP Financial Measures

  The following table presents a reconciliation of gross profit, gross margin, and net loss, the most comparable GAAP measures to non-GAAP gross profit, non-GAAP gross margin and non-GAAP net income:                                                                                      Year Ended December 31,                                                                                     2021                 2020                                                                                          (in thousands) Non-GAAP Gross Profit: Gross profit                                                                   $    327,835          $ 282,765 Amortization of acquired developed technology                                         2,685              1,192 Stock-based compensation                                                              8,410              6,896 Total non-GAAP gross profit                                                    $    338,930          $ 290,853 Gross margin                                                                           77.0  %            80.4  % Non-GAAP gross margin                                                                  79.6  %            82.7  %

Non-GAAP Net Income Attributable to BlackLine, Inc.: Net loss attributable to BlackLine, Inc.

                                       $   (115,161)         $ (46,911) Benefit from income taxes related to acquisitions                                      (961)              (669) Amortization of intangible assets                                                    10,479              7,679 Stock-based compensation                                                             65,723             49,690 Amortization of debt discount and issuance costs                                     55,538             22,689 Change in fair value of contingent consideration                                     (2,758)                28 Transaction-related costs                                                             1,586              4,736 Loss on extinguishment of convertible senior notes                                    7,012                  - Adjustment to redeemable non-controlling interest                                    15,077              8,858 Total non-GAAP net income attributable to BlackLine, Inc.                      $     36,535          $  46,100                                           46

--------------------------------------------------------------------------------                               Results of Operations  The following tables set forth selected historical consolidated statements of operations data, which should be read in conjunction with Critical Accounting Policies and Estimates, Liquidity and Capital Resources, and Contractual Obligations and Commitments included in this Item 7, as well as Quantitative and Qualitative Disclosures About Market Risk and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.  Consolidated statements of operations information was as follows (in thousands):                                                             Year Ended December 31,                                                              2021               2020                                                                 (in thousands) Revenues Subscription and support                              $     398,633          $ 328,559 Professional services                                        27,073             23,178 Total revenues                                              425,706            351,737 Cost of revenues Subscription and support                                     71,979             47,919 Professional services                                        25,892             21,053 Total cost of revenues                                       97,871             68,972 Gross profit                                                327,835            282,765 Operating expenses Sales and marketing                                         202,620            174,581 Research and development                                     77,322             56,464 General and administrative                                   86,507             71,611 Total operating expenses                                    366,449            302,656 Loss from operations                                        (38,614)           (19,891) Other income (expense)  Interest income                                                 700              4,502 Interest expense                                            (62,945)           (23,311)  Other expense, net                                          (62,245)           (18,809) Loss before income taxes                                   (100,859)           (38,700) Provision for income taxes                                      135                702 Net loss                                                   (100,994)           (39,402) Net loss attributable to non-controlling interest              (910)

(1,349)

Adjustment attributable to non-controlling interest 15,077

8,858

 Net loss attributable to BlackLine, Inc.              $    (115,161)         $ (46,911)   Revenues                                  Year Ended December 31,                 Change                                    2021               2020            $            %                                         (in thousands, except percentages) Subscription and support   $     398,633           $ 328,559      $ 70,074        21  % Professional services             27,073              23,178         3,895        17  % Total revenues             $     425,706           $ 351,737      $ 73,969        21  %                                          47

--------------------------------------------------------------------------------                                                    Year Ended December 31,                                                     2021

2020

 Dollar-based net revenue retention rate                     109  %         106  % Number of customers                                       3,825          3,433 Number of users                                         328,389        291,873   The increase in revenues for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to an increase in the number of customers, an increase in the number of users added by existing customers, and an increase in non-user based strategic product sales. The total number of customers and users increased by 11% and 13%, respectively, during the year ended December 31, 2021.  Cost of revenues                                   Year Ended December 31,                 Change                                 2021                  2020            $            %                                         (in thousands, except percentages) Subscription and support   $    71,979             $ 47,919       $ 24,060        50  % Professional services           25,892               21,053          4,839        23  % Total cost of revenues     $    97,871             $ 68,972       $ 28,899        42  % Gross margin                      77.0   %             80.4  %

The increase in cost of revenues for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to the following:

  •$11.8 million increase in infrastructure expenses due to higher spend on cloud hosting services related to the migration of new and existing customers to the Google Cloud Platform, and an increase in cloud hosting services in connection with the Rimilia acquisition, as well as international expansion.  •$10.2 million increase in salaries, benefits, and stock-based compensation driven primarily by 30% higher average cost of revenues-related headcount from the year ended December 31, 2020 to the year ended December 31, 2021;

•$2.6 million increase in amortization of developed technology due to net additions of software placed into service;

•$2.5 million increase in depreciation and amortization mainly due to the addition of developed technology from the Rimilia acquisition; and

  •$1.7 million increase in professional services expense due to an increase in consulting services,  Sales and marketing                                      Year Ended December 31,                Change                                      2021               2020            $            %                                            (in thousands, except percentages) Sales and marketing            $      202,620       $ 174,581       $ 28,039        16  % Percentage of total revenues             47.6  %         49.6  %   The increase in sales and marketing expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to the following:  •$23.3 million increase in salaries, sales commissions, and stock-based compensation driven primarily by higher headcount and increased commissions from revenue growth in sales of our solutions. Sales and marketing average headcount increased 12% from the year ended December 31, 2020 to the year ended December 31, 2021; and

•$3.5 million increase in advertising and trade shows driven by further virtual events, online marketing and direct mail;

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 Research and development                                                               Year Ended December 31,                         Change                                                            2021                    2020                $                 %                                                                          (in thousands, except percentages) Research and development, gross                       $    92,323               $ 67,283          $ 25,040                37  % Capitalized internally developed software costs           (15,001)               (10,819)           (4,182)               39  % Research and development, net                         $    77,322               $ 56,464          $ 20,858                37  % Percentage of total revenues                                 18.2   %

16.1 %

The increase in research and development expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to the following:

•$22.1 million increase in salaries, benefits, and stock-based compensation driven primarily by 31% higher average headcount from the year ended December 31, 2020 to the year ended December 31, 2021;

  •$1.6 million increase in computer software due primarily to greater spend on cloud hosting services related to the development of technology of the Google Cloud Platform, as well as purchases of additional software licenses driven by higher average research and development headcount; and

•$1.0 million increase in professional services expense, partially offset by

  •$4.2 million increase in capitalized software costs due to significant new and enhanced functionality of our solutions, as well as increased capitalized labor costs due to higher headcount. Collectively, these increases resulted in a decrease in net expenses.  General and administrative                                       Year Ended December 31,                 Change                                     2021                  2020            $            %                                             (in thousands, except percentages) General and administrative     $    86,507             $ 71,611       $ 14,896        21  % Percentage of total revenues          20.3   %             20.4  %

The increase in general and administrative expenses for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to the following:

•$17.8 million increase in salaries, benefits, and stock-based compensation driven primarily by 23% higher average headcount from the year ended December 31, 2020 to the year ended December 31, 2021;

•$1.8 million increase in foreign currency losses due to the strengthening of the US dollar against multiple currencies, partially offset by;

•$1.1 million increase in computer software due primarily to greater spend on a variety of software licenses and productivity tools as well as increased employee base, partially offset by;

•$2.8 million net decrease in the fair value of the contingent consideration liability primarily related to the Rimilia Acquisition; and

•transaction-related costs of $1.6 million in the year ended December 31, 2021, compared to $4.7 million in the year ended December 31, 2020.

 Interest income                          Year Ended December 31,                  Change                            2021                2020           $            %                                (in thousands, except percentages) Interest income   $      700                 $ 4,502      $ (3,802)      (84) %

The decrease in interest income during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to a decrease in average interest rates, partially offset by an increase in

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average cash, cash equivalents, and marketable securities balances in the year ended December 31, 2021, compared to the year ended December 31, 2020.

 Interest expense                           Year Ended December 31,                  Change                             2021                2020           $            %                                 (in thousands, except percentages) Interest expense   $      62,945             $ 23,311      $ 39,634       170  %   The increase in interest expense during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to $41.2 million in amortization of the debt discount on the 2026 Notes and a $7.0 million loss on the partial extinguishment of the 2024 Notes, partially offset by a $8.6 million decrease in amortization of the debt discount on the 2024 Notes due to the partial repurchase.  Provision for income taxes                                       Year Ended December 31,                  Change                                          2021                 2020         $           %                                            (in thousands, except percentages) Provision for income taxes   $         135                   $ 702      $ (567)      (81) %   We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions. For the year ended December 31, 2021, our annual estimated effective tax rate differed from the U.S. federal statutory rate of 21% primarily as a result of state taxes, foreign taxes, and changes in our valuation allowance for domestic income taxes. For the years ended December 31, 2021 and 2020, we recorded $0.1 million and $0.7 million in income tax expense, respectively. The decrease in income tax expense for the year ended December 31, 2021, compared to the year ended December 31, 2020, was attributable to 2021 tax benefits associated with our international operations. For the year ended December 31, 2021, we continued to maintain a full valuation allowance on our U.S. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized.                          Liquidity and Capital Resources  At December 31, 2021, our principal sources of liquidity were an aggregate of $1.2 billion of cash and cash equivalents and marketable securities, which primarily consist of short-term, investment-grade U.S. treasury securities. We had $1.4 billion aggregate principal amount of Notes outstanding at December 31, 2021.  We believe our existing cash and cash equivalents, investments in marketable securities and cash from operations will be sufficient to meet our working capital needs, capital expenditures and financing obligations for at least the next 12 months.

Contractual Obligations and Commitments

Notes Payable

  During the quarter ended December 31, 2021, the Stock Price Condition allowing holders of the 2024 Notes to convert was met. As a result, holders have the option to convert their 2024 Notes at any time during the calendar quarter ending March 31, 2022. We have the ability to settle the 2024 Notes in cash, shares of our common stock, or a combination of cash and shares of our common stock at our election. From January 1, 2022, through the date of this filing, we have not received any conversion requests for our 2024 Notes. It is our current intent to settle any such conversions through combination settlement, which involves repayment of the principal portion in cash and any excess conversion value over the principal amount in shares of our common stock.  In connection with the offering of the 2024 Notes, we entered into the 2024 Capped Calls with certain counterparties covering, subject to anti-dilution adjustments, approximately 3.4 million shares of our common stock and are generally expected to offset the potential economic dilution of our common stock up to the initial cap price.                                        50 --------------------------------------------------------------------------------  The 2024 Capped Calls have an initial strike price of $73.40 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes, and an initial cap price of $106.76 per share, subject to certain adjustments. As of December 31, 2021, all of the 2024 Capped Calls remained outstanding.  In connection with the offering of the 2026 Notes, we entered into the 2026 Capped Calls with certain counterparties covering, subject to anti-dilution adjustments, approximately 6.9 million shares of our common stock and are generally expected to offset the potential economic dilution of our common stock up to the initial cap price. The 2026 Capped Calls have an initial strike price of $166.23 per share - subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes - and an initial cap price of $233.31 per share, subject to certain adjustments. As of December 31, 2021, all of the 2026 Capped Calls remained outstanding.

Lease Liabilities

As of December 31, 2021, we have obligations totaling $19.4 million related to existing property and equipment leases. For one of our existing leases, we estimate that, in readiness for our occupancy, we have remaining leasehold improvements to complete of $5.6 million at December 31, 2021.

In addition, at December 31, 2021, the Company has two lease obligations totaling $1.1 million that commenced in the first quarter of 2022 with lease terms of approximately ten months and twenty-six months.

Purchase Obligations

  Purchase obligations represent our most significant contractual obligations in the ordinary course of business for which we have not received the related goods or services, in whole or in part. As at December 31, 2021, we have $58.2 million of contractual obligations related to three commitments, with $9.8 million payable within 12 months, and have additional contractual obligations with other vendors that are collectively immaterial and which we can readily settle given our liquidity position and capital resources.

Contingent Consideration

  We are required to pay up to a maximum of $8.0 million of contingent consideration related to our 2013 Acquisition should we realize a tax benefit from the use of net operating losses generated from the stock option exercises concurrent with the 2013 Acquisition and up to a maximum of $15.0 million of contingent consideration related to the Rimilia Acquisition if certain Rimilia Annual Recurring Revenue ("ARR") thresholds are met during the second year subsequent to the acquisition date.

We are also required to pay up to a maximum of $75.0 million of contingent consideration over the next three years related to our FourQ Acquisition should we meet certain financial performance milestones.

Unrecognized Tax Liabilities

  At December 31, 2021, while we have liabilities for unrecognized tax benefits of $4.3 million, due to their nature, there is a high degree of uncertainty regarding the timing of future cash outflows and other events that extinguish these liabilities.  Letters of Credit

Commitments under letters of credit at December 31, 2021 were scheduled to expire as follows (in thousands):

                      Total      Less than 1 Year       1-3 Years      3-5 Years       Thereafter Letters of credit   $ 287      $               -      $       -      $       35      $      252   Letters of credit are maintained pursuant to certain of our lease arrangements. The letters of credit remain in effect at varying levels through the terms of the related agreements.                                        51 --------------------------------------------------------------------------------

Off-Balance Sheet Arrangements

  As part of our ongoing business, we do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.  In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, vendors, investors, directors and officers with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments we could be required to make under these indemnification provisions is indeterminable. We have never paid a material claim, nor have we been sued in connection with these indemnification arrangements. At December 31, 2021, we had not accrued a liability for these indemnification arrangements because the likelihood of incurring a payment obligation, if any, in connection with these indemnification arrangements is not probable or reasonably estimable.

Future Capital Requirements

  Our future capital requirements will depend on many factors, including our growth rate, the expansion of our direct sales force, strategic relationships and international operations, the timing and extent of spending to support research and development efforts and strategic transactions and the continuing market acceptance of our solutions. From time to time, we have required, and may in the future require or opportunistically raise, additional equity or debt financing. Sales of additional equity or equity-linked securities could result in dilution to our stockholders. If we raise funds by borrowing from third parties, the terms of those financing arrangements would require us to incur interest expense and may include negative covenants or other restrictions on our business that could impair our operating flexibility. We can provide no assurance that financing will be available at all or, if available, that we would be able to obtain financing on terms favorable to us. If we are unable to raise additional capital when needed, we would be required to curtail our operating activities and capital expenditures, and our business operating results and financial condition would be adversely affected.

Historical Cash Flows

  The following table sets forth a summary of our cash flows for the periods indicated:                                                             Year Ended December 31,                                                              2021               2020                                                                 (in thousands) Net cash provided by operating activities             $      80,093          $  54,735 Net cash provided by (used in) investing activities   $    (506,941)         $ 173,594 Net cash provided by financing activities             $     599,240

$ 18,862

Net Cash Provided by Operating Activities

  Our net loss and cash flows from operating activities are significantly influenced by our investments in headcount and infrastructure to support anticipated growth. In recent periods, our net loss has generally been significantly greater than our use of cash for operating activities due to our subscription-based revenue model in which billings occur in advance of revenue recognition, as well as the substantial amount of non-cash charges which we incur. Non-cash charges primarily include depreciation and amortization, stock-based compensation, change in fair value of contingent consideration, loss on extinguishment of convertible notes, non-cash lease expense, amortization of debt discount and issuance costs, and deferred taxes.  For the year ended December 31, 2021, cash provided by operations was $80.1 million, resulting from net non-cash expenses of $156.5 million, partially offset by our net loss of $101.0 million and net cash flow provided by changes in operating assets and liabilities of $24.6 million. The $24.6 million of net cash flows provided by changes in our operating assets and liabilities reflected the following:                                        52 --------------------------------------------------------------------------------  •$51.6 million increase in deferred revenue as a result of the growth of our customer and user bases as reflected by greater billings for our subscription and support services;

•$14.9 million increase in accrued bonuses, commissions and payroll taxes due to increased headcount and higher sales; and

•$4.0 million increase in accounts payable.

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

•$22.5 million increase in increased prepaid commissions partially offset by related amortization;

•$14.3 million increase in accounts receivable, unbilled balances and advance billings;

•$5.2 million decrease in operating lease liabilities; and

•$4.0 million increase in prepaid expenses and other current assets;

  For the year ended December 31, 2020, cash provided by operations was $54.7 million, resulting from net non-cash expenses of $97.5 million, partially offset by our net loss of $39.4 million and net cash flow used as a result of changes in operating assets and liabilities of $3.4 million. The $3.4 million of net cash flows used as a result of changes in our operating assets and liabilities reflected the following:  •$12.4 million increase in other assets primarily related to increased prepaid commissions net of related amortization and increased implementation costs for cloud computing arrangements;

•$5.7 million increase in accounts receivable;

•$5.3 million increase in prepaid expenses and other current assets;

•$5.0 million decrease in operating lease liabilities; and

•$4.4 million decrease in accounts payable.

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

  •$26.4 million increase in deferred revenue as a result of the growth of our customer and user bases as reflected by greater billings for our subscription and support services; and

•$3.1 million increase in accrued expenses and other current liabilities.

Net Cash Provided By (Used In) Investing Activities

  Our investing activities consist primarily of purchases of, and maturities and sales of, marketable securities, capitalized software development costs, and capital expenditures for property and equipment.

For the year ended December 31, 2021, cash used in investing activities was $506.9 million as a result of the following:

•$483.7 million of purchases of marketable securities, net of proceeds from maturities;

•$14.5 million in capitalized software development costs; and

•$8.7 million in purchases of property and equipment.

For the year ended December 31, 2020, cash provided by investing activities was $173.6 million as a result of the following:

•$312.4 million of proceeds from maturities and sales of marketable securities, net of purchases;

These changes in our investing activities were partially offset by the following:

•$119.3 million in cash paid for an acquisition, net of cash acquired;

•$10.6 million in capitalized software development costs;

•$6.5 million in purchases of property and equipment; and

•$2.3 million in purchases of intangible assets related to the purchase of a defensive patent.

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Net Cash Provided By Financing Activities

For the year ended December 31, 2021, cash provided by financing activities was $599.2 million as a result of the following:

•$594.2 million proceeds from the issuance of the 2026 Notes, net of the partial repurchase of the 2024 Notes and the purchase of the associated 2026 Capped Calls;

•$11.4 million of proceeds from exercises of stock options;

•$9.0 million of proceeds from the employee stock purchase plan; and

•$2.2 million of investment from redeemable non-controlling interest.

These changes in our financing activities were partially offset by the following:

•$17.0 million of acquisitions of common stock for tax withholding obligations.

For the year ended December 31, 2020, cash provided by financing activities was $18.9 million as a result of the following:

•$20.6 million of proceeds from exercises of stock options; and

•$7.0 million of proceeds from the employee stock purchase plan.

These changes in our financing activities were partially offset by the following:

•$8.2 million of acquisitions of common stock for tax withholding obligations.

Backlog

  We enter into both single and multi-year subscription contracts for our solutions. The timing of our invoices to the customer is a negotiated term and thus varies among our subscription contracts. For multi-year agreements, it is common to invoice an initial amount at contract signing followed by subsequent annual invoices. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenues, deferred revenue or elsewhere in our consolidated financial statements and are considered by us to be backlog. At December 31, 2021 and 2020, we had backlog of approximately $596.3 million and $468.6 million, respectively. We expect backlog will change from period to period for several reasons, including the timing and duration of customer agreements, varying billing cycles of subscription agreements, and the timing and duration of customer renewals. Because revenue for any period is a function of revenue recognized from deferred revenue under contracts in existence at the beginning of the period, as well as contract renewals and new customer contracts during the period, backlog at the beginning of any period is not necessarily indicative of future revenue performance. We do not utilize backlog as a key management metric internally.

Critical Accounting Estimates

  Our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.  We believe that the following critical accounting policies involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to a full understanding and evaluation of our consolidated financial condition and results of operations. See "Significant Accounting Policies" in Note 2 of the accompanying notes to our consolidated financial statements for additional information.                                        54 --------------------------------------------------------------------------------

Deferred Customer Acquisition Costs

  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 certain sales incentive programs to our employees ("deferred customer contract acquisition costs") and our partners ("partner referral fees") meet the requirements to be capitalized. Deferred customer acquisition costs related to new revenue contracts and upsells are deferred and then amortized straight line over the expected period of benefit that we have determined to be five years, based upon both the product turnover rate and estimated customer life which involves some level of judgement in terms of the inherent assumptions used. Partner referral fees are deferred and then amortized on a straight-line basis over the related contractual period, as the fees for renewals are commensurate with fees incurred for the initial contract. Deferred customer acquisition costs and partner referral fees are included within other assets on the consolidated balance sheets. There were no impairment losses in relation to the costs capitalized for the periods presented.

Capitalized Software Costs

  We account for the costs of computer software obtained or developed for internal use in accordance with ASC 350, Intangibles-Goodwill and Other ("ASC 350"). We capitalize certain implementation costs incurred in a hosting arrangement that is a service contract. These capitalized costs exclude training costs, project management costs, and data migration costs. We capitalize certain costs in the development of our SaaS subscription solutions when (i) the preliminary project stage is completed, (ii) management has authorized further funding for the completion of the project and (iii) it is probable that the project will be completed and performed as intended. These capitalized costs include estimated personnel and related expenses for employees as well as costs of third-party contractors who are directly associated with and who devote time to internal-use software projects and, when material, interest costs incurred during the development. Capitalization of these costs ceases once the project is substantially complete and the software is ready for its intended purpose. Costs incurred for significant upgrades and enhancements to our SaaS software solutions are also capitalized. Costs incurred for post-configuration training, maintenance and minor modifications or enhancements are expensed as incurred. Capitalized software development costs are amortized using the straight-line method over an estimated useful life of three years.

Business Combinations

The results of businesses acquired in business combinations are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. We perform valuations of assets acquired and liabilities assumed and allocate the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed requires our management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in business combinations. Contingent consideration payable in cash arising from business combinations is recorded at fair value as a liability on the acquisition date and remeasured at each reporting date. Changes in fair value are recorded in general and administrative expenses in the consolidated statements of operations. Determining the fair value of the contingent consideration each period requires management to make assumptions and judgments. These estimates involve inherent uncertainties, and if different assumptions had been used, the fair value of contingent consideration could have been materially different from the amounts recorded. The significant inputs used in the fair value measurement of contingent consideration are the amount and timing of Rimilia ARR in the second year subsequent to the acquisition. Significant changes in the estimated ARR and the periods in which they are generated would significantly impact the fair value of the contingent consideration liability.

Transaction-related costs incurred by the Company are expensed as incurred and are included in general and administrative expenses in the Company’s consolidated statements of operations.

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Recent Accounting Pronouncements

  See Note 2, "Significant Accounting Policies-Recently Issued Accounting Standards," of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our financial condition, results of operations and cash flows.

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