What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 198 added, 106 removed, 291 unchanged (51% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2019 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 20, 2020.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2019 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 20, 2020.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

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With our platform, organizations can rapidly and easily design, build, and implement powerful, enterprise-grade custom applications through our intuitive, visual interface with little or no coding required.

Our customers have used applications built on our platform to launch new business lines, automate vital employee workflows, manage complex trading platforms, accelerate drug development, and build global procurement systems.

Our customers have used applications built on our platform to launch new business lines, automate vital employee workflows, manage complex trading platforms,

accelerate drug development, and build global procurement systems.

With our platform, decision makers can reimagine their products, services, processes, and customer interactions by removing much of the complexity and many of the challenges associated with traditional approaches to software development.

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Generally, our sales force targets its efforts on organizations with over 2,000 employees and $2 billion in annual revenue.

Revenue from government agencies represented 14.9% and 17.8% of our total revenue in the three

months ended March 31, 2020 and March 31, 2019, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three months ended March 31, 2020 or March 31, 2019.

Revenue from government agencies represented 19.0% and 16.8% of our total revenue in the three and six months ended June 30, 2020, respectively, as compared to 16.8% and 17.3% of our total revenue in the three and six months ended June 30, 2019, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three and six months ended June 30, 2020 or June 30, 2019.

Our platform supports multiple languages to facilitate collaboration and address challenges in multi-national organizations.

We offer our platform globally.

In the three months ended March 31, 2020 and March 31, 2019, 33.5% and 31.9%, respectively, of our total revenue was generated from customers outside of the United States.

As of March 31, 2020, we operated in 12 countries.

In the three and six months ended June 30, 2020, 36.8% and 35.0%, respectively, of our total revenue was generated from customers outside of the United States as compared to 32.9% and 32.4% in the three and six months ended June 30, 2019, respectively.

As of June 30, 2020, we operated in 12 countries.

We believe we have a significant opportunity to grow our international footprint.

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We adopted ASC 606, the new revenue recognition guidance, on January 1, 2019 using the modified retrospective method.

Under this method of adoption, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit and applied the new standard only to contracts that were not completed prior January 1, 2019.

Because we were an emerging growth company until December 31, 2019, the Jumpstart Our Business Startups Act allowed us to delay adoption of ASC 606 until such time it was made applicable to private companies.

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Refer to our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 20, 2020, for a complete reconciliation of our revenues under the old and new guidance.

Prior period revenue amounts in this Form 10-Q have been recast as if we had reported under ASC 606 for the applicable periods.

Prior period amounts in this Form 10-Q have been recast as if we had reported under ASC 606 for the applicable periods.

Recent Developments

Acquisition of Novayre Solutions SL

In January 2020, we acquired Novayre Solutions SL, or Novayre, a developer of a robotic process automation platform, for approximately $6.9 million.

The transaction was financed through available cash on hand.

Novayre's results of operations are included in our condensed consolidated statements of operations from the acquisition date onwards.

Beginning in late 2019 and continuing into the first quarter of 2020, the outbreak of the novel coronavirus disease, or COVID-19, has resulted in the declaration of a global pandemic and adversely affected economic activity across virtually all sectors and industries on a local, national, and global scale.

Public Offering

In June 2020, we completed an underwritten public offering of 2,500,000 shares of our Class A common stock, of which 1,931,206 shares of Class A common stock were sold by us and 568,794 shares of Class A common stock were sold by existing

stockholders.

The underwriter purchased the shares from us and the selling stockholders at a price of $56.50 per share.

Our net proceeds from the offering were $107.9 million, after deducting underwriting discounts and commissions and offering expenses.

We did not receive any of the proceeds from the sale of shares by the selling stockholders.

Beginning in late 2019 and continuing into the second quarter of 2020, the outbreak of the novel coronavirus disease, or COVID-19, has resulted in the declaration of a global pandemic and adversely affected economic activity across virtually all sectors and industries on a local, national, and global scale.

The impact of COVID-19 on the economy and our business continues to be a fluid situation.

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To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and marketing events.

For instance, we have decided to move our annual user conference Appian World to a virtual-only format this year.

Through March 31, 2020, we have not seen a meaningful adverse impact to our financial position, results of operations, and cash flows and liquidity as a result of COVID-19.

While the verticals from which we have historically generated the majority of our revenue have been less impacted by COVID-19 to date, there may be impacts to our financial condition and results of operations in the second quarter of 2020 and beyond as a result of reduced demand for our products and services and longer sales cycles.

Through June 30, 2020, we have not seen a meaningful adverse impact to our financial position, results of operations, and cash flows and liquidity as a result of COVID-19.

While the verticals from which we have historically generated the majority of our revenue have been less impacted by COVID-19 to date, there may be impacts to our financial condition and results of operations in the third quarter of 2020 and beyond as a result of reduced demand for our products and services and longer sales cycles.

The ultimate impact of COVID-19 on our business is not estimable at this time and will be largely dependent upon a number of factors outside of our control including the extent and duration of the outbreak as well as any mitigating actions which may be undertaken by global governments and the general public.

Refer to Item 1A.

Risk Factors for further discussion on certain risks and uncertainties stemming from COVID-19.

Our Business Model

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As the usage of partners expands, we expect the proportion of our total revenue from subscriptions to increase over time relative to professional services.

As of March 31, 2020 and March 31, 2019, 64.0% and 57.3% of our revenue, respectively, was derived from sales of subscriptions while the remaining 36.0% and 42.7%, respectively, was derived from the sale of professional services.

For the three and six months ended June 30, 2020, 62.0% and 63.1% of our revenue, respectively, was derived from sales of subscriptions while the remaining 38.0% and 36.9%, respectively, was derived from the sale of professional services.

For the three and six months ended June 30, 2019, 56.5% and 56.9% of our revenue, respectively, was derived from sales of subscriptions while the remaining 43.5% and 43.1%, respectively, was derived from the sale of professional services.

• Investments in Growth.

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Cloud Subscription Revenue

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Cloud subscription revenue $ 29,580 $ 22,796 $ 57,970 $ 44,074

Cloud subscription revenue is a portion of our revenue and includes SaaS subscriptions bundled with maintenance and support and hosting services.

Cloud subscription revenue includes SaaS subscriptions bundled with maintenance and support and hosting services.

As we generally sell our SaaS subscriptions on a per-user basis, our cloud subscription revenue for any customer is primarily determined by the number of users who access and utilize the applications built on our platform as well as the price paid.

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Cloud Subscription Revenue Retention Rate

As of March 31,

As of June 30,

Cloud subscription revenue retention rate 113 % 122 %

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Our cloud subscription revenue retention rate can fluctuate from period to period due to large customer contracts in any given period.

The cloud subscription revenue retention rate as of March 31, 2019 was elevated as we focused on converting customers with on-premises term license subscriptions to cloud subscriptions.

The cloud subscription revenue retention rate as of June 30, 2019 was elevated as we continued to focus on converting customers with on-premises term license subscriptions to cloud subscriptions.

Key Components of Results of Operations

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These partners refer software subscription customers to us and generally perform professional services with respect to any new service contracts they originate, increasing our subscriptions revenue without any change to our professional services revenue.

As we expand the network of strategic partners, we expect professional services revenue to decline as a percentage of total revenue over time since our strategic partners may perform professional services associated with software subscriptions that we sell.

As we expand the

network of strategic partners, we expect professional services revenue to decline as a percentage of total revenue over time since our strategic partners may perform professional services associated with software subscriptions that we sell.

Cost of Revenue

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Subscriptions gross margin is primarily affected by the growth in our subscriptions revenue as compared to the growth in, and timing of, costs to support such revenue.

We expect to continue to invest in customer support and SaaS operations to support the growth in the business, and the timing of those investments is expected to cause gross margins to fluctuate in the short term but improve over time.

We expect to continue to invest in customer support and SaaS operations to support growth in the business, and the timing of those investments is expected to cause gross margins to fluctuate in the short term but improve over time.

Professional Services Gross Margin.

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We expect our general and administrative expense to increase in absolute dollars as we continue to support our growth.

Other Expense

Other Expense (Income), Net

Other expense (income), net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates, interest income on our cash and cash equivalents, and gains or losses on the disposal of property and equipment.

Other (Income) Expense

Other (Income) Expense, Net

Other (income) expense, net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates, interest income on our cash and cash equivalents, and gains or losses on the disposal of property and equipment.

Interest Expense

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The following table sets forth our consolidated statement of operations data (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Subscriptions $ 41,418 $ 36,860 $ 91,854 $ 71,417

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Subscriptions (1)

4,701 4,036 10,084 7,621

Professional services (1)

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General and administrative (1)

11,450 9,261 24,591 18,277

Total operating expenses 57,714 52,018 121,065 103,581

Operating loss (12,095) (9,794) (20,701) (25,119)

Other expense (income)

Other expense (income), net 3,114 (302)

Other (income) expense

Other (income) expense, net (682) (79) 2,432 (381)

Interest expense 128 69 271 140

Total other expense (income) 3,257 (231)

Total other (income) expense (554) (10) 2,703 (241)

Loss before income taxes (11,541) (9,784) (23,404) (24,878)

Income tax (benefit) expense (194) 122

Income tax expense 274 267 80 389

Net loss $ (11,815) $ (10,051) $ (23,484) $ (25,267)

(1) Stock-based compensation as a component of these line items is as follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Cost of revenue

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The following table sets forth our consolidated statement of operations data expressed as a percentage of total revenue:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Subscriptions 62.0 % 56.5 % 63.1 % 56.9 %

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Operating loss (18.1) (15.0) (14.2) (20.0)

Other expense (income)

Other expense (income), net 3.9 (0.5)

Other (income) expense

Other (income) expense, net (1.0) (0.1) 1.7 (0.3)

Interest expense 0.2 0.1 0.2 0.1

Total other expense (income) 4.1 (0.4)

Total other (income) expense (0.8) — 1.9 (0.2)

Loss before income taxes (17.3) (15.0) (16.1) (19.8)

Income tax (benefit) expense (0.2) 0.2

Income tax expense 0.4 0.4 0.1 0.3

Net loss (17.7) % (15.4) % (16.1) % (20.1) %

Comparison of the Three Months Ended March 31, 2020 and 2019

Three Months Ended March 31,

Comparison of the Three Months Ended June 30, 2020 and 2019

Three Months Ended June 30,

2020 2019 % Change

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Total revenue $ 66,775 $ 65,275 2.3 %

Total revenue increased $18.6 million, or 30.8%, in the three months ended March 31, 2020 compared to the same period in 2019 due to an increase in our subscriptions revenue of $15.9 million and an increase in our professional services revenue of $2.7 million.

Of the increase in subscriptions revenue, $8.2 million, or 51.9%, was attributable to on-premise software revenue while $7.1 million, or 44.8%, was attributable to cloud subscription revenue.

With respect to new versus existing customers, $9.5 million of the increase in revenue stemmed from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining $6.3 million was the result of sales of subscriptions to new customers, $2.8 million of which related to a three year on-premise contract which closed in the quarter ended March 31, 2020.

The increase in professional services revenue was due to $5.9 million in sales to new customers, offset by a $3.2 million decrease in revenue from existing customers.

Total revenue increased $1.5 million, or 2.3%, in the three months ended June 30, 2020 compared to the same period in 2019 due to an increase in our subscriptions revenue of $4.6 million, partially offset by a decrease in our professional services revenue of $3.1 million.

The increase in subscriptions revenue was driven largely by a $6.8 million increase in cloud subscription revenue, which was partially offset by a $2.7 million decline in on-premise software revenue.

With respect to new versus existing customers, there was a $4.7 million increase in subscriptions revenue resulting from the sales of subscriptions to new customers which was offset by a reduction in expanded deployments for existing on-premise software customers.

The decrease in professional services revenue was due to a $9.0 million decrease in revenue from existing customers which was partially offset by a $5.9 million increase in sales to new customers.

Cost of Revenue

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 % Change

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Total gross margin 68.3 % 64.7 %

Cost of revenue increased $0.1 million, or 0.2%, in the three months ended March 31, 2020 compared to the same period in 2019, primarily due to a $1.0 million increase in other cost of revenue, a $0.9 million increase in professional services and product support personnel costs, and a $0.2 million increase in facility and overhead costs, largely offset by a $2.0 million decrease in contractor costs.

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in the three months ended March 31, 2020.

Personnel costs increased due to an increase in professional services and product support staff personnel headcount of 22.2% from March 31, 2019 to March 31, 2020.

Facility and overhead costs increased to support our personnel growth.

Contractor costs decreased in the three months ended March 31, 2020 compared to the same period in 2019 because of a decrease in the usage of subcontractors for professional service engagements.

Subscriptions gross margin decreased to 89.3% in the three months ended March 31, 2020 compared to 89.6% in the same period in 2019 due to increased hosting costs during the three months ended March 31, 2020 as sales of our cloud offering increased and became a larger proportion of our overall subscription revenue.

Professional services gross margin increased to 34.1% in the three months ended March 31, 2020 compared to 20.5% in the same period in 2019 due to a decrease in the usage of subcontractors for professional services engagements, a $1.7 million decrease in stock-based compensation expense due to the vesting of restricted stock units granted to three of our co-founders during the three months ended March 31, 2019, and the timing of certain contracts which were delivered in 2019 but for which revenue was recognized in 2020.

Due to the higher percentage of subscriptions revenue for the comparable periods, gross margin increased to 69.4% in the three months ended March 31, 2020 as compared to 60.1% in the same period in 2019.

Cost of revenue decreased $1.9 million, or 8.2%, in the three months ended June 30, 2020 compared to the same period in 2019, primarily due to a $2.8 million decrease in contractor costs coupled with a $1.4 million decrease in billable expenses and a $0.3 million decrease in facility and overhead costs.

These decreases were partially offset by a $2.0 million increase in professional services and product support personnel costs and a $0.6 million increase in other cost of revenue.

Contractor costs decreased in the three months ended June 30, 2020 compared to the same period in 2019 because of a decrease in the usage of subcontractors for professional services engagements.

Billable expenses decreased primarily due to lower travel and entertainment related expenses as a result of our shift to largely remote work while the decrease in facility and overhead costs was due largely to a reduction in rent expense.

Personnel costs increased due to an increase in professional services and product support staff personnel headcount of 18.2% from June 30, 2019 to June 30, 2020 .

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in the three months ended June 30, 2020.

Subscriptions gross margin decreased to 88.6% for the three months ended June 30, 2020 compared to 89.1% in the same period in 2019 due to increased hosting costs during the three months ended June 30, 2020 as sales of our cloud offering increased and became a larger proportion of our overall subscription revenue.

Professional services gross margin increased to 35.1% for the three months ended June 30, 2020 compared to 33.1% in the same period in 2019 due to a decrease in the usage of subcontractors for professional services engagements, a decrease in travel and entertainment related expenses, and a decrease in rent expenses.

Due to the higher percentage of subscriptions revenue for the comparable periods and the aforementioned declines in professional services expenses, gross margin rose to 68.3% in the three months ended June 30, 2020 as compared to 64.7% in the same period in 2019.

Sales and Marketing Expense

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 % Change

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% of revenue 43.6 % 45.9 %

Sales and marketing expense increased $5.6 million, or 19.5%, in the three months ended March 31, 2020 compared to the same period in 2019, primarily due to a $3.0 million increase in sales and marketing personnel costs, a $1.8 million increase in marketing costs, a $0.4 million increase in professional fees, and a $0.4 million increase in facility and overhead costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount by 6.6% from March 31, 2019 to March 31, 2020 and increased sales commissions driven by our revenue growth, partially offset by a $1.6 million decrease in stock-based compensation expense attributable to the vesting of restricted stock units granted to our co-founders which occurred in the three months ended March 31, 2019.

Marketing costs increased due largely to costs incurred related to our annual user conference Appian World.

Professional fees increased due to an increase in consulting fees to support our ongoing marketing events and activities.

Facility and overhead costs increased to support our personnel growth.

Sales and marketing expense decreased $0.9 million, or 3.0%, in the three months ended June 30, 2020 compared to the same period in 2019, primarily due to a $3.7 million decrease in marketing costs and a $2.8 million decrease in facility and overhead costs, which were partially offset by a $5.0 million increase in sales and marketing personnel costs and a $0.6 million increase in professional fees.

Marketing costs decreased largely due to reduced costs incurred as a result of moving our annual user conference Appian World to virtual-only as well as a reduction in the number of in-person marketing events.

Facility and overhead costs decreased due to lower travel and entertainment related expenses as a result of our shift to largely remote work.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 9.8% from June 30, 2019 to June 30, 2020 and increased sales commissions driven by our subscriptions revenue growth.

Professional fees increased due to an increase in consulting fees and contract labor to support our growth.

Research and Development Expense

Three Months Ended March 31,

Three Months Ended June 30,

2020 2019 % Change

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% of revenue 25.7 % 19.6 %

Research and development expense increased $2.1 million, or 14.9%, in the three months ended March 31, 2020 compared to the same period in 2019, primarily due to a $1.9 million increase in research and development personnel costs and a $0.2 million increase in facility and overhead costs, partially offset by a $0.1 million decrease in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount by 30.2% from March 31, 2019 to March 31, 2020.

Facility and overhead costs increased slightly to support our personnel growth.

Research and development expense increased $4.4 million, or 34.6%, in the three months ended June 30, 2020 compared to the same period in 2019, primarily due to a $4.7 million increase in research and development personnel costs, partially offset by a $0.2 million decrease in facility and overhead costs.

Personnel costs increased due to an increase in research and development personnel headcount by 30.0% from June 30, 2019 to June 30, 2020.

Facility and overhead costs decreased due to lower travel and entertainment related expenses as a result of our shift to largely remote work .

General and Administrative Expense

Three Months Ended June 30,

2020 2019 % Change

(dollars in thousands)

General and administrative expense $ 11,450 $ 9,261 23.6 %

% of revenue 17.1 % 14.2 %

General and administrative expense increased $2.2 million, or 23.6%, in the three months ended June 30, 2020 compared to the same period in 2019 due to a $1.9 million increase in general and administrative personnel costs and a $0.3 million increase in professional fees, which was partially offset by a $0.1 million decrease in facility and overhead costs.

Personnel costs increased due to an increase in general and administrative personnel headcount by 30.3% from June 30, 2019 to June 30, 2020, coupled with a $0.8 million increase in stock-based compensation expense which was primarily attributable to a stock option to purchase 700,000 shares of our Class A common stock granted to our Chief Executive Officer in May 2019.

Professional fees increased due to the use of consulting services to support our back-office initiatives.

Facility and overhead costs decreased primarily due to lower travel and entertainment related expenses as a result of our shift to largely remote work.

Other Income, Net

Three Months Ended June 30,

2020 2019 % Change

(dollars in thousands)

Other income, net $ (682) $ (79) ***

% of revenue (1.0) % (0.1) %

*** - Indicates a percentage that is not meaningful

Other income, net increased by $0.6 million i n the three months ended June 30, 2020 compared to the same period in 2019, primarily due to $0.6 million in foreign exchange gains in the three months ended June 30, 2020 compared to nominal foreign exchange losses in the three months ended June 30, 2019.

The increase in foreign exchange gains was primarily due to currency fluctuations of the British Pound Sterling, Euro, Singapore dollar, and Swiss franc versus the U.S.

dollar during the three months ended June 30, 2020 compared to the same period in 2019.

Interest Expense

Three Months Ended June 30,

2020 2019 % Change

(dollars in thousands)

Interest expense $ 128 $ 69 85.5%

% of revenue 0.2 % 0.1 %

Interest expense increased by $0.1 million, or 85.5%, in the three months ended June 30, 2020 compared to the same period in 2019, primarily due to commitment fees on the letter of credit outstanding.

Comparison of the Six Months Ended June 30, 2020 and 2019

Six Months Ended June 30,

2020 2019 % Change

(dollars in thousands)

Subscriptions $ 91,854 $ 71,417 28.6 %

Professional services 53,785 54,162 (0.7) %

Total revenue $ 145,639 $ 125,579 16.0 %

T otal revenue increased $20.1 million, or 16.0%, in the six months ended June 30, 2020 compared to the same period in 2019 due to an increase in our subscriptions revenue of $20.4 million which was partially offset by a decrease in our professional services revenue of $0.4 million.

Of the increase in subscriptions revenue, $13.9 million, or 68.0%, was attributable to cloud subscription revenue while $5.5 million, or 27.0%, was attributable to on-premise software revenue.

With respect to new versus existing customers, $13.4 million of the increase in revenue stemmed from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $7.0 million was the result of sales of subscriptions to new customers, $2.8 million of which related to a three year on-premise contract which closed in the first quarter of 2020.

The decrease in professional services revenue was due to a $10.5 million decrease in revenue from existing customers which was substantially offset by $10.1 million in sales to new customers.

Cost of Revenue

Six Months Ended June 30,

2020 2019 % Change

(dollars in thousands)

Cost of revenue

Subscriptions $ 10,084 $ 7,621 32.3 %

Professional services 35,191 39,496 (10.9) %

Total cost of revenue $ 45,275 $ 47,117 (3.9) %

Subscriptions gross margin 89.0 % 89.3 %

Professional services gross margin 34.6 % 27.1 %

Total gross margin 68.9 % 62.5 %

Cost of revenue decreased $1.8 million, or 3.9%, in the six months ended June 30, 2020 compared to the same period in 2019, primarily due to a $4.8 million decrease in contractor costs, a $1.4 million decrease in billable expenses, and a $0.1 million decrease in facility and overhead costs.

These decreases were largely offset by a $2.9 million increase in professional services and product support personnel costs and a $1.6 million increase in o ther cost of revenue.

Contractor costs

decreased in the six months ended June 30, 2020 compared to the same period in 2019 because of a decrease in the usage of subcontractors for professional service engagements.

Personnel costs increased due to an increase in professional services and product support staff personnel headcount of 18.2% from June 30, 2019 to June 30, 2020.

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in the six months ended June 30, 2020.

Subscriptions gross margin was 89.0% for the six months ended June 30, 2020 compared to 89.3% in the same period in 2019 due to increased hosting costs during the six months ended June 30, 2020 as sales of our cloud offering increased and became a larger proportion of our overall subscription revenue.

Professional services gross margin was 34.6% f or the six months ended June 30, 2020 compared to 27.1% in the same period in 2019 due to a decrease in the usage of subcontractors for professional services engagements, a decrease in travel and entertainment related expenses, a decrease in rent expenses, a $1.6 million decrease in stock-based compensation expense due to the vesting of restricted stock units granted to three of our co-founders during the six months ended June 30, 2019 , and the timing of certain contracts which were delivered in 2019 but for which revenue was recognized in 2020.

Due to the higher percentage of subscriptions revenue for the comparable periods as well as the aforementioned declines in professional services expenses, gross margin was 68.9% in the six months ended June 30, 2020 as compared to 62.5% in the same period in 2019.

Sales and Marketing Expense

Six Months Ended June 30,

2020 2019 % Change

(dollars in thousands)

Sales and marketing $ 63,258 $ 58,583 8.0 %

% of revenue 43.4 % 46.7 %

Sales and marketing expense increased $4.7 million, or 8.0%, in the six months ended June 30, 2020 compared to the same period in 2019, primarily due to an $8.0 million increase in sales and marketing personnel costs and a $1.0 million increase in professional fees, which were partially offset by a $2.4 million decrease in facility and overhead costs and a $1.9 million decrease in ma rketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount by 9.8% from June 30, 2019 to June 30, 2020 and increased sales commissions driven by our subscriptions revenue growth , partially offset by a $1.8 million decrease in stock-based compensation expense.

Professional fees increased due to an increase in consulting fees and contract labor to support our growth.

Facility and overhead costs decreased due to lower travel and entertainment related expenses as a result of our shift to largely remote work .

Marketing costs decreased due to reduced costs incurred as a result of moving our annual user conference Appian World to virtual-only as well as a reduction in the number of in-person marketing events.

Research and Development Expense

Six Months Ended June 30,

2020 2019 % Change

(dollars in thousands)

Research and development $ 33,216 $ 26,721 24.3 %

% of revenue 22.8 % 21.3 %

Research and development expense increased $6.5 million, or 24.3%, in the six months ended June 30, 2020 compared to the same period in 2019, primarily due to a $6.6 million increase in research and development personnel costs, partially offset by a $0.1 million decrease in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount by 30.0% from June 30, 2019 to June 30, 2020, partially offset by a $1.4 million decrease in stock-based compensation expense.

Professional fees decreased due to a decrease in consulting fees to support the development and enhancement of our platform.

General and Administrative Expense

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 % Change

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% of revenue 16.9 % 14.6 %

General and administrative expense increased $4.1 million, or 45.8%, in the three months ended March 31, 2020 compared to the same period in 2019 due to a $2.4 million increase in general and administrative personnel costs, a $1.1 million increase in professional fees, and a $0.7 million increase in facility and overhead costs.

Personnel costs increased due to an increase in general and administrative personnel headcount by 35.3% from March 31, 2019 to March 31, 2020 coupled with a $1.1 million increase in stock-based compensation expense during the three months ended March 31, 2020 which was primarily attributable to a stock option to purchase 700,000 shares of our Class A common stock granted to our Chief Executive Officer in the second quarter of 2019.

General and administrative expense increased $6.3 million, or 34.5%, in the six months ended June 30, 2020 compared to the same period in 2019 due to a $4.3 million increase in general and administrative personnel costs, a $1.4 million increase in professional fees, and a $0.6 million increase in facility and overhead costs.

Personnel costs increased due to an increase in general and administrative personnel headcount by 30.3% from June 30, 2019 to June 30, 2020 coupled with a $1.9 million increase in stock-based compensation expense during the six months ended June 30, 2020 which was primarily attributable to a stock option to purchase 700,000 shares of our Class A common stock granted to our Chief Executive Officer in May 2019.

Professional fees increased due to the use of consulting services to support our back-office initiatives.

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Other Expense (Income), Net

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 % Change

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*** - Indicates a percentage that is not meaningful

Other expense (income), net increased by $3.4 million in the three months ended March 31, 2020 compared to the same period in 2019, primarily due to $3.5 million in foreign exchange losses in the three months ended March 31, 2020 compared to $0.1 million in foreign exchange losses in the three months ended March 31, 2019.

Other expense (income), net increased by $2.8 million in the six months ended June 30, 2020 compared to the same period in 2019, primarily due to $2.9 million in foreign exchange losses in the six months ended June 30, 2020 compared to $0.1 million in foreign exchange losses in the six months ended June 30, 2019.

The increase in foreign exchange losses was primarily due to currency fluctuations of the British pound sterling, Euro, Australian dollar, Singapore dollar, and Swedish krona versus the U.S.

dollar during the three months ended March 31, 2020 compared to the same period in 2019.

dollar during the six months ended June 30, 2020 compared to the same period in 2019.

Interest Expense

Three Months Ended March 31,

Six Months Ended June 30,

2020 2019 % Change

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% of revenue 0.2 % 0.1 %

*** - Indicates a percentage that is not meaningful

Interest expense increased by $0.1 million in the three months ended March 31, 2020 compared to the same period in 2019, primarily due to commitment fees on the letter of credit outstanding.

Interest expense increased by $0.1 million, or 93.6%, in the six months ended June 30, 2020 compared to the same period in 2019, primarily due to commitment fees on the letter of credit outstanding.

Liquidity and Capital Resources

As of March 31, 2020, we had $149.2 million of cash and cash equivalents.

As of June 30, 2020, we ha d $256.1 million of cash and cash equivalents.

The underwriter purchased the shares from us and the selling stockholders at a price of $56.50 per share.

proceeds from the offering were $107.9 million, after deducting underwriting discounts and commissions and offering expenses.

We did not receive any of the proceeds from the sale of shares by the selling stockholders.

We believe our existing cash and cash equivalents, together with any positive cash flows from operations and available borrowings under our line of credit, will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

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To the extent existing cash and cash equivalents and investments and cash from operations are not sufficient to fund future activities, we may need to raise additional funds.

We may seek to raise additional funds through equity, equity-linked, or debt financings.

We recently have raised and may continue to seek to raise additional funds through equity, equity-linked, or debt financings.

If we raise additional funds through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our equity securities and could contain covenants that restrict operations.

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If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.

The following table shows a summary of our cash flows for the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended March 31,

Cash used in operating activities (3,859) (4,123)

The following table shows a summary of our cash flows for the six months ended June 30, 2020 and 2019 (in thousands):

Six Months Ended June 30,

Cash (used in) provided by operating activities $ (6,957) $ 12,007

Cash used in investing activities (6,824) (27,689)

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Sources of Funds

We have financed our operations in large part with equity and debt financing arrangements, including net proceeds of $77.8 million from our initial public offering in May 2017, net proceeds of $57.8 million from our underwritten public offering in August 2018, and net proceeds of $101.3 million from our underwritten public offering in September 2019, as well as through sales of subscriptions and professional services and borrowings under our credit facilities.

We also financed $3.7 million of office furniture and fixtures and $0.8 million of computer hardware, both associated with the build out of our new headquarters.

We have financed our operations in large part with equity and debt financing arrangements, including net proceeds of $77.8 million from our initial public offering in May 2017, net proceeds of $57.8 million from our underwritten public offering in August 2018, net proceeds of $101.3 million from our underwritten public offering in September 2019, and net proceeds of $107.9 million from our underwritten public offering in June 2020.

In addition, we have financed our operations through sales of subscriptions and professional services and borrowings under our credit facilities.

We also financed $3.7 million of office furniture and fixtures and $0.8 million of equipment, both associated with the build out of our new headquarters.

In November 2017, we entered into a $20.0 million revolving line of credit with a lender.

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Any amounts borrowed under the credit facility are collateralized by substantially all of our assets.

We were in compliance with all covenants as of March 31, 2020.

As of March 31, 2020, we had not made any borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $11.1 million in connection with securing our leased office space.

We were in compliance with all covenants as of June 30, 2020.

As of June 30, 2020, we had not made any borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $11.1 million i n connection with securing our leased office space.

Our principal uses of cash are funding operations and other working capital requirements.

More recently, we have utilized cash to pay for the acquisition of an entity we believe is complementary to our business.

Over the past several years, revenue has increased significantly from year to year and, as a result, cash flows from customer collections have increased.

Over the past several years, revenue

has increased significantly from year to year and, as a result, cash flows from customer collections have increased.

However, operating expenses have also increased as we have invested in growing our business.

Our uses of cash in 2020 included the acquisition of Novayre while cash uses in 2019 included the build out of our new headquarters, which included spend approximately $21.0 million above the $18.4 million tenant improvement allowance provided by the landlord for the build out, of which $4.5 million related to office furniture and fixtures and computer hardware that has been financed.

For the three months ended March 31, 2020, substantially all of the $6.3 million of cash used in investing activities was related to the acquisition of Novayre.

Our uses of cash in 2020 to date have included the acquisition of Novayre and modest capital expenditures while cash uses in 2019 included the build out of our new headquarters, which included spend approximately $21.0 million above the $18.4 million tenant improvement allowance provided by the landlord for the build out, of which $17.0 million related to office furniture and fixtures and computer hardware that has been financed.

For the six months ended June 30, 2020, substantially all of the $6.8 million of cash used in investing activities was related to the acquisition of Novayre.

Historical Cash Flows

Operating Activities

For the three months ended March 31, 2020, net cash used in operating activities of $3.9 million consisted of a net loss of $11.7 million, offset by $5.2 million in adjustments for non-cash items and $2.6 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted of stock-based compensation of $3.5 million and depreciation and amortization expense of $1.5 million, and bad debt expense of $0.2 million.

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $5.8 million decrease in accounts receivable stemming from increased cash collections during the three months ended March 31, 2020, a $1.2 million increase in operating lease liabilities, and a $0.5 million decrease in deferred commissions.

These increases to working capital were partially offset by a $2.5 million decrease in deferred revenue as a result of decreased subscription sales, a $1.8 million decrease in accounts payable and accrued expenses primarily due to the timing of payments, and a $0.4 million decrease in accrued compensation expense due largely to a decrease in employee reimbursable expenses.

For the three months ended March 31, 2019, net cash used in operating activities of $4.1 million consisted of a net loss of $15.2 million, offset by $8.0 million in adjustments for non-cash items and $3.1 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted of stock-based compensation of $7.2 million and depreciation and amortization expense of $0.8 million.

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $1.9 million increase in deferred revenue as a result of increased subscription sales.

For the six months ended June 30, 2020, net cash used in operating activities of $7.0 million consisted of a net loss of $23.4 million, offset by $10.1 million in adjustments for non-cash items and $6.4 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted of stock-based compensation of $7.1 million, depreciation and amortization expense of $3.0 million, and bad debt expense of $0.2 million.

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $2.6 million increase in accrued compensation and related benefits as a result of higher employee benefit accruals such as vacation and bonuses, a $2.4 million increase in operating lease liabilities, a $2.3 million increase in deferred revenue as a result of increased subscription sales, a $1.9 million decrease in prepaid expenses and other assets, and a $1.3 million increase in other liabilities due to the deferral of social security tax payments pursuant to the provisions of the CARES Act.

These increases to working capital were partially offset by a $2.1 million increase in accounts receivable stemming from decreased cash collections during the six months ended June 30, 2020, a $1.7 million decrease in accounts payable and accrued expenses primarily due to the timing of payments, and a $0.3 million increase in deferred commissions.

For the six months ended June 30, 2019, net cash provided by operating activities of $12.0 million consisted of a net loss of $25.3 million , offset by $12.0 million in adjustments for non-cash items and $25.2 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted of stock-based compensation of $9.9 million , depreciation and amortization expense of $1.9 million , a loss on disposal of equipment of $0.1 million , and bad debt expense of $0.1 million .

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $13.5 million decrease in prepaid expenses and other assets, primarily due to a decrease in the non-trade receivable resulting from our tenant improvement allowance.

In accordance with accounting principles generally accepted in the United States of America, or U.S.

GAAP, the $17.0 million of tenant improvement allowance reimbursements received during the six months ended June 30, 2019 are a source of cash in operating activities, whereas the capital expenditures are recorded as cash used in investing activities.

There was also a $9.3 million decrease in accounts receivable due to increased cash collections during the six months ended June 30, 2019 and a $5.5 million increase in accounts payable and accrued expenses primarily due to the timing of payments.

There was also a $4.6 million increase in deferred rent, non-current as a result of taking initial possession of the second phase of our new headquarters in February 2019 and recording an additional lease incentive obligation.

There was also a $1.6 million increase in accounts payable and accrued expenses primarily due to the timing of payments and a $1.3 million decrease in prepaid expenses and other assets primarily due to a decrease in the non-trade receivable resulting from out tenant improvement allowance.

Additionally, the $4.5 million of tenant improvement allowance reimbursements received during the three months ended March 31, 2019 are considered a source of cash in operating activities whereas the capital expenditures are recorded as cash used in investing activities.

These increases were partially offset by a $0.8 million increase in accounts receivable due to increased sales in the three months ended March 31, 2019 as well as the timing of billings and collections.

There was also a $2.9 million increase in deferred commissions due to increased sales, a $1.5 million decrease in accrued compensation and related benefits primarily due to the payment of year-end bonuses, and a $0.1 million decrease in other current liabilities.

There was also a $0.6 million increase in deferred revenue as a result of increased subscription sales.

These increases were partially offset by a $3.2 million decrease in accrued compensation and related benefits primarily due to a decrease in accrued vacation expense because of our new paid-time off policy, which took effect on January 1, 2019.

There was also a $4.8 million increase in deferred commissions due to increased sales during the six months ended June 30, 2019 and a $0.3 million decrease in other current liabilities.

Investing Activities

For the three months ended March 31, 2020, net cash used in investing activities was $6.3 million which was primarily the result of $6.1 million in payments, net of cash acquired, related to the acquisition of Novayre.

For the six months ended June 30, 2020, net cash used in investing activities was $6.8 million which was primarily the result of $6.1 million in payments, net of cash acquired, related to the acquisition of Novayre.

In addition, there were approximately $0.7 million in purchases of property and equipment.

For the three months ended March 31, 2019, net cash used in investing activities was $16.6 million and related primarily to the build-out of our new headquarters and the purchase of property and equipment.

For the six months ended June 30, 2019, net cash used in investing activities was $27.7 million and related primarily to the build-out of our new headquarters and the purchase of property and equipment.

Financing Activities

For the three months ended March 31, 2020, net cash provided by financing activities was $0.3 million, consisting of $0.7 million in proceeds received from stock option exercises partially offset by $0.4 million in principal payments on finance leases.

For the three months ended March 31, 2019, net cash provided by financing activities was $1.1 million, consisting of proceeds received from stock option exercises.

For the six months ended June 30, 2020, net cash provided by financing activities was $109.8 million, consisting of $108.2 million in proceeds from our underwritten public offering in June 2020, net of underwriting discounts and commissions and the payment of offering expenses and $2.2 million in proceeds received from stock option exercises, partially offset by $0.7 million in principal payments on finance leases.

For the six months ended June 30, 2019, net cash provided by financing activities was $2.0 million, consisting of proceeds received from stock option exercises.

Contractual Obligations and Commitments

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The Lease Second Amendment modified the Deed of Lease dated as of April 17, 2018, as amended on December 23, 2019, between us and Landlord, or the Lease, for our headquarters in McLean, Virginia.

Under the Lease Second Amendment, we exercised an option to expand its lease to the fourth floor of the North Tower, or the Fourth Floor, adding approximately 34,158 square feet to the premises.

Under the Lease Second Amendment, we exercised an option to expand the lease to the fourth floor of the North Tower, or the Fourth Floor, adding approximately 34,158 square feet to the premises.

We will commence occupancy of the Fourth Floor on the sooner of the completion of certain improvements to the Fourth Floor and October 14, 2020.

The monthly base rent for the Fourth Floor will be $87,388 for the first 27 months of the lease term, subject to periodic increases thereafter.

Other than as described above, as of March 31, 2020, there was no material change in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 20, 2020.

Other than as described above, as of June 30, 2020, there was no material change in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 20, 2020.

Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

As of June 30, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We do not engage in off-balance sheet financing arrangements.

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Although we believe the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.

Significant estimates and judgments embedded in the consolidated financial statements for the periods presented include revenue recognition, stock-based compensation, the valuation of goodwill and intangible assets, and income taxes.

While we continue to monitor the developments surrounding the COVID-19 pandemic, we are not aware of any specific events or circumstances that would require us to update our estimates, assumptions, and judgments.

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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-Q

Item 2. Management’s Discussion and Analysis