What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 140 added, 139 removed, 350 unchanged (44% of the section changed)

11 unchanged sentences

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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In addition, over time we expect professional services revenue as a percentage of total revenue to decline as we increasingly rely on strategic partners to help our customers deploy our software.

We believe our investment in professional services, including strategic partners building their practices around Appian, will drive increased adoption of our platform.

We believe our

investment in professional services, including strategic partners building their practices around Appian, will drive increased adoption of our platform.

Our customers include financial services, life sciences, government, telecommunications, media, energy, manufacturing, and transportation organizations.

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 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.

Revenue from government agencies represented 19.9% and 17.9% of our total revenue in the three and nine months ended September 30, 2020, respectively, as compared to 19.5% and 18.0% of our total revenue in the three and nine months ended September 30, 2019, respectively.

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

In the three and nine months ended September 30, 2020, 32.2% and 34.0%, respectively, of our total revenue was generated from customers outside of the United States as compared to 31.0% and 31.9% in the three and nine months ended September 30, 2019, respectively.

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

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

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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.

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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.

Beginning in late 2019 and continuing into the third 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.

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.

Through September 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 fourth 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.

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At the same time, many of our customers have historically purchased subscriptions only for a limited set of their total potential end users.

As a result of these factors, the proportion of total revenue for a customer associated with professional services is relatively high during the initial deployment period.

As a result of these factors, the proportion of

total revenue for a customer associated with professional services is relatively high during the initial deployment period.

Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect subscriptions revenue as a percentage of total revenue to increase.

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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.

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.

For the three and nine months ended September 30, 2020, 65.7% and 64.0% of our revenue, respectively, was derived from sales of subscriptions while the remaining 34.3% and 36.0%, respectively, was derived from the sale of professional services.

For the three and nine months ended September 30, 2019, 57.1% and 56.9% of our revenue, respectively, was derived from sales of subscriptions while the remaining 42.9% 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Cloud Subscription Revenue Retention Rate

As of June 30,

As of September 30,

Cloud subscription revenue retention rate 115 % 121 %

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This calculation includes the impact on our revenue from customer non-renewals, pricing changes, and growth in the number of users on our platform.

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 June 30, 2019 was elevated as we continued to focus on converting customers with on-premises term license subscriptions to cloud subscriptions.

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 September 30, 2019 was elevated as we continued to focus on converting customers with on-premise term license subscriptions to cloud subscriptions.

Key Components of Results of Operations

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• SaaS subscriptions bundled with maintenance and support and hosting services;

• On-premises term license subscriptions bundled with maintenance and support.

• On-premise term license subscriptions bundled with maintenance and support.

Our maintenance and support agreements provide customers with the right to unspecified software upgrades, maintenance releases and patches released during the term of the maintenance and support agreement on a when-and-if-available basis, and rights to technical support.

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Our professional services revenue is comprised of fees for consulting services, including application development and deployment assistance and training related to our platform.

Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect professional services revenue as percentage of total revenue to decrease.

Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect professional services revenue as a percentage of total revenue to decrease.

Additionally, if there is a decline in our procurement of new customers as a result of the COVID-19 pandemic, we may also see a similar decline in professional services revenue.

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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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The unpredictability of the timing of entering into significant professional services agreements sold on a standalone basis may cause significant fluctuations in our quarterly financial results.

Gross profit and gross margin, or gross profit as a percentage of total revenue, has been, and will continue to be, affected by various factors, including the mix of subscriptions revenue and professional services revenue.

Subscription pricing, the costs associated with third-party hosting facilities, and the extent to which we expand our professional services to support future growth will impact our gross margins.

Gross profit and gross margin, or gross profit as a percentage of total revenue, have been, and will continue to be, affected by various factors, including the mix of SaaS subscriptions and on-premise term license subscriptions, the mix of total subscriptions revenue and professional services revenue, subscription pricing, the costs associated with third-party hosting facilities, and the extent to which we expand our professional services to support future growth.

Our gross margin may fluctuate from period to period based on the above factors.

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In general, our operating expenses are expected to continue to increase as we invest resources in growing our various teams.

However, our hiring activity in the near term will likely be lower in comparison to prior periods as a result of cost controlling measures we are implementing in response to the ongoing COVID-19 pandemic.

Sales and Marketing Expense

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Research and development expense consists primarily of personnel costs for our employees who develop and enhance our platform, including salaries, bonuses, stock-based compensation, and other personnel costs.

Also included are non-personnel costs such as subcontracting, consulting and professional fees to third party development resources, allocated facility costs, overhead, and depreciation and amortization costs.

Also included are non-personnel costs such as subcontracting, consulting and professional fees to third party development resources, allocated facility costs, and overhead.

Our research and development efforts are focused on enhancing the speed and power of our software platform.

We expect research and development expenses to continue to increase as they are critical to maintain and improve our quality of applications and our competitive position.

We expect research and development expenses to continue to increase as they are critical to maintain and improve the quality of applications and our competitive position.

General and Administrative Expense

General and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, and other personnel costs for our administrative, legal, information technology, human resources, finance and accounting employees, and executives.

Additional expenses included in this category are non-personnel costs such as travel-related expenses, contracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses, along with allocated facility costs and overhead.

Additional expenses included in this category are non-personnel costs such as travel-related expenses, contracting and professional fees, audit fees, tax services and legal fees, insurance and other corporate expenses, allocated facility costs and overhead, and depreciation and amortization costs.

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

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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

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

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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Net loss (4.7) % (22.1) % (12.2) % (20.8) %

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

Three Months Ended June 30,

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

Three Months Ended September 30,

2020 2019 % Change

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Total revenue $ 77,304 $ 66,155 16.9 %

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.

Total revenue increased $11.1 million, or 16.9%, in the three months ended September 30, 2020 compared to the same period in 2019 due to an increase in our subscriptions revenue of $13.0 million, partially offset by a decrease in our professional services revenue of $1.8 million.

The increase in subscriptions revenue was driven largely by a $9.7 million increase in cloud subscription revenue and a $2.6 million increase in on-premise software revenue.

With respect to new versus existing customers, there was a $9.2 million increase stemming from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $3.8 million was the result of sales of subscriptions to new customers.

The decrease in professional services revenue was due primarily to a $7.5 million decrease in revenue from existing customers which was substantially offset by a $5.7 million increase in sales to new customers.

Further contributing to the

decrease in professional services revenue was our increased usage of partners to perform professional services in the three months ended September 30, 2020 as compared to the same period in 2019, which has resulted in increases to our subscriptions revenue without any change to our professional services revenue.

Cost of Revenue

Three Months Ended June 30,

Three Months Ended September 30,

2020 2019 % Change

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Total gross margin 72.1 % 63.8 %

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.

Cost of revenue decreased $2.4 million, or 10.0%, in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $3.4 million decrease in contractor costs coupled with a $1.2 million decrease in billable expenses and a $0.2 million decrease in facility and overhead costs.

These decreases were partially offset by a $1.7 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.

Contractor costs decreased in the three months ended September 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.

Personnel costs increased due to an increase in professional services and product support staff headcount of 15.4% from September 30, 2019 to September 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 September 30, 2020.

Subscriptions gross margin increased to 90.0% for the three months ended September 30, 2020 compared to 88.1% in the same period in 2019 due to an increase in subscriptions revenue during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, partially offset by increased hosting costs as sales of our cloud offering increased and became a larger proportion of our overall subscriptions revenue.

Professional services gross margin increased to 38.0% for the three months ended September 30, 2020 compared to 31.4% 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 72.1% in the three months ended September 30, 2020 as compared to 63.8% in the same period in 2019.

Sales and Marketing Expense

Three Months Ended June 30,

Three Months Ended September 30,

2020 2019 % Change

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% of revenue 40.9 % 41.7 %

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.

Sales and marketing expense increased $4.0 million, or 14.6%, in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $4.4 million increase in sales and marketing personnel costs, a $1.0 million increase in marketing costs, and a $0.8 million increase in professional fees, which were partially offset by a $2.1 million decrease in

facility and overhead costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 12.1% from September 30, 2019 to September 30, 2020 and increased sales commissions driven by our subscriptions revenue growth, partially offset by a $0.3 million decrease in stock-based compensation expense.

Marketing costs increased largely due to increased advertising and business development costs during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

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 in 2020.

Research and Development Expense

Three Months Ended June 30,

Three Months Ended September 30,

2020 2019 % Change

2 unchanged sentences

% of revenue 23.5 % 23.7 %

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 .

Research and development expense increased $2.5 million, or 15.6%, in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to a $3.1 million increase in research and development personnel costs, partially offset by a $0.4 million decrease in facility and overhead costs and a $0.1 million decrease in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount by 13.5% from September 30, 2019 to September 30, 2020.

Facility and overhead costs decreased due to non-recurring charges which were incurred in 2019 to support our personnel growth coupled with lower travel and entertainment related expenses as a result of our shift to largely remote work in 2020.

Professional fees decreased due to a decrease in consulting fees.

General and Administrative Expense

Three Months Ended June 30,

Three Months Ended September 30,

2020 2019 % Change

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% of revenue 17.4 % 16.9 %

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,

General and administrative expense increased $2.3 million, or 20.5%, in the three months ended September 30, 2020 compared to the same period in 2019 due to a $1.3 million increase in general and administrative personnel costs, a $0.6 million increase in facility and overhead costs, and a $0.4 million increase in professional fees.

Personnel costs increased due to an increase in general and administrative personnel headcount by 30.7% from September 30, 2019 to September 30, 2020.

Facility and overhead costs increased primarily due to an increase in bad debt expense during the three months ended September 30, 2020, partially offset by lower travel and entertainment related expenses as a result of our shift to largely remote work in 2020.

Professional fees increased due to increased legal fees.

Other (Income) Expense, Net

Three Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

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

Other (income) expense, net $ (4,277) $ 2,262 ***

% of revenue (5.5) % 3.4 %

*** - 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.

Other (income) expense, net increased by $6.5 million in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to $3.3 million in foreign exchange gains in the three months ended September 30, 2020 compared to $2.4 million in foreign exchange losses in the three months ended September 30, 2019.

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

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

Additionally, we recognized $1.0 million in other income during the three months ended September 30, 2020 due to a payment received from a state government as a result of our achievement of certain job creation and capital investment goals.

Interest Expense

Three Months Ended June 30,

Three Months Ended September 30,

2020 2019 % Change

2 unchanged sentences

% 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,

Interest expense increased by a nominal amount in the three months ended September 30, 2020 compared to the same period in 2019, primarily due to commitment fees on the letter of credit outstanding.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Nine Months Ended September 30,

2020 2019 % Change

3 unchanged sentences

Total revenue $ 222,943 $ 191,734 16.3 %

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.

Total revenue increased $31.2 million, or 16.3%, in the nine months ended September 30, 2020 compared to the same period in 2019 due to an increase in our subscriptions revenue of $33.4 million which was partially offset by a decrease in our professional services revenue of $2.2 million.

Of the increase in subscriptions revenue, $23.6 million, was attributable to cloud subscription revenue while $8.1 million, was attributable to on-premise software revenue.

With respect to new versus existing customers, $24.4 million of the increase in revenue stemmed from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $9.0 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.

The decrease in professional services revenue was due primarily to a $15.6 million decrease in revenue from existing customers which was substantially offset by $13.4 million in sales to new customers.

Further contributing to the decrease in professional services revenue was our increased usage of partners to perform professional services in the nine months ended September 30, 2020 as compared to the same period in 2019, which has resulted in increases to our subscriptions revenue without any change to our professional services revenue.

Cost of Revenue

Six Months Ended June 30,

Nine Months Ended September 30,

2020 2019 % Change

7 unchanged sentences

Total gross margin 70.0 % 62.9 %

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.

Cost of revenue decreased $4.2 million, or 6.0%, in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to an $8.2 million decrease in contractor costs, a $2.6 million decrease in billable expenses, and a $0.3 million decrease in facility and overhead costs.

These decreases were partially offset by a $4.6 million increase in professional services and product support personnel costs and a $2.2 million increase in other cost of revenue.

Contractor costs decreased in the nine months ended September 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.

Personnel costs increased due to an increase in professional services and product support staff personnel headcount of 15.4% from September 30, 2019 to September 30, 2020.

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

Subscriptions gross margin was 89.4% for the nine months ended September 30, 2020 compared to 88.9% in the same period in 2019 due to an increase in subscriptions revenue during the nine months ended September 30, 2020, partially offset by increased hosting costs as sales of our cloud offering increased and became a larger proportion of our overall subscriptions revenue.

Professional services gross margin was 35.7% for the nine months ended September 30, 2020 compared to 28.6% 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, and a $1.3 million decrease in stock-based compensation expense due to the vesting of restricted stock units granted to three of our co-founders during the nine months ended September 30, 2019.

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 70.0% in the nine months ended September 30, 2020 as compared to 62.9% in the same period in 2019.

Sales and Marketing Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2020 2019 % Change

2 unchanged sentences

% of revenue 42.6 % 45.0 %

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 .

Sales and marketing expense increased $8.7 million, or 10.1%, in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $12.4 million increase in sales and marketing personnel costs and a $1.8 million increase in professional fees, which were partially offset by a $4.5 million decrease in facility and overhead costs and a $0.9 million decrease in marketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount by 12.1% from September 30, 2019 to September 30, 2020 and increased sales commissions driven by our subscriptions revenue growth, partially offset by a $2.1 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 in 2020.

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,

Nine Months Ended September 30,

2020 2019 % Change

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% of revenue 23.0 % 22.1 %

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.

Research and development expense increased $8.9 million, or 21.1%, in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to a $9.6 million increase in research and development personnel costs, partially offset by a $0.4 million decrease in facility and overhead cost and a $0.2 million decrease in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount by 13.5% from September 30, 2019 to September 30, 2020, partially offset by a $1.1 million decrease in stock-based compensation expense.

Facilities and overhead costs decreased due to non-recurring charges which were incurred in 2019 to support our personnel growth coupled with lower travel and entertainment related expenses as a result of our shift to largely remote work in 2020.

Professional fees decreased due to a decrease in consulting fees.

General and Administrative Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2020 2019 % Change

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% of revenue 17.1 % 15.4 %

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.

Facility and overhead costs increased to support our personnel growth.

Other Expense (Income), Net

Six Months Ended June 30,

General and administrative expense increased $8.6 million, or 29.2%, in the nine months ended September 30, 2020 compared to the same period in 2019 due to a $5.6 million increase in general and administrative personnel costs, a $1.8 million increase in professional fees, and a $1.2 million increase in facility and overhead costs.

Personnel costs increased due to an increase in general and administrative personnel headcount by 30.7% from September 30, 2019 to September 30, 2020 coupled with a $2.2 million increase in stock-based compensation expense during the nine months ended September 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 increased legal fees.

Facility and overhead costs increased to support our personnel growth as well as a result of an increase in bad debt expense.

Other (Income) Expense, Net

Nine Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

Other expense (income), net $ 2,432 $ (381) ***

Other (income) expense, net $ (1,845) $ 1,881 ***

% of revenue (0.8) % 1.0 %

*** - Indicates a percentage that is not meaningful

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

Other (income) expense, net increased by $3.7 million in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to $0.4 million in foreign exchange gains compared to $2.5 million in foreign exchange losses in the nine months ended September 30, 2019.

The increase in foreign exchange gains was primarily due to currency fluctuations of the Euro, Swedish krona, and Swiss franc versus the U.S.

dollar during the nine months ended September 30, 2020 compared to the same period in 2019.

Additionally, we recognized $1.0 million of other income in the nine months ended September 30, 2020 due to a payment received from a state government as a result of our achievement of certain job creation and capital investment goals.

Interest Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2020 2019 % Change

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% of revenue 0.2 % 0.1 %

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.

Interest expense increased by $0.2 million, or 65.3%, in the nine months ended September 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 June 30, 2020, we ha d $256.1 million of cash and cash equivalents.

As of September 30, 2020, we ha d $251.1 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.

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.

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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 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

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

Nine Months Ended September 30,

Cash used in operating activities $ (13,453) $ (2,880)

Cash used in investing activities (7,174) (31,430)

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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 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.

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

As of September 30, 2020, we had not made any borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $11.2 million in 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 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 $4.5 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.

For the nine months ended September 30, 2020, the majority of the $7.2 million of cash used in investing activities was related to the acquisition of Novayre.

Historical Cash Flows

Operating Activities

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.

For the nine months ended September 30, 2020, net cash used in operating activities of $13.5 million consisted of a net loss of $27.1 million and $2.1 million of cash used from changes in working capital, offset by $15.8 million in adjustments for non-cash items.

Adjustments for non-cash items consisted primarily of stock-based compensation of $10.7 million, depreciation and amortization expense of $4.5 million, and bad debt expense of $0.8 million .

The decrease in cash and cash equivalents resulting from changes in working capital primarily consisted of a $22.6 million increase in accounts receivable stemming from increased sales as well as the timing of billings and collections, a $10.5 million increase in deferred revenue as a result of

increased subscription sales, a $5.8 million increase in accrued compensation and related benefits as a result of higher employee benefit accruals such as vacation and bonuses, a $4.3 million increase in deferred commissions due to increased sales activity, a $3.4 million increase in operating lease liabilities as a result of recognizing a new right-of-use liability related to the expanded occupancy of our headquarters building, and a $3.0 million increase in other liabilities due to the deferral of social security tax payments pursuant to the provisions of the CARES Act.

These decreases to working capital were partially offset by a $4.5 million decrease in prepaid expenses and other assets and a $2.5 million decrease in accounts payable and accrued expenses, both of which were primarily due to the timing of payments.

For the nine months ended September 30, 2019, net cash used in operating activities of $2.9 million consisted of a net loss of $39.9 million , offset by $16.4 million in adjustments for non-cash items and $20.7 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted of stock-based compensation of $13.1 million , depreciation and amortization expense of $3.3 million , a loss on disposal of equipment of $0.1 million , and bad debt expense of $0.1 million, offset by a provision for deferred income taxes of $0.2 million .

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $23.3 million decrease in prepaid expenses and other assets, primarily due to the receipt of 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.

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

There was also a $1.9 million decrease in accounts receivable due to increased cash collections and a $5.7 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 $2.3 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.

These increases were partially offset by a $3.9 million decrease in accounts payable and accrued expenses, primarily due to the timing of payments, a $6.2 million increase in deferred commissions due to increased sales, and a $2.2 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 $0.3 million decrease in other current liabilities.

Investing Activities

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.

For the nine months ended September 30, 2020, net cash used in investing activities was $7.2 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 $1.0 million in purchases 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.

For the nine months ended September 30, 2019, net cash used in investing activities was $31.4 million and related primarily to the build-out of our new headquarters and the purchase of property and equipment.

Financing Activities

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.

For the nine months ended September 30, 2020, net cash provided by financing activities was $110.3 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 $3.2 million in proceeds received from stock option exercises, partially offset by $1.1 million in principal payments on finance leases.

For the nine months ended September 30, 2019, net cash provided by financing activities was $105.4 million, consisting of $101.7 million in proceeds from our underwritten public offering in September 2019, net of underwriting discounts and commissions and the payment of offering expenses, and $4.1 million in proceeds received from stock option exercises.

These increases were offset by principal payments on capital lease obligations of $0.3 million.

Contractual Obligations and Commitments

We entered into a Second Amendment to Deed of Lease, or the Lease Second Amendment, with Tamares 7950 Owner LLC, or the Landlord, effective as of January 1, 2020.

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 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 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.

As of September 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 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.

As of September 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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The preparation of our condensed consolidated financial statements in conformity with U.S.

GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes.

GAAP requires us to make estimates and judgments that affect the amounts reported in our financial statements and accompanying notes.

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.

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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