APPIAN CORP 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements: Page Report of Independent Registered Public Accounting Firm - Opinion on Consolidated Financial Statements 67 Report of Independent Registered Public Accounting Firm - Opinion on Internal Controls over Financial Reporting 69 Consolidated Balance Sheets 70 Consolidated Statements of Operations 71 Consolidated Statements of Comprehensive Loss 72 Consolidated Statements of Changes in Stockholders' Equity (Deficit) 73 Consolidated Statements of Cash Flows 74 Notes to Consolidated Financial Statements 75 66 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Appian Corporation McLean, Virginia Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Appian Corporation (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 18, 2021 expressed an unqualified opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition for Multiple Performance Obligations As discussed in Note 3 to the consolidated financial statements, certain of the Company's revenue contracts contain multiple performance obligations that might include Software as a Service (“SaaS”) subscriptions, term license subscriptions, maintenance and support and professional services. The Company accounts for individual products and services separately if they are capable of being distinct and are distinct within the context of the contract. In such cases, the transaction price is allocated to the distinct performance obligations based on their relative standalone selling price or residual approach and revenue is recognized when control of the distinct performance obligation is transferred. 67 We identified the identification of distinct performance obligations and the determination of standalone selling prices as a critical audit matter. Auditing these elements of revenue recognition was especially challenging due to the significant judgment involved in assessing the completeness of the distinct performance obligations in arrangements containing multiple performance obligations. In addition, the evaluation of the reasonableness of the range of prices used to establish the standalone selling price for maintenance and support and professional services was complex, which directly affects the amount of SaaS and term license subscriptions revenue recognized using the residual approach. The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of internal controls over the Company's revenue recognition process including controls over: (i) the identification of distinct performance obligations, and (ii) the determination of standalone selling prices for the distinct performance obligations. • Testing a sample of revenue contracts and underlying order documents to evaluate management’s identification of distinct performance obligations. • Evaluating the reasonableness of management’s analysis supporting the standalone selling prices by tracing, on a sample basis, revenue transactions to the underlying source documents and recalculating the mathematical accuracy of the analysis. /s/ BDO USA, LLP We have served as the Company's auditor since 2013. McLean, Virginia February 18, 2021 68 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Appian Corporation McLean, Virginia Opinion on Internal Control over Financial Reporting We have audited Appian Corporation’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria . We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 18, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP McLean, Virginia February 18, 2021 69 APPIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) As of December 31, 2020 2019 Assets Current assets Cash and cash equivalents $ 112,462 $ 159,755 Short-term investments and marketable securities 109,826 — Accounts receivable, net of allowance of $ 1,400 and $ 600 as of December 31, 2020 and December 31, 2019, respectively 97,278 70,408 Deferred commissions, current 17,899 14,543 Prepaid expenses and other current assets 27,955 32,955 Total current assets 365,420 277,661 Property and equipment, net 35,404 39,554 Long-term investments 36,120 — Goodwill 4,862 — Intangible assets, net of accumulated amortization of $ 429 as of December 31, 2020 1,744 — Operating right-of-use assets 30,659 24,205 Deferred commissions, net of current portion 34,198 28,979 Deferred tax assets 489 494 Other assets 3,625 592 Total assets $ 512,521 $ 371,485 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 2,967 $ 5,222 Accrued expenses 5,821 7,488 Accrued compensation and related benefits 22,981 10,691 Deferred revenue, current 116,256 82,201 Operating lease liabilities, current 6,923 3,836 Finance lease liabilities, current — 1,447 Other current liabilities 940 1,395 Total current liabilities 155,888 112,280 Operating lease liabilities, net of current portion 51,194 44,416 Finance lease liabilities, net of current portion — 2,375 Deferred revenue, net of current portion 3,886 7,139 Deferred tax liabilities 70 38 Other non-current liabilities 4,878 — Total liabilities 215,916 166,248 Commitments and contingent liabilities (see Notes 4 and 13) Stockholders’ equity Class A common stock—par value $ 0.0001 ; 500,000,000 shares authorized and 38,971,324 shares issued and outstanding as of December 31, 2020; 500,000,000 shares authorized and 34,525,386 shares issued and outstanding as of December 31, 2019 4 3 Class B common stock—par value $ 0.0001 ; 100,000,000 shares authorized and 31,707,866 shares issued and outstanding as of December 31, 2020; 100,000,000 shares authorized and 32,942,636 shares issued and outstanding as of December 31, 2019 3 3 Additional paid-in capital 470,498 340,929 Accumulated other comprehensive loss ( 5,010 ) ( 285 ) Accumulated deficit ( 168,890 ) ( 135,413 ) Total stockholders’ equity 296,605 205,237 Total liabilities and stockholders’ equity $ 512,521 $ 371,485 The accompanying notes are an integral part of these consolidated financial statements. 70 APPIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) Year Ended December 31, 2020 2019 2018 Revenue Subscriptions $ 198,710 $ 151,299 $ 126,012 Professional services 105,863 109,053 100,731 Total revenue 304,573 260,352 226,743 Cost of revenue Subscriptions 20,826 17,098 11,997 Professional services 67,940 76,743 72,928 Total cost of revenue 88,766 93,841 84,925 Gross profit 215,807 166,511 141,818 Operating expenses Sales and marketing 130,316 117,440 105,992 Research and development 70,241 58,043 44,724 General and administrative 53,152 41,496 37,821 Total operating expenses 253,709 216,979 188,537 Operating loss ( 37,902 ) ( 50,468 ) ( 46,719 ) Other (income) expense Other (income) expense, net ( 5,786 ) ( 941 ) 2,295 Interest expense 478 367 198 Total other (income) expense ( 5,308 ) ( 574 ) 2,493 Loss before income taxes ( 32,594 ) ( 49,894 ) ( 49,212 ) Income tax expense 883 820 239 Net loss $ ( 33,477 ) $ ( 50,714 ) $ ( 49,451 ) Net loss per share: Basic and diluted $ ( 0.48 ) $ ( 0.77 ) $ ( 0.80 ) Weighted average common shares outstanding: Basic and diluted 69,050,565 65,479,327 62,140,684 The accompanying notes are an integral part of these consolidated financial statements. 71 APPIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Year Ended December 31, 2020 2019 2018 Net loss $ ( 33,477 ) $ ( 50,714 ) $ ( 49,451 ) Comprehensive income (loss), net of income taxes: Foreign currency translation adjustment ( 4,703 ) ( 827 ) 103 Unrealized losses on available-for-sale securities ( 22 ) — — Total other comprehensive loss, net of income taxes $ ( 38,202 ) $ ( 51,541 ) $ ( 49,348 ) The accompanying notes are an integral part of these consolidated financial statements. 72 APPIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (in thousands, except share data) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity Shares Amount Balance, December 31, 2017 60,599,877 $ 6 $ 141,268 $ 439 $ ( 96,189 ) $ 45,524 Net loss — — — — ( 49,451 ) ( 49,451 ) Issuance of common stock from public offering, net of issuance costs 1,675,000 — 57,829 — — 57,829 Issuance of common stock to directors 11,952 — — — — — Vesting of restricted stock units 143,390 — — — — — Exercise of stock options 1,486,218 — 3,133 — — 3,133 Stock-based compensation expense — — 16,054 — — 16,054 Other comprehensive income — — — 103 — 103 Balance, December 31, 2018 63,916,437 6 218,284 542 ( 145,640 ) 73,192 Cumulative-effect adjustment for the adoption of ASC 606 — — — — 60,941 60,941 Net loss — — — — ( 50,714 ) ( 50,714 ) Issuance of common stock from public offering, net of issuance costs 1,825,000 — 101,303 — — 101,303 Issuance of common stock to directors 10,654 — — — — — Vesting of restricted stock units 521,460 — — — — — Exercise of stock options 1,194,471 — 4,899 — — 4,899 Stock-based compensation expense — — 16,443 — — 16,443 Other comprehensive loss — — — ( 827 ) — ( 827 ) Balance, December 31, 2019 67,468,022 6 340,929 ( 285 ) ( 135,413 ) 205,237 Net loss — — — — ( 33,477 ) ( 33,477 ) Issuance of common stock from public offering, net of issuance costs 1,931,206 1 107,914 — — 107,915 Issuance of common stock to directors 7,942 — — — — — Vesting of restricted stock units 270,609 — — — — — Exercise of stock options 1,001,411 — 6,376 — — 6,376 Stock-based compensation expense — — 15,279 — — 15,279 Other comprehensive loss — — — ( 4,725 ) — ( 4,725 ) Balance, December 31, 2020 70,679,190 $ 7 $ 470,498 $ ( 5,010 ) $ ( 168,890 ) $ 296,605 The accompanying notes are an integral part of these consolidated financial statements. 73 APPIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net loss $ ( 33,477 ) $ ( 50,714 ) $ ( 49,451 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 5,851 4,742 2,021 Bad debt expense 984 99 211 Loss (gain) on disposal of property and equipment 22 146 ( 4 ) Change in fair value of available-for-sale securities 22 — — Deferred income taxes ( 184 ) ( 334 ) ( 218 ) Stock-based compensation 15,279 16,443 16,054 Changes in assets and liabilities: Accounts receivable ( 33,559 ) 7,432 ( 23,332 ) Prepaid expenses and other assets 3,740 8,972 ( 1,025 ) Deferred commissions ( 8,575 ) ( 9,319 ) ( 7,615 ) Accounts payable and accrued expenses ( 4,238 ) ( 4,039 ) 7,461 Accrued compensation and related benefits 11,801 ( 3,072 ) ( 3 ) Other liabilities 3,681 1,318 1,823 Deferred revenue 27,626 12,573 23,023 Operating lease liabilities 3,407 6,827 — Deferred rent, non-current — — ( 266 ) Net cash used in operating activities ( 7,620 ) ( 8,926 ) ( 31,321 ) Cash flows from investing activities: Purchases of investments ( 145,968 ) — — Payments for acquisitions, net of cash acquired ( 6,138 ) — — Proceeds from sale of equipment — — 4 Purchases of property and equipment ( 1,251 ) ( 32,421 ) ( 7,014 ) Net cash used in investing activities ( 153,357 ) ( 32,421 ) ( 7,010 ) Cash flows from financing activities: Principal payments on finance leases ( 3,822 ) ( 653 ) — Proceeds from public offerings, net of underwriting discounts 108,260 101,653 58,258 Payments of costs related to public offerings ( 346 ) ( 350 ) ( 429 ) Proceeds from exercise of common stock options 6,376 4,899 3,133 Net cash provided by financing activities 110,468 105,549 60,962 Effect of foreign exchange rate changes on cash and cash equivalents 3,216 623 ( 1,459 ) Net (decrease) increase in cash and cash equivalents ( 47,293 ) 64,825 21,172 Cash and cash equivalents, beginning of period 159,755 94,930 73,758 Cash and cash equivalents, end of period $ 112,462 $ 159,755 $ 94,930 Supplemental disclosure of cash flow information: Cash paid for interest $ 165 $ 331 $ 46 Cash paid for income taxes $ 1,182 $ 356 $ 680 Supplemental disclosure of non-cash financing information: Finance lease obligations to acquire new office furniture and fixtures and computer hardware $ — $ 4,475 $ — The accompanying notes are an integral part of these consolidated financial statements. 74 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business Appian Corporation (together with its subsidiaries, “Appian,” the “Company,” “we,” or “our”) provides a low-code automation platform that accelerates the creation of high-impact business applications, enabling our customers to automate the most important aspects of their business. Global organizations use our applications to improve customer experience, achieve operational excellence, and simplify global risk management and compliance. We were incorporated in the state of Delaware in August 1999. We are headquartered in McLean, Virginia and operate in Canada, Switzerland, the United Kingdom, France, Germany, the Netherlands, Italy, Australia, Spain, Singapore, and Sweden. 2. Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”). We adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("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 to January 1, 2019. For fiscal years 2018 and prior, revenue was recognized under ASC Topic 605, Revenue Recognition ("ASC 605"). Use of Estimates The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the amounts reported in these consolidated financial statements and accompanying notes. Although we believe the estimates we use are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ from those estimates. Significant estimates embedded in the consolidated financial statements include revenue recognition, income taxes and the related valuation allowance, the valuation of goodwill and intangible assets, leases, costs to obtain a contract with a customer, the valuation of financial instruments, and stock-based compensation. The ongoing outbreak of the novel coronavirus disease ("COVID-19") has resulted in the declaration of a global pandemic and introduced a level of disruption and uncertainty into the financial markets and global economy. While we continue to monitor the developments surrounding the pandemic, as of the date of issuance of these financial statements, we are not aware of any specific events or circumstances that would require us to update our estimates, assumptions, and judgments or revise the carrying value of our assets or liabilities. We cannot estimate the impacts COVID-19 will have on our business going forward as such impacts 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. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Appian and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Public Offerings 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 75 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. In September 2019, we completed an underwritten public offering of 2,329,000 shares of our Class A common stock, of which 1,825,000 shares of Class A common stock were sold by us and 504,000 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 $ 55.70 per share. Our net proceeds from the offering were $ 101.3 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. In August 2018, we completed an underwritten public offering of 2,000,000 shares of our Class A common stock, of which 1,675,000 shares of Class A common stock were sold by us and 325,000 shares of Class A common stock were sold by existing stockholders, at an offering price to the public of $ 35.15 per share. Our net proceeds from the offering were $ 57.8 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. Revenue Recognition Refer to Note 3 for a detailed discussion on specific revenue recognition principles related to our major revenue streams. Cost of Revenue Subscriptions Cost of subscriptions revenue consists primarily of fees paid to our third-party managed hosting providers and other third-party service providers, personnel costs such as payroll and benefits for our technology operations and customer support teams, and allocated facility costs and overhead. Professional Services Cost of professional services revenue includes all direct and indirect costs to deliver our professional services and training, including employee compensation for our global professional services and training personnel, third-party contractor costs, allocated facility costs and overhead, and the costs of billable expenses such as travel and lodging. 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 and allocated facility costs and overhead. Concentration of Credit and Customer Risk Our financial instruments exposed to concentration of credit and customer risk consist primarily of cash and cash equivalents, trade accounts receivable, and our short- and long-term investments. Deposits held with banks may exceed the amount of insurance provided on such deposits. We believe the financial institutions holding our cash deposits are financially sound and, accordingly, minimal credit risk exists with respect to these balances. With regard to our customers, credit evaluation and account monitoring procedures are used to minimize the risk of loss. We believe no additional credit risk beyond amounts provided for collection loss are inherent in accounts receivable. Revenue generated from government agencies represented 18.1 %, 17.1 %, and 15.7 % of our revenue for the years ended December 31, 2020, 2019, and 2018, respectively, of which the top three federal government agencies generated 6.6 %, 7.4 %, and 7.8 % of our revenue for the years ended December 31, 2020, 2019, and 2018, respectively. Additionally, 33.8 %, 32.3 %, and 28.7 % of our revenue during the years ended December 31, 2020, 2019, and 2018, respectively, was generated from customers outside the United States. Cash and Cash Equivalents 76 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We consider all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase, as well as overnight repurchase agreements, to be cash equivalents. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectability of accounts and incorporates an estimation of expected lifetime credit losses on our receivables. We regularly review the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, customer creditworthiness, and current economic trends. If the financial condition of our customers were to deteriorate, resulting in their inability to make required payments, additional provisions for doubtful accounts would be required and would increase bad debt expense. There was a $ 0.8 million increase in the allowance for doubtful accounts from December 31, 2019 to December 31, 2020. Activity in the allowance for doubtful accounts was as follows (in thousands): Year Ended December 31, 2020 2019 2018 Balance as of January 1 $ 600 $ 600 $ 400 Additions 984 99 211 Less write-offs, net of recoveries ( 184 ) ( 99 ) ( 11 ) Balance as of December 31 $ 1,400 $ 600 $ 600 Non-Trade Receivables We record non-trade receivables to reflect amounts due for activities other than sales of subscriptions to our platform and professional services. Our non-trade receivables related entirely to a receivable resulting from our tenant improvement allowance. The tenant improvement allowance receivable was $ 14.4 million as of December 31, 2018 and was classified within Prepaid expenses and other current assets in the accompanying consolidated balance sheets. We recognized our initial tenant improvement allowance receivable of $ 15.8 million related to our new headquarters once we took initial possession of the space in October 2018. We recognized an additional tenant improvement allowance receivable of $ 2.6 million when we took possession of adjacent office space in February 2019. We had received the entire tenant improvement allowance of $ 17.0 million as of December 31, 2019, and therefore, there was no receivable balance remaining as of such date. Assets Recognized from the Costs to Obtain a Contract with a Customer We capitalize the incremental costs of obtaining a contract with a customer, including sales commissions paid to our direct sales force that are incremental costs to obtaining customer contracts. These costs are recorded as deferred commissions in the consolidated balance sheets. Costs to obtain a contract for a new customer or upsell are amortized over an estimated economic life of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals. We determine the estimated economic life based on both qualitative and quantitative factors such as expected renewals, product life cycles, contractual terms, and customer attrition. We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the estimated economic life. Commissions paid relating to contract renewals are deferred and amortized over the related renewal period. We also capitalize the incremental fringe benefits associated with commission expenses paid to our direct sales force. Costs to obtain a contract for professional services arrangements are expensed as incurred as the contractual period of our professional services arrangements are one year or less. Amortization associated with commission expense is recorded to sales and marketing costs in our consolidated statements of operations. The following table summarizes the activity of costs to obtain a contract with a customer for the years ended December 31, 2020 and December 31, 2019 (in thousands): 77 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2020 2019 Balance as of January 1 $ 43,522 $ 29,108 Adoption of ASC 606 — 5,094 Additional contract costs deferred 31,898 25,004 Amortization of deferred contract costs ( 23,323 ) ( 15,684 ) Balance as of December 31 $ 52,097 $ 43,522 For the periods prior to January 1, 2019 under ASC 605, deferred commissions are the incremental costs directly associated with subscription agreements with customers and consist of sales commissions paid to our direct sales force. Commissions are considered direct and incremental and as such are deferred and amortized over the terms of the related customer contracts consistent with the related revenue. Commission expense was $ 23.3 million, $ 15.7 million, and $ 15.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Significant additions or improvements extending the useful life of an asset are capitalized, while repairs and maintenance costs which do not significantly improve the related assets or extend their useful lives are charged to expense as incurred. The following table outlines the useful lives of our major asset categories: Asset Category Useful Life (in years) Computer software 3 Computer hardware 3 Equipment 5 Office furniture and fixtures 10 Leasehold improvements (a) (a) - Leasehold improvements have an estimated useful life of the shorter of the useful life of the assets or the lease term. Impairment of Long-Lived Assets Long-lived assets and certain intangible assets are reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable through undiscounted cash flows from the use of the assets. If such assets are considered to be impaired, the assets are written down to their estimated fair value. No indicators of impairment were identified for the years ended December 31, 2020, 2019, and 2018. Investments and Fair Value of Financial Instruments Refer to Note 16 for a detailed discussion on our policies specific to investments and determining fair value. Stock-Based Compensation We account for stock-based compensation expense related to stock-based awards based on the estimated fair value of the award on the grant date. We calculate the fair value of stock options containing only a service condition using the Black-Scholes option pricing model. The fair value of restricted stock units ("RSUs") is based on the closing market price of our common stock on the Nasdaq Global Market on the date of grant. For service-based awards such as RSUs, stock-based compensation expense is recognized on a straight-line basis over the requisite service period. For performance-based awards, stock-based compensation expense is recognized using the accelerated attribution method based on the probability of satisfying 78 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the performance condition. For awards that contain market conditions, compensation expense is measured using a Monte Carlo simulation and recognized using the accelerated attribution method over the derived service period based on the expected market performance as of the grant date. We account for forfeitures as they occur rather than estimating expected forfeitures. Leases Refer to Note 4 for a detailed discussion on our policies specific to leasing arrangements. Basic and Diluted Loss per Common Share We compute net loss per common share using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock are substantially identical, other than voting and conversion rights. Accordingly, the Class A common stock and Class B common stock share equally in our net losses. Basic net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period increased by common shares that could be issued upon the conversion or exercise of other outstanding securities to the extent those additional common shares would be dilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net loss per share by application of the treasury stock method. Due to net losses for the years ended December 31, 2020, 2019, and 2018, basic and diluted net loss per share were the same as the effect of potentially dilutive securities would have been anti-dilutive. Income Taxes We use the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. We recognize the effect on deferred tax assets and liabilities of a change in tax rates as income and expense in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized. Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not the position is sustainable upon examination by the taxing authority. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. We recognize penalties and interest related to unrecognized tax benefits as income tax expense. We calculate the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified. The amount of income taxes paid is subject to examination by U.S. federal, state, and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to our assessment of relevant risks, facts, and circumstances existing at that time. To the extent the assessment of such tax position changes, we record the change in estimate in the period in which we make that determination. Segment Reporting Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. Our CODM is our chief executive officer, who reviews financial information presented on a company wide basis for purposes of allocating resources and evaluating financial performance. As such, our operations constitute a single operating segment and one reportable segment. 79 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreign Currency Our operations located outside of the United States where the local currency is the functional currency are translated into U.S. dollars using the current rate method. Results of operations are translated at the average rate of exchange for the period. Assets and liabilities are translated at the closing rates on the balance sheet date. Gains and losses on translation of these accounts are accumulated and reported as a separate component of stockholders’ equity and other comprehensive income. Gains and losses on foreign currency transactions are recognized in the accompanying consolidated statements of operations as a component of other expense, net. Transaction gains and losses from transactions denominated in foreign currencies resulted in net transaction gains of $ 4.3 million for the year ended December 31, 2020 and net transaction losses of $ 0.2 million and $ 3.0 million for the years ended December 31, 2019 and 2018, respectively. Research and Development Research and development expenses include payroll, employee benefits, and other headcount-related costs associated with product development. Our product utilizes a common codebase, whether accessed by customers via the cloud or via an on-premises installation. Since our software is sold and licensed externally, we consider our software as external-use software for purposes of applying the capitalized software development guidance. Product development costs are expensed as incurred until technological feasibility has been established, which we define as the completion of all planning, designing, coding, and testing activities necessary to establish products that meet design specifications including functions, features, and technical performance requirements. We have determined technological feasibility for our software products is reached shortly before they are released for sale. Costs incurred after technological feasibility is established are not significant, and accordingly we expense all research and development costs when incurred. Advertising Expenses We expense advertising costs as they are incurred. Advertising expenses were $ 6.0 million, $ 4.1 million, and $ 3.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. Recent Accounting Pronouncements Adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adopting the standard did not have a material impact on our consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which eliminates, modifies, and adds disclosure requirements for fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adopting the standard did not have a material impact on our consolidated financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract , which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adopting the standard did not have a material impact on our consolidated financial statements. 80 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Not Yet Adopted In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848), which provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates such as the Secured Overnight Financing Rate (SOFR). This guidance is effective upon issuance and generally can be applied through the end of calendar year 2022. We are currently evaluating the impact and applicability of this new standard. 3. Revenue Revenue Recognition We generate subscriptions revenue primarily through the sale of software-as-a-service ("SaaS") subscriptions bundled with maintenance and support and hosting services as well as term license subscriptions bundled with maintenance and support. We generate professional services revenue from fees for our consulting services, including application development and deployment assistance as well as training related to our platform. The following table summarizes revenue from contracts with customers for the years ended December 31, 2020 and 2019 (in thousands): Year Ended December 31, 2020 2019 SaaS subscriptions $ 129,219 $ 95,028 Term license subscriptions 51,415 40,428 Maintenance and support 18,076 15,843 Professional services 105,863 109,053 Total revenue $ 304,573 $ 260,352 Performance Obligations and Timing of Revenue Recognition We primarily sell products and services that fall into the categories discussed below. Each category contains one or more performance obligations that are either (1) capable of being distinct (i.e., the customer can benefit from the product or service on its own or together with readily available resources, including those purchased separately from us) and distinct within the context of the contract (i.e., separately identified from other promises in the contract) or (2) a series of distinct products or services that are substantially the same and have the same pattern of transfer to the customer. Our term license subscriptions are delivered at a point in time while our SaaS subscriptions, maintenance and support, and professional services are delivered over time. Subscriptions Revenue Subscriptions revenue is primarily related to (1) SaaS subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support. We generally charge subscription fees on a per-user basis and, to a lesser degree, non-user based single application licenses. We bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly, or monthly basis. In certain instances, our customers have paid their entire contract up front. SaaS Subscriptions We generate cloud-based subscription revenue primarily from the sales of subscriptions to access our cloud offering, together with related support services to our customers. We perform all required maintenance and support for our cloud offering. Revenue is recognized on a ratable basis over the contract term beginning on the date the service is made available to the customer. Our cloud-based subscription contracts generally have a term of one to three years in length. We bill customers and collect payment for subscriptions to our platform in advance, and they are non-cancellable. 81 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Term License Subscriptions Our term license subscription revenue is derived from customers with on-premises installations of our platform pursuant to contracts that were historically one to three years in length. The majority of recent contracts have been one year in length. Although term license subscriptions are sold with maintenance and support, the software is fully functional at the beginning of the subscription and is considered a distinct performance obligation. On rare occasions, a cloud-based subscription may include the right for the customer to take possession of the license and as such, the revenue is treated as a license. Revenue from term license subscriptions is recognized when control of the software license has transferred to the customer, which is the later of delivery or commencement of the contract term. Maintenance and Support Maintenance and support subscriptions include both technical support and when-and-if-available software upgrades, which are treated as a single performance obligation as they are considered a series of distinct services that are substantially the same and have the same duration and measure of progress. Revenue from maintenance and support is recognized ratably over the contract period, which is the period over which the customer has continuous access to maintenance and support. Professional Services Our professional services revenue is comprised of fees for consulting services, including application development and deployment assistance as well as training services related to our platform. Our professional services are considered distinct performance obligations when sold standalone or with other products. Consulting Services We sell consulting services to assist customers in planning and executing the deployment of our software. Customers are not required to use consulting services to fully benefit from the software. Consulting services are regularly sold on a standalone basis and either (1) under a fixed-fee arrangement or (2) on a time and materials basis. Consulting contracts are each considered separate performance obligations because they do not integrate with each other or with other products and services to deliver a combined output to the customer, do not modify or customize (or are not modified or customized by) each other or other products and services, and do not affect the customer's ability to use the other consulting offerings or other products and services. Revenue under consulting contracts is recognized over time as services are delivered. For time and materials-based consulting contracts, we have elected the practical expedient of recognizing revenue upon invoicing since the invoiced amount corresponds directly to the value of our service to date. Training Services We sell various training services to our customers. Training services are sold in the form of prepaid training credits that are redeemed based on a fixed rate per course. Training revenue is recognized when the associated training services are delivered. Significant Judgments and Estimates Determining the Transaction Price The transaction price includes both fixed and variable consideration. Variable consideration is included in the transaction price to the extent it is probable a significant reversal will not occur. The amount of variable consideration excluded from the transaction price for the years ended December 31, 2020 and 2019 was insignificant. Our estimates of variable consideration are also subject to subsequent true-up adjustments and may result in changes to transaction prices; however, such true-up adjustments are not expected to be material. Allocating the Transaction Price Based on Standalone Selling Prices ("SSP") 82 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We allocate the transaction price to each performance obligation in a contract based on its relative SSP. The SSP is the observable price at which we sell the product or service separately. In the absence of observable pricing, we estimate SSP using the residual approach. We establish SSP as follows: 1. SaaS subscriptions - Given the highly variable selling price of our SaaS subscriptions, we establish the SSP of our SaaS subscriptions using a residual approach after first determining the SSP of consulting and training services. We have concluded the residual approach to estimating SSP of our SaaS subscriptions is an appropriate allocation of the transaction price. 2. Term license subscriptions - Given the highly variable selling price of our term license subscriptions, we have established SSP of term license subscriptions using a residual approach after first determining the SSP of maintenance and support. Maintenance and support is sold on a standalone basis in conjunction with renewals of our legacy perpetual software licenses and within a narrow range of the net license fee. Because an economic relationship exists between the license and maintenance and support, we have concluded the residual approach to estimating SSP of term license subscriptions is an appropriate allocation of the transaction price. 3. Maintenance and support - We establish SSP of maintenance and support as a percentage of the stated net subscription fee based on observable pricing of maintenance and support renewals from our legacy perpetual software licenses. 4. Consulting services and training services - SSP of consulting services and training services is established based on the observable pricing of standalone sales within each geographic region where the services are sold. Contract Balances Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. Contract assets primarily relate to unbilled amounts for contracts with customers for which the amount of revenue recognized exceeds the amount billed to the customer. Contract assets are transferred to accounts receivable when the right to invoice becomes unconditional. As of December 31, 2020 and December 31, 2019, contract assets of $ 20.1 million and $ 22.8 million, respectively, are included in the Prepaid expenses and other current assets and Other assets line items in our consolidated balance sheets. Contract liabilities consist of deferred revenue and include payments received in advance of the satisfaction of performance obligations. Deferred revenue is then recognized as the revenue recognition criteria are met. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current. For the year ended December 31, 2020, we recognized $ 83.4 million of revenue that was included in the deferred revenue balance as of December 31, 2019. Transaction Price Allocated to the Remaining Performance Obligations As of December 31, 2020, we had an aggregate transaction price of $ 206.2 million allocated to unsatisfied performance obligations. We expect to recognize $ 189.6 million of this balance as revenue over the next 24 months with the remaining amount recognized thereafter. 4. Leases At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease. Operating leases with a term greater than one year are recognized on the balance sheet as right-of-use ("ROU") assets, lease liabilities, and, if applicable, long-term lease liabilities. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. We have elected not to recognize on the balance sheet leases with a term of one year or less. For contracts with lease and non-lease components, we have elected not to allocate the contract consideration and to account for the lease and non-lease components as a single lease component. Finance leases are included in the Property and equipment, net, Finance lease liabilities, current, and Finance lease liabilities, net of current portion line items in our consolidated balance sheets. 83 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rates within most of our leases are generally not determinable; therefore, we use the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment and is estimated for each lease based on the rate we would have to pay for a collateralized loan with the same term and payments as the lease. We consider various factors, including our level of collateralization, estimated credit rating, and the currency in which the lease is denominated. Operating lease ROU assets also include any lease prepayments, offset by lease incentives. Certain of our leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option while an option to terminate is considered unless it is reasonably certain we will not exercise the option. For certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. Expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense. We have lease agreements which require payments for lease and non-lease components (i.e., common area maintenance) that are accounted for as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as maintenance costs based on future obligations, are not included in ROU assets or lease liabilities but are rather expensed as incurred and recorded as variable lease expense. As of December 31, 2020, we have operating leases for corporate offices. Our operating leases have remaining lease terms ranging from 3 months to 11 years, some of which include options to extend the leases for up to 10 years. In April 2018, we entered into a lease agreement with respect to 176,222 square feet of office space in McLean, Virginia for a new corporate headquarters. The initial term of the lease was 150 months. We took initial possession of the first phase of the new headquarters in October 2018 and began to recognize rent expense as of that date. In February 2019, we took possession of an additional 28,805 square feet of adjacent office space. In January 2020, we entered into an amendment which adjusts the original terms of the headquarters lease. Under this amendment, we exercised an option to expand occupancy, adding 34,158 square feet of office space. Occupancy of the added space commenced on October 14, 2020. Pursuant to the guidance of ASC 842, the amendment is considered a modification to the original lease and is accounted for as a separate contract because it represents a new ROU asset and the lease costs on the new space are charged at prevailing market rates. Effective July 1, 2020, we took possession of the space, began to recognize rent expense, and reported a $ 7.9 million ROU asset and lease liability on our consolidated balance sheets. In October 2020, we paid the full $ 2.7 million principal balances outstanding under our finance leases pursuant to an option permitting us to pay such balances in full at any time. As of the date of the paydown, the titles to the assets were transferred to us, the associated ROU liabilities were retired, the carrying values of the purchased assets were adjusted, and the assets were reclassified from finance leases to property and equipment, net on the consolidated balance sheets. The following table sets forth the components of lease expense for the years ended December 31, 2020 and 2019 (in thousands): Year Ended December 31, 2020 2019 Operating lease cost $ 6,649 $ 9,733 Finance lease costs: Amortization of right-of-use assets 1,242 700 Interest on lease liabilities 150 108 Short-term lease cost 565 462 Variable lease cost 281 409 Total $ 8,887 $ 11,412 Supplemental balance sheet information related to leases as of December 31, 2020 and December 31, 2019 was as follows (in thousands, except for lease term and discount rate): 84 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020 2019 Operating Leases Operating right-of-use assets $ 30,659 $ 24,205 Operating lease liabilities, current $ 6,923 $ 3,836 Operating lease liabilities, net of current portion 51,194 44,416 Total operating lease liabilities $ 58,117 $ 48,252 Finance Leases Property and equipment, at cost $ — $ 4,475 Accumulated depreciation — ( 703 ) Property and equipment, net $ — $ 3,772 Finance lease liabilities, current $ — $ 1,447 Finance lease liabilities, net of current portion — 2,375 Total finance lease liabilities $ — $ 3,822 Weighted Average Remaining Lease Term (in years) Operating leases 10.6 11.4 Finance leases 0.0 2.5 Weighted Average Discount Rate Operating leases 9.6 % 9.8 % Finance leases — % 5.5 % For the year ended December 31, 2020, amortization of operating ROU assets totaled $ 1.6 million while interest expense on operating ROU liabilities totaled $ 1.9 million. Supplemental cash flow information related to leases for the years ended December 31, 2020 and 2019 was as follows (in thousands): Year Ended December 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows for operating leases $ 3,407 $ 6,413 Operating cash outflows for finance leases 150 108 Financing cash outflows for finance leases 3,822 653 ROU assets obtained in exchange for lease obligations: Operating leases — 523 Finance leases — 4,475 A summary of our future minimum lease commitments under non-cancellable leases as of December 31, 2020 is as follows (in thousands): 85 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Operating Leases 2021 $ 7,487 2022 8,104 2023 8,174 2024 8,571 2025 9,265 Thereafter 57,386 Total lease payments 98,987 Less: imputed interest ( 40,870 ) Total $ 58,117 5. Acquisitions Novayre Solutions SL In January 2020, we acquired 100 % of the outstanding common stock of Novayre Solutions SL ("Novayre"), a developer of a robotic process automation platform, for approximately $ 6.9 million. The acquisition was made due to the attractive nature of the product offerings of Novayre and in furtherance of our objective to enhance our automation platform. The transaction was financed through available cash on hand. The allocation of the purchase price was based upon estimated fair values of the assets acquired and liabilities assumed. The final allocation of the purchase price is as follows: Cash acquired $ 731 Other current assets 213 Property and equipment 22 Developed technology 1,537 Customer relationships 406 Goodwill 4,348 Other noncurrent assets 10 Total assets acquired 7,267 Current liabilities 14 Noncurrent liabilities 344 Total liabilities assumed 358 Net assets acquired $ 6,909 There were no changes to our reportable segments as a result of the acquisition, and revenue and expenses from the date of the acquisition through December 31, 2020 were immaterial. Additionally, acquisition costs incurred in relation to the transaction were immaterial. Acquired property and equipment is depreciated on a straight-line basis over the assets' respective estimated remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, non-contractual relationships, and expected future synergies. We do not expect the purchase price allocated to goodwill and intangible assets to be deductible for tax purposes. 6. Property and Equipment, net Property and equipment, net consisted of the following as of December 31, 2020 and 2019 (in thousands): 86 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020 2019 Leasehold improvements $ 36,263 $ 37,130 Office furniture and fixtures 2,521 4,963 Computer hardware 4,535 3,365 Computer software 1,352 1,350 Equipment 49 72 Property and equipment, gross 44,720 46,880 Less: accumulated depreciation ( 9,316 ) ( 7,326 ) Property and equipment, net $ 35,404 $ 39,554 Depreciation expense totaled $ 5.4 million, $ 4.7 million, and $ 2.0 million for the years ended December 31, 2020, 2019, and 2018, respectively. During the year ended December 31, 2020, we retired $ 1.3 million of leasehold improvements, $ 0.2 million of computer hardware, and $ 0.1 million of office furniture and fixtures and equipment, and nominal losses on disposal were recorded. During the year ended December 31, 2019, we retired $ 3.2 million of leasehold improvements, $ 0.9 million of computer hardware, $ 0.4 million of office furniture and fixtures, $ 0.4 million of software, and $ 0.1 million of equipment and recorded a loss on disposal of $ 0.1 million. 7. Accrued Expenses Accrued expenses consisted of the following as of December 31, 2020 and 2019 (in thousands): As of December 31, 2020 2019 Accrued hosting costs $ 1,229 $ 1,865 Accrued contract labor costs 908 1,921 Accrued marketing and trade show expenses 596 365 Accrued audit and tax expenses 370 315 Accrued legal costs 760 422 Accrued reimbursable employee expenses 231 1,353 Accrued third party license fees 570 288 Other accrued expenses 1,157 959 Total $ 5,821 $ 7,488 8. Debt Line of Credit In November 2017, we entered into a $ 20.0 million revolving line of credit with a lender. The facility matures in November 2022. We may elect whether amounts drawn on the revolving line of credit bear interest at a floating rate per annum equal to either LIBOR or the prime rate plus an additional interest rate margin that is determined by the availability of the borrowings under the revolving line of credit. The additional interest rate margin will range from 2.00 % to 2.50 % in the case of LIBOR advances and from 1.00 % to 1.50 % in the case of prime rate advances. The revolving line of credit contains an unused facility fee in an amount between 0.15 % and 0.25 % of the average unused portion of the revolving line of credit, which is payable quarterly. The agreement contains certain customary affirmative and negative covenants and requires us to maintain (i) an adjusted quick ratio of at least 1.35 to 1.00 and (ii) minimum adjusted EBITDA, in the amounts and for the periods set forth in the agreement. Any amounts borrowed under the credit facility are collateralized by substantially all of our assets. We were in compliance with all covenants as of December 31, 2020. As of December 31, 2020, we had no outstanding borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $ 11.2 million in connection with securing our 87 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS leased office space. We are monitoring the LIBOR to SOFR transition, which may result in modification or amendment of our existing revolving line of credit. 9. Income Taxes For the years ended December 31, 2020, 2019, and 2018, our loss before income taxes was comprised of the following (in thousands): Year Ended December 31, 2020 2019 2018 Domestic $ ( 25,463 ) $ ( 32,091 ) $ ( 30,663 ) Foreign ( 7,131 ) ( 17,803 ) ( 18,549 ) Total $ ( 32,594 ) $ ( 49,894 ) $ ( 49,212 ) For the years ended December 31, 2020, 2019, and 2018, our income tax expense (benefit) was comprised of the following (in thousands): Year Ended December 31, 2020 2019 2018 Current: Federal $ 11 $ 3 $ — State 79 60 25 Foreign 977 1,091 432 Total current expense 1,067 1,154 457 Deferred: Federal — — — State — — — Foreign ( 184 ) ( 334 ) ( 218 ) Total deferred benefit ( 184 ) ( 334 ) ( 218 ) Total income tax expense $ 883 $ 820 $ 239 For the years ended December 31, 2020, 2019, and 2018, the provision for income taxes differs from the amount computed by applying the federal statutory income tax rates to our loss before the provision (benefit) for income taxes as follows: Year Ended December 31, 2020 2019 2018 U.S. federal statutory tax rate 21.0 % 21.0 % 21.0 % State tax expense 18.2 7.1 7.2 Foreign rate differential ( 3.6 ) ( 5.1 ) ( 5.1 ) Nondeductible expenses ( 0.6 ) ( 0.7 ) ( 0.7 ) Equity compensation 46.2 12.0 9.5 Tax credits 12.0 6.5 3.9 Unrecognized tax benefits ( 2.2 ) ( 1.1 ) ( 0.8 ) Other ( 1.1 ) ( 0.8 ) 0.6 Remeasurement of deferred taxes ( 1.7 ) ( 1.6 ) — Change in valuation allowance ( 90.9 ) ( 38.9 ) ( 36.0 ) Total ( 2.7 ) % ( 1.6 ) % ( 0.4 ) % 88 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effective tax rate of ( 2.7 )% in 2020 includes $ 29.6 million of tax expense attributable to the change in the valuation allowance in the United States and Switzerland, partially offset by $ 18.8 million of favorable excess tax benefits for equity compensation and research credits. Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2020 and 2019, significant components of our deferred tax assets and liabilities were as follows (in thousands): As of December 31, 2020 2019 Deferred tax assets: Net operating losses $ 59,417 $ 34,875 Tax credits 11,922 8,648 Deferred revenue 824 1,291 Equity compensation 3,090 1,668 Lease liabilities 15,768 13,066 Accrued vacation 339 409 Bad debt 383 164 Other 1,234 260 Gross deferred tax assets 92,977 60,381 Less: Valuation allowance ( 65,914 ) ( 35,607 ) Total deferred tax assets 27,063 24,774 Deferred tax liabilities: Prepaid expenses ( 11,082 ) ( 9,562 ) Right-of-use assets ( 8,270 ) ( 6,488 ) Unbilled receivables ( 2,559 ) ( 3,849 ) Depreciation ( 4,221 ) ( 4,377 ) Other ( 512 ) ( 42 ) Total deferred tax liabilities ( 26,644 ) ( 24,318 ) Net deferred tax asset $ 419 $ 456 As of December 31, 2020 and 2019, we had $ 183.9 million and $ 99.3 million of gross net operating loss (“NOL”) carryforwards for U.S. federal tax purposes, respectively. U.S. federal NOL carryforwards in the amount of $ 24.4 million, gross, generated prior to 2018 will expire, if unused, in 2037. Under the Tax Cuts and Jobs Act of 2017 (the "TCJA"), as modified by the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act"), federal NOL carryforwards generated in tax years beginning after December 31, 2017 may be carried forward indefinitely. As of December 31, 2020, we had $ 159.5 million of gross NOL carryforwards generated after 2017 for U.S. federal tax purposes, which may be used to offset 80% of our taxable income annually. Section 382 of the Internal Revenue Code limits the utilization of NOL carryforwards when ownership changes occur, as defined by that section. A number of states have similar state laws that limit utilization of state NOL carryforwards when ownership changes occur. We have performed an analysis of our Section 382 ownership changes and have determined all U.S. federal and state NOL carryforwards are available for use as of December 31, 2020. As of December 31, 2020 and 2019, we had $ 10.5 million and $ 7.5 million, respectively, of U.S. federal tax credit carryforwards which will expire, if unused, between 2031 and 2040. As of December 31, 2020 and 2019, we had U.S. gross state NOL carryforwards of $ 177.2 million and $ 100.9 million, respectively. We had tax effected state NOL carryforwards of $ 11.2 million and $ 6.5 million as of December 31, 2020 and 2019, respectively. The rules regarding carryforwards vary from state to state, and the ability to utilize NOLs varies based on 89 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS timing and amount. The majority of state NOL carryforwards generated prior to 2018 will expire, if unused, in 2037. Due to the TCJA, certain state NOL carryforwards generated after 2017 have an indefinite carryforward period. As of December 31, 2020 and 2019, we had foreign gross NOL carryforwards of $ 78.6 million and $ 62.8 million, respectively, primarily attributable to our subsidiary in Switzerland. Those NOL carryforwards will begin to expire, if unused, between 2021 to 2027. The net change in the total valuation allowance during the year ended December 31, 2020 was $ 30.3 million, primarily driven by the valuation allowance recorded against the United States and Switzerland deferred tax assets. As of December 31, 2020, we continued to maintain a full valuation allowance against U.S. deferred tax assets based on our cumulative operating results as of December 31, 2020, three-year cumulative loss, and assessment of our expected future results of operations. We have evaluated all evidence, both positive and negative, in assessing the likelihood of realizability, and we determined the negative evidence outweighed the positive evidence. As of December 31, 2020, we have a valuation allowance of $ 9.2 million against foreign deferred tax assets, primarily for deferred tax assets at our subsidiary in Switzerland. Based on our cumulative operating results as of December 31, 2020 and assessment of our expected future results of operations, we determined it was not more likely than not that we would be able to realize the deferred tax assets prior to expiration. We plan to distribute previously undistributed earnings of our foreign subsidiaries back to the United States in future years. Upon repatriation of those earnings, if any, we may be subject to taxes, including withholding taxes, net of any applicable foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable. As of December 31, 2020 and 2019, we had unrecognized tax benefits of $ 2.3 million and $ 1.6 million, respectively, of which no ne would affect our effective tax rate if recognized due to the valuation allowance. The following table summarizes the activity related to our unrecognized tax benefit from January 1, 2018 to December 31, 2020 (in thousands): Balance as of December 31, 2017 $ 651 Additions for tax positions in current years 388 Additions for tax positions in prior years — Reductions due to lapse in statutes of limitations — Settlements — Balance as of December 31, 2018 1,039 Additions for tax positions in current years 536 Additions for tax positions in prior years — Reductions due to lapse in statutes of limitations — Settlements — Balance as of December 31, 2019 1,575 Additions for tax positions in current years 702 Additions for tax positions in prior years — Reductions due to lapse in statutes of limitations — Settlements — Balance as of December 31, 2020 $ 2,277 We recognize interest and penalties related to uncertain tax positions in income tax expense. During the years ended December 31, 2020 and 2019, we recognized nominal amounts in interest. We did no t recognize any interest during the year ended December 31, 2018. The cumulative balance of interest and penalties as of December 31, 2020 and 2019 were not meaningful. We anticipate total unrecognized tax benefits will not decrease over the next year. 90 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. The tax years 2017 through 2020 remain open to examination by the major taxing jurisdictions to which we are subject. There are no open examinations that would have a meaningful impact to our consolidated financial statements. The CARES Act also includes various other income and payroll tax measures outside of the carryforward provisions discussed previously. Pursuant to one of these measures, we have elected the option to defer the deposit and payment of our share of social security taxes that would otherwise be due between March 27, 2020 and December 31, 2020. Under the CARES Act, half of these deferred payments are due by the end of fiscal year 2021 while the other half are due by the end of fiscal year 2022. 10. Stock-Based Compensation Equity Incentive Plans In May 2017, our Board of Directors adopted, and our stockholders approved, the 2017 Equity Incentive Plan (the “2017 Plan”), which became effective as of the date of the final prospectus for our initial public offering. The 2017 Plan provides for the grant of incentive stock options to employees, and for the grant of nonstatutory stock options, restricted stock awards, RSUs, stock appreciation rights, performance-based stock awards, and other forms of equity compensation to employees, including officers, non-employee directors, and consultants. We initially reserved 6,421,442 shares of Class A common stock for issuance under the 2017 Plan, which included 421,442 shares that remained available for issuance under our 2007 Stock Option Plan (the “2007 Plan”) at the time the 2017 Plan became effective. The number of shares reserved under the 2017 Plan increases for any shares subject to outstanding awards originally granted under the 2007 Plan that expire or are forfeited prior to exercise. As a result of the adoption of the 2017 Plan, no further grants may be made under the 2007 Plan. As of December 31, 2020, there were 7,165,409 shares of Class A common stock reserved for issuance under the 2017 Plan, of which 4,276,377 were available to be issued. Stock Options We estimate the fair value of stock options containing only a service condition using the Black-Scholes option pricing model, which requires the use of subjective assumptions, including the expected term of the option, the current price of the underlying stock, the expected stock price volatility, expected dividend yield, and the risk-free interest rate for the expected term of the option. The expected term represents the period of time the stock options are expected to be outstanding. Due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the stock options, we use the simplified method to estimate the expected term for our stock options. Under the simplified method, the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected term of the stock options. We assume no dividend yield because dividends are not expected to be paid in the near future, which is consistent with our history of not paying dividends. In May 2019, our Board of Directors granted a stock option to purchase 700,000 shares of our Class A common stock to our Chief Executive Officer (the "2019 CEO Grant") under the 2017 Plan with an exercise price of $ 33.98 per share. The 2019 CEO Grant is eligible to vest based on the achievement of a stock price appreciation target of our Class A common stock. Specifically, the 2019 CEO Grant will vest when shares of our Class A common stock close at or above $ 84.63 per share for a period equal to or greater than 90 consecutive calendar days or upon the occurrence of a change in control in which the value of our Class A common stock is equal to or greater than $ 84.63 per share within five years of the grant date. The fair value of the 2019 CEO Grant was determined using a Monte Carlo simulation. The fair value of the award at the grant date was $ 9.5 million and will be amortized over the derived service period of 2.6 years. Refer to Note 17 for further details on the status of this award. 91 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the assumptions used to estimate the fair value of stock options granted during the years ended December 31, 2020, 2019, and 2018: Year Ended December 31, 2020 2019 2018 Risk-free interest rate * 2.1 % * Expected term (in years) * 2.6 * Expected volatility * 55.0 % * Expected dividend yield * — % * * Not applicable because no stock options were granted during the period. The following table summarizes stock option activity for the years ended December 31, 2020, 2019, and 2018: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (in thousands) Outstanding at December 31, 2017 7,010,887 $ 6.36 6.6 $ 176,122 Granted — — Exercised ( 1,486,218 ) 2.10 41,606 Canceled ( 503,601 ) 9.51 Outstanding at December 31, 2018 5,021,068 7.30 6.4 97,440 Granted 700,000 33.98 Exercised ( 1,194,471 ) 4.11 44,081 Canceled ( 67,986 ) 10.17 Outstanding at December 31, 2019 4,458,611 12.30 5.8 115,501 Granted — — Exercised ( 1,001,411 ) 6.39 81,181 Expired ( 1,380 ) 11.82 Canceled ( 56,580 ) 11.33 Outstanding at December 31, 2020 3,399,240 $ 14.06 4.9 $ 503,174 Exercisable at December 31, 2020 2,232,140 $ 8.38 5.1 $ 343,098 There were no stock options granted during the years ended December 31, 2020 and 2018. The weighted average grant date fair value of stock options granted during the year ended December 31, 2019 was $ 13.57 per share. The total fair value of stock options that vested during the years ended December 31, 2020, 2019, and 2018 was $ 2.8 million, $ 2.0 million, and $ 10.5 million, respectively. As of December 31, 2020, the total compensation cost related to unvested stock options not yet recognized was $ 4.0 million, which will be recognized over a weighted average period of one year . 92 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock Units The following table summarizes RSU activity for the years ended December 31, 2020, 2019, and 2018: Number of Shares Weighted Average Grant Date Fair Value Non-vested and outstanding at December 31, 2017 731,975 $ 22.16 Granted 622,166 29.60 Vested ( 143,390 ) 22.19 Canceled ( 35,702 ) 23.97 Non-vested and outstanding at December 31, 2018 1,175,049 26.04 Granted 436,912 40.70 Vested ( 521,460 ) 27.81 Canceled ( 67,666 ) 26.38 Non-vested and outstanding at December 31, 2019 1,022,835 31.39 Granted 589,692 60.47 Vested ( 270,609 ) 31.29 Canceled ( 176,915 ) 32.01 Non-vested and outstanding at December 31, 2020 1,165,003 $ 46.04 As of December 31, 2020, total unrecognized compensation cost related to unvested RSUs was approximately $ 48.0 million, which will be recognized over a weighted average period of 2.3 years. In November 2018, our co-founders were granted 255,930 RSUs under the 2017 Plan at a fair value of $ 30.06 per share. The awards were approved by the Board of Directors. The value of these awards at the grant date was $ 7.7 million and was amortized over the vesting periods . The RSUs vested during the year ended December 31, 2019. The following table summarizes the components of our stock-based compensation expense by instrument type for the years ended December 31, 2020, 2019, and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 RSUs $ 10,745 $ 12,667 $ 7,714 Stock options 4,164 3,408 7,947 Common stock awards to Board of Directors 370 368 393 Total stock-based compensation expense $ 15,279 $ 16,443 $ 16,054 93 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-based compensation expense for RSUs, stock options, and issuances of common stock to directors is included in the following line items in the accompanying consolidated statements of operations for the years ended December 31, 2020, 2019, and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Cost of revenue Subscriptions $ 943 $ 647 $ 514 Professional services 1,477 2,748 1,717 Operating expenses Sales and marketing 2,821 4,742 3,473 Research and development 2,718 3,480 2,416 General and administrative 7,320 4,826 7,934 Total stock-based compensation expense $ 15,279 $ 16,443 $ 16,054 11. Stockholders' Equity As of December 31, 2020, we had authorized 500,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each with a par value of $ 0.0001 per share, of which 38,971,324 shares of Class A common stock and 31,707,866 shares of Class B common stock were issued and outstanding. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. The holders of Class A common stock are entitled to one vote per share, and the holders of Class B common stock are entitled to ten votes per share on all matters subject to stockholder vote. The holders of Class B common stock also have approval rights for certain corporate actions. Each share of Class B common stock may be converted into one share of Class A common stock at the option of its holder and will be automatically converted upon transfer thereof, subject to certain exceptions. In addition, upon the date on which the outstanding shares of Class B common stock represent less than 10 % of the aggregate voting power of our capital stock, all outstanding shares of Class B common stock shall convert automatically into Class A common stock. 12. Basic and Diluted Loss per Common Share The following table sets forth the computation of basic and diluted net loss per share for the years ended December 31, 2020, 2019, and 2018 (in thousands, except share and per share data): 94 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2020 2019 2018 Numerator: Net loss $ ( 33,477 ) $ ( 50,714 ) $ ( 49,451 ) Denominator: Weighted average common shares outstanding, basic and diluted 69,050,565 65,479,327 62,140,684 Net loss per share, basic and diluted $ ( 0.48 ) $ ( 0.77 ) $ ( 0.80 ) The following outstanding securities, prior to the use of the treasury stock method or the if-converted method, have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been antidilutive: Year Ended December 31, 2020 2019 2018 Stock options 3,399,240 4,458,611 5,021,068 Non-vested restricted stock units 1,165,003 1,022,835 1,175,049 13. Commitments and Contingencies Contractual Warranty and Indemnification Obligations We provide limited product warranties. Historically, any payments made under these provisions have been immaterial. We also agree to standard indemnification provisions in the ordinary course of business. Pursuant to these provisions, we agree to indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with certain intellectual property infringement claims by any third party arising from the use of our products or services in accordance with the agreement. The term of our contractual indemnity provisions often survives termination or expiration of the applicable agreement. We carry insurance that covers certain third-party claims relating to our services and limits our exposure. We have never incurred costs to defend lawsuits or settle claims related to these indemnification provisions. Letters of Credit At December 31, 2020 and 2019, we had outstanding letters of credit totaling $ 11.2 million and $ 10.5 million, respectively, in connection with securing our leased office space. All letters of credit are secured by our borrowing arrangement as described in Note 8. Legal From time to time, we are subject to legal, regulatory, and other proceedings and claims that arise in the ordinary course of business. There are no issues or resolutions of any matters expected to have a material adverse impact on our consolidated financial statements. Other Commitments We also have entered into a non-cancellable agreement for the use of technology that is integral in the development of our software and pay annual royalty fees of $ 0.3 million. 95 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Segment and Geographic Information The following table summarizes revenue by geography for the years ended December 31, 2020, 2019, and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Domestic $ 201,483 $ 176,187 $ 161,716 International 103,090 84,165 65,027 Total $ 304,573 $ 260,352 $ 226,743 With respect to geographic information, revenue is attributed to respective geographies based on the contracting address of the customer. Revenues from customers attributed to the United Kingdom were 12.5 % and 12.2 % of our total revenue for the years ended December 31, 2020 and 2019, respectively. There were no individual foreign countries from which more than 10% of our total revenue was attributable for the year ended December 31, 2018. Substantially all of our long-lived assets were held in the United States as of December 31, 2020 and December 31, 2019. 15. Retirement Plans We have a defined contribution 401(k) retirement and savings plan (the “401(k) Plan”) to provide retirement benefits for all eligible employees. All employees over the age of 21 on their first day of the month immediately following the month of hiring are eligible to participate in the 401(k) Plan. The Plan excludes United States expatriate employees, employees who are residents of Puerto Rico, and employees covered by another country’s pension retirement plan who are receiving employer contributions in that plan. The 401(k) Plan allows eligible employees to make salary-deferred contributions up to 75 % of their pre-tax annual compensation, as defined and subject to certain Internal Revenue Service limitations. Employer contributions are made semi-monthly and calculated as 100 % of the employee's contribution for each pay period up to a maximum of 4 % of the employee's eligible gross compensation for the pay period. Employer contributions vest at 25 % per year over four years , beginning with the completion of the first year of service. For th e years ended December 31, 2020, 2019, and 2018, we incurred $ 6.8 million, $ 5.5 million, and $ 4.7 million, respectively, in contribution expense related to employer matching contributions. We are obligated to make plan contributions for the employees of certain of our wholly-owned foreign subsidiaries. For the years ended December 31, 2020, 2019, and 2018, we incurred $ 1.7 million, $ 1.5 million, and $ 1.3 million, respectively, in contribution expense related to our foreign subsidiaries. 16. Investments and Fair Value Measurements Fair Value Measurements We use a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires us to use observable inputs when available and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows: • Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities; • Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and • Level 3. Unobservable inputs for which there is little or no market data, which require us to develop our own assumptions. The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and 96 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS minimize the use of unobservable inputs. There were no instruments measured at fair value on a recurring basis using significant unobservable inputs during the years ended December 31, 2020 and 2019. The valuation techniques that may be used to measure fair value are as follows: • Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; • Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts; • Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (i.e., replacement cost). The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value as of December 31, 2020 and December 31, 2019 because of the relatively short duration of these instruments. Investments Our investment portfolio consists largely of debt investments classified as available-for-sale. Changes in the fair value of available-for-sale securities, excluding other-than-temporary impairments, are recorded in other comprehensive income (loss). The components of our investments as of December 31, 2020 are as follows (in thousands): Year Ended December 31, 2020 Fair Value Measurement Balance Sheet Classification Fair Value Level Cost Basis Unrealized Gains / (Losses) Market Value Cash and Cash Equivalents Short-term Investments Long-term Investments Money market fund Level 1 $ 27,150 $ — $ 27,150 $ 27,150 $ — $ — U.S. Treasury bonds Level 1 24,445 ( 3 ) 24,442 — 16,273 8,169 Commercial paper Level 2 76,905 — 76,905 16,493 60,412 — Corporate bonds Level 2 34,738 ( 11 ) 34,727 — 27,542 7,185 Asset-backed securities Level 2 26,373 ( 8 ) 26,365 — 5,599 20,766 Total investments $ 189,611 $ ( 22 ) $ 189,589 $ 43,643 $ 109,826 $ 36,120 There were no Level 3 assets held at any point during the year ended December 31, 2020. Additionally, there were no transfers between Levels 1 and 2 during the year ended December 31, 2020. The amortized cost basis and fair value of debt securities at December 31, 2020, by contractual maturity, are as follows (in thousands): As of December 31, 2020 Cost Basis Fair Value Due in one year or less $ 153,483 $ 153,469 Due after one year through five years 36,128 36,120 Total investments $ 189,611 $ 189,589 Actual maturities may differ from the contractual maturities in the table above because borrowers have the right to call or prepay certain obligations. 97 APPIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Subsequent Events Effective February 3, 2021, the 2019 CEO Grant as discussed in Note 10 has satisfied all of the conditions required to be considered fully vested. As a result, we expect to accelerate the recognition of approximately $ 3.3 million in stock-based compensation expense in the first quarter of 2021. 98 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable.