What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-05 · 148 added, 257 removed, 233 unchanged (63% of the section changed)

8 unchanged sentences

Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

We provide 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 help organizations build applications and workflows rapidly, with a low-code automation platform.

Combining people, technologies, and data in a single workflow, Appian can help companies maximize their resources and improve business results.

Many of the world's largest organizations use Appian applications to improve customer experience, achieve operational excellence, and simplify global risk management and compliance.

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

1 unchanged sentence

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

We have generated the majority of our revenue from sales of subscriptions, which include (1) software as a service subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support.

We have generated the majority of our revenue from sales of subscriptions, which include (1) SaaS subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support.

Our subscription fees are based primarily on the number of users who access and utilize the applications built on our platform or, alternatively, non-user based single application licenses.

1 unchanged sentence

Due to the variability of our billing terms and the episodic nature of our customers purchasing additional subscriptions, we do not believe changes in our deferred revenue in a given period are directly correlated with our revenue growth.

Since inception, we have invested in our professional services organization to help ensure customers are able to build and deploy applications on our platform.

Since inception, we have invested in our Customer Success organization to help ensure customers are able to build and deploy applications on our platform.

We have several strategic partnerships, including with KPMG, PwC, Accenture, and Deloitte, for them to refer customers to us in order to purchase subscriptions and then to provide professional services directly to the customers using our platform.

3 unchanged sentences

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

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

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

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

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

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

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

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

Revenue from government agencies represented 20.9% of our total revenue in the three months ended March 31, 2021 as compared to 14.9% of our total revenue in the three months ended March 31, 2020.

No single end-customer accounted for more than 10% of our total revenue in the three months ended March 31, 2021 or March 31, 2020.

Our platform supports multiple languages to facilitate collaboration and address challenges in multinational organizations.

We offer our platform globally.

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

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

In the three months ended March 31, 2021, 32.2% of our total revenue was generated from customers outside of the United States as compared to 33.5% in the three months ended March 31, 2020.

As of March 31, 2021, we operated in 12 countries.

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

We are investing in new geographies, including through investment in direct and indirect sales channels, professional services, and customer support and implementation partners.

Basis of Reporting - ASC 606

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

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

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

We elected to use this extended transition period, and accordingly, did not report revenues under ASC 606 in our Quarterly Reports on Form 10-Q during 2019.

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

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

Recent Developments

Public Offering

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

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

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

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

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

Beginning in late 2019 and continuing into 2021, the outbreak of the novel coronavirus disease, or COVID-19, has resulted in the declaration of a global pandemic and adversely affected economic activity across virtually all sectors and industries on a local, national, and global scale.

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

Operationally, we remain focused on supporting our customers, employees, and communities during this time.

We have responded quickly to adopt a virtual corporate strategy consisting of enabling most of our employees to work productively from home while continuing to guard the health and safety of our teams, support our customers, and mitigate risk.

We are focused on ensuring continuity for our customers.

We responded quickly to adopt a virtual corporate strategy consisting of enabling most of our employees to work productively from home while continuing to guard the health and safety of our teams, support our customers, and mitigate risk.

We remain focused on ensuring continuity for our customers.

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

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

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

Through March 31, 2021, we have not seen a meaningful adverse impact to our financial position, results of operations, and cash flows and liquidity as a result of COVID-19.

While the verticals from which we have historically generated the majority of our revenue have been less impacted by COVID-19 to date, there may be impacts to our financial condition and results of operations in 2021 and beyond as a result of reduced demand for our products and services and longer sales cycles.

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

Our Business Model

Our business model focuses on maximizing the lifetime value of customer relationships, which is a function of the duration of a customer’s deployment of Appian as well as the price and number of subscriptions of Appian that a customer purchases.

Our business model focuses on maximizing the lifetime value of customer relationships, which is a function of the duration of a customer’s deployment of our platform as well as the price and number of subscriptions of our platform that a customer purchases.

We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who generally take more than one year to become productive given the length of our sales cycle, and marketing costs, all of which, with the exception of sales commissions, are expensed as incurred.

11 unchanged sentences

We have aggressively invested, and intend to continue to invest in, our sales force in order to drive sales to new customers.

In particular, we have recently made, and plan to continue to make, investments to enhance the expertise of our sales and marketing organization within our key industry verticals of financial services, life sciences, and government.

We continue to make investments to enhance the expertise of our sales and marketing organization within our key industry verticals of financial services, government, and life sciences.

In addition, we have established relationships with strategic partners who work with organizations undergoing digital transformations.

Our ability to continue to grow our customer base is dependent, in part, upon our ability to compete within the increasingly competitive markets in which we participate.

Our ability to continue to grow our customer base is dependent, in part, upon our ability to differentiate ourselves within the increasingly competitive markets in which we participate.

• Further Penetration of Existing Customers.

1 unchanged sentence

Many of our customers begin by building a single application and then grow to build dozens of applications on our platform.

Generally, the development of new applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue to us because we charge subscription fees on a per-user basis for the significant majority of our customer contracts.

Generally, the development of new applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue to us because we charge subscription fees on a per-user basis and, to a lesser degree, non-user based single application licenses.

As a result of this “land and expand” strategy, we have generated significant additional revenue from our customer base.

Our ability to increase sales to existing customers will depend on a number of factors, including the size of our sales force and professional services teams, customers’ level of satisfaction with our platform and professional services, pricing, economic conditions, and our customers’ overall spending levels.

We have also refocused some of our professional services personnel to become customer success managers.

We have also re-focused some of our professional services personnel to become customer success managers.

Their role is to ensure the customer realizes value from our platform and support the “land and expand” strategy versus delivering billable hours.

• Mix of Subscription and Professional Services Revenue.

• Mix of Subscriptions and Professional Services Revenue.

We believe our professional services have driven customer success and facilitated the adoption of our platform by customers.

1 unchanged sentence

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

As a result of these factors, the proportion of

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

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

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

2 unchanged sentences

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

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

For the three and nine months ended September 30, 2019, 57.1% and 56.9% of our revenue, respectively, was derived from sales of subscriptions while the remaining 42.9% and 43.1%, respectively, was derived from the sale of professional services.

For the three months ended March 31, 2021, 71.8% of our revenue was derived from sales of subscriptions, while the remaining 28.2% was derived from the sale of professional services.

For the three months ended March 31, 2020, 64.0% of our revenue was derived from sales of subscriptions, while the remaining 36.0% was derived from the sale of professional services.

• Investments in Growth.

We have made, and plan to continue to make, investments for long-term growth, including investment in our platform and infrastructure to continuously maximize the power and simplicity of the platform to meet the evolving needs of our customers and to take advantage of our market opportunity.

In addition, we continue to pursue strategic acquisitions that enhance our product offerings as evidenced by our recent acquisition of Novayre.

In addition, we continue to pursue strategic acquisitions that enhance our product offerings.

We also intend to continue to invest in sales and marketing as we further expand our sales teams, increase our marketing activities, and grow our international operations.

2 unchanged sentences

Cloud Subscription Revenue

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

2020 2019 2020 2019

Three Months Ended March 31,

Cloud subscription revenue $ 39,053 $ 28,390

3 unchanged sentences

Cloud Subscription Revenue Retention Rate

As of September 30,

As of March 31,

Cloud subscription revenue retention rate 118 % 115 %

6 unchanged sentences

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

Our cloud subscription revenue retention rate can fluctuate from period to period due to large

customer contracts in any given period.

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

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

Cloud subscription revenue retention rate increased year over year due to improved upsell rates in the latter half of 2020.

Key Components of Results of Operations

7 unchanged sentences

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

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

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

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

When our platform is deployed within a customer’s own data center or private cloud, it is installed on the customer’s infrastructure and generally offered as a term license.

When our platform is delivered as a SaaS subscription, we handle its operational needs in third-party hosted data centers.

On-premises term license subscriptions are offered when the customer prefers to self-manage the deployment of our platform within their own infrastructure.

When our platform is delivered as a SaaS subscription, we manage their operational needs in third-party hosted data centers.

Professional Services

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

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

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

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

Additionally, professional services revenue may be negatively impacted if there is a decline in our procurement of new customers as a result of the COVID-19 pandemic.

We have several strategic partnerships, including with KPMG, PwC, Accenture, and Deloitte.

2 unchanged sentences

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

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

Professional services revenue may also decline in absolute dollars if we increasingly rely on our network to procure new customers.

Cost of Revenue

3 unchanged sentences

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, travel costs, third-party contractor costs, and allocated facility costs and overhead as well as 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.

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

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.

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

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

1 unchanged sentence

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

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

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

Professional Services Gross Margin

Professional services gross margin is affected by the growth in our professional services revenue as compared to the growth in, and timing of, the cost of our professional services organization as we continue to invest in the growth of our business.

Professional services gross margin is impacted by the amount of services performed by subcontractors as opposed to internal resources.

Our professional services gross margin is also impacted by the amount of services performed by partners as opposed to internal resources.

Professional services gross margin is affected by the growth in our professional services revenue as compared to the growth in, and timing of, the cost of our Customer Success organization as we continue to invest in the growth of our business.

Professional services gross margin is also impacted by the amount of services performed by subcontractors and partners as opposed to internal resources.

More recently, we have reduced our usage of subcontractors, and the COVID-19 pandemic has resulted in fewer in-person professional services engagements and deployments, both of which have reduced certain classes of expenses and improved professional services margins.

However, our improved margins may not be indicative of future trends and are subject to fluctuation based on the factors discussed above and uncertainties related to the COVID-19 pandemic outside of our control.

Operating Expenses

4 unchanged sentences

Sales and marketing expense primarily includes personnel costs, including salaries, bonuses, commissions, stock-based compensation, and other personnel costs related to sales teams.

Additional expenses in this category include travel and entertainment, marketing and promotional events, marketing activities, subcontracting fees, and allocated facility costs and overhead.

In order to continue to grow our business, geographical footprint, and brand awareness, we expect sales and marketing expense to increase in absolute dollars as we continue to invest to acquire new customers and further expand usage of our platform within our existing customer base.

Additional expenses in this category include travel and entertainment, marketing activities and promotional events, subcontracting fees, and allocated facility costs and overhead.

In order to continue to grow our business, geographical footprint, and brand awareness, we expect to continue investing resources in sales and marketing by increasing the number of sales and account management teams.

As a result, we expect sales and marketing expense to increase in absolute dollars as we continue to invest to acquire new customers and further expand usage of our platform within our existing customer base.

Research and Development Expense

4 unchanged sentences

General and Administrative Expense

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

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

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

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

1 unchanged sentence

Other (Income) Expense, Net

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

Other (income) expense, net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates, interest income on our cash and cash equivalents and investments, gains or losses on the disposal of property and equipment, and other sources of income or expense not related to our core business operations.

Interest Expense

1 unchanged sentence

Results of Operations

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

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

2020 2019 2020 2019

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

Three Months Ended March 31,

Subscriptions $ 63,766 $ 50,436

3 unchanged sentences

Subscriptions 5,854 5,383

5,101 4,484 15,185 12,105

Professional services 17,675 18,736

16,450 19,467 51,641 58,963

Total cost of revenue 23,529 24,119

2 unchanged sentences

Sales and marketing 35,984 34,172

31,633 27,603 94,891 86,186

Research and development 20,690 16,038

18,150 15,697 51,366 42,418

General and administrative 19,142 13,141

13,485 11,191 38,076 29,468

Total operating expenses 75,816 63,351

Operating loss (10,490) (8,606)

Other (income) expense

Other (income) expense, net (4,277) 2,262 (1,845) 1,881

Other expense

Other expense, net 2,893 3,114

Interest expense 81 143

Total other (income) expense (4,158) 2,358 (1,455) 2,117

Total other expense 2,974 3,257

Loss before income taxes (13,464) (11,863)

Income tax expense 255 5 335 394

Income tax expense (benefit) 123 (194)

Net loss $ (13,587) $ (11,669)

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

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

2020 2019 2020 2019

Three Months Ended March 31,

Cost of revenue

6 unchanged sentences

Total stock-based compensation expense $ 7,894 $ 3,476

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

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

2020 2019 2020 2019

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

Three Months Ended March 31,

Subscriptions 71.8 % 64.0 %

12 unchanged sentences

Operating loss (11.8) (10.9)

Other (income) expense

Other (income) expense, net (5.5) 3.4 (0.8) 1.0

Other expense

Other expense, net 3.3 3.9

Interest expense 0.1 0.2

Total other (income) expense (5.4) 3.6 (0.7) 1.1

Total other expense 3.4 4.1

Loss before income taxes (15.2) (15.0)

Income tax expense 0.3 — 0.2 0.2

Income tax expense (benefit) 0.1 (0.2)

Net loss (15.3) % (14.8) %

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

Three Months Ended September 30,

Comparison of the Three Months Ended March 31, 2021 and 2020

Three Months Ended March 31,

2021 2020 % Change

3 unchanged sentences

Total revenue $ 88,855 $ 78,864 12.7 %

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

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

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

Total revenue increased $10.0 million, or 12.7%, in the three months ended March 31, 2021 compared to the same period in 2020 due to an increase in our subscriptions revenue of $13.3 million, partially offset by a decrease in our professional services revenue of $3.3 million.

The increase in subscriptions revenue was driven largely by a $10.7 million increase in cloud subscription revenue and a $2.1 million increase in on-premises subscription revenue.

With respect to new versus existing customers, there was a $6.6 million increase in subscriptions revenue stemming from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $6.7 million was the result of sales of subscriptions to new customers.

The decrease in professional services revenue was due primarily to a $12.9 million decrease in revenue from existing customers which was substantially offset by a $9.6 million increase in sales to new customers.

Further contributing to the

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

Cost of Revenue

Three Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

Cost of revenue

Subscriptions $ 5,101 $ 4,484 13.8 %

Professional services 16,450 19,467 (15.5) %

Total cost of revenue $ 21,551 $ 23,951 (10.0) %

Subscriptions gross margin 90.0 % 88.1 %

Professional services gross margin 38.0 % 31.4 %

Total gross margin 72.1 % 63.8 %

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

These decreases were partially offset by a $1.7 million increase in professional services and product support personnel costs and a $0.6 million increase in other cost of revenue.

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

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

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

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

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

Professional services gross margin increased to 38.0% for the three months ended September 30, 2020 compared to 31.4% in the same period in 2019 due to a decrease in the usage of subcontractors for professional services engagements, a decrease in travel and entertainment related expenses, and a decrease in rent expenses.

Due to the higher percentage of subscriptions revenue for the comparable periods and the aforementioned declines in professional services expenses, gross margin rose to 72.1% in the three months ended September 30, 2020 as compared to 63.8% in the same period in 2019.

Sales and Marketing Expense

Three Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

Sales and marketing $ 31,633 $ 27,603 14.6 %

% of revenue 40.9 % 41.7 %

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

facility and overhead costs.

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

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

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

Facility and overhead costs decreased due to lower travel and entertainment related expenses as a result of our shift to largely remote work in 2020.

Research and Development Expense

Three Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

Research and development $ 18,150 $ 15,697 15.6 %

% of revenue 23.5 % 23.7 %

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

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

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

Professional fees decreased due to a decrease in consulting fees.

General and Administrative Expense

Three Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

General and administrative expense $ 13,485 $ 11,191 20.5 %

% of revenue 17.4 % 16.9 %

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

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

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

Professional fees increased due to increased legal fees.

Other (Income) Expense, Net

Three Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

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

% of revenue (5.5) % 3.4 %

*** - Indicates a percentage that is not meaningful

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

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

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

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

Interest Expense

Three Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

Interest expense $ 119 $ 96 24.0%

% of revenue 0.2 % 0.1 %

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

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

Nine Months Ended September 30,

2020 2019 % Change

(dollars in thousands)

Subscriptions $ 142,614 $ 109,191 30.6 %

Professional services 80,329 82,543 (2.7) %

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

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

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

With respect to new versus existing customers, $24.4 million of the increase in revenue stemmed from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $9.0 million was the result of sales of subscriptions to new customers, $2.8 million of which related to a three year on-premise contract which closed in the first quarter of 2020.

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

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

contributing to the decrease in professional services revenue was our increased usage of partners to perform professional services in the three months ended March 31, 2021 as compared to the same period in 2020, which has resulted in increases to our subscriptions revenue without any change to our professional services revenue.

Cost of Revenue

Nine Months Ended September 30,

Three Months Ended March 31,

2021 2020 % Change

7 unchanged sentences

Total gross margin 73.5 % 69.4 %

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

Cost of revenue decreased $0.6 million, or 2.4%, in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $2.3 million decrease in contractor costs coupled with a $1.2 million decrease in billable expenses and a $0.1 million decrease in facility and overhead costs.

These decreases were partially offset by a $2.3 million increase in professional services and product support personnel costs and a $0.8 million increase in other cost of revenue.

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

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

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

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

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

Due to the higher percentage of subscriptions revenue for the comparable periods as well as the aforementioned declines in professional services expenses, gross margin was 70.0% in the nine months ended September 30, 2020 as compared to 62.9% in the same period in 2019.

Contractor costs decreased in the three months ended March 31, 2021 compared to the same period in 2020 due to a decrease in the usage of subcontractors for professional services engagements.

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

Personnel costs increased due to an increase in professional services and product support personnel headcount of 9.8% from March 31, 2020 to March 31, 2021.

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in the three months ended March 31, 2021.

Subscriptions gross margin increased to 90.8% for the three months ended March 31, 2021 compared to 89.3% in the same period in 2020 due to an increase in subscriptions revenue during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, partially offset by increased hosting costs as sales of our cloud offering increased and became a larger proportion of our overall subscriptions revenue.

Professional services gross margin decreased to 29.6% for the three months ended March 31, 2021 compared to 34.1% in the same period in 2020 due to a decrease in professional services revenue during the three months ended March 31, 2021 coupled with higher personnel costs, partially offset by decreases in the usage of subcontractors for professional services engagements and travel and entertainment-related expenses as a result of our shift to largely remote work.

Given the higher percentage of subscriptions revenue for the comparable periods and the aforementioned decline in professional services revenue, gross margin rose to 73.5% in the three months ended March 31, 2021 as compared to 69.4% in the same period in 2020.

Sales and Marketing Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2021 2020 % Change

2 unchanged sentences

% of revenue 40.5 % 43.3 %

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

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

Professional fees increased due to an

increase in consulting fees and contract labor to support our growth.

Facility and overhead costs decreased due to lower travel and entertainment related expenses as a result of our shift to largely remote work in 2020.

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

Sales and marketing expense increased $1.8 million, or 5.3%, in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $5.5 million increase in sales and marketing personnel costs and a $0.3 million increase in professional fees, which were offset by a $2.8 million decrease in facility and overhead costs and a $1.2 million decrease in marketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 15.4% from

March 31, 2020 to March 31, 2021, increased sales commissions driven by our subscriptions revenue growth, and a $0.4 million increase in stock-based compensation expense.

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

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

Marketing costs decreased due to a reduction of in-person marketing events and lower spending associated with hosting our annual user conference Appian World during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Research and Development Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2021 2020 % Change

2 unchanged sentences

% of revenue 23.3 % 20.3 %

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

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

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

Professional fees decreased due to a decrease in consulting fees.

Research and development expense increased $4.7 million, or 29.0%, in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $4.2 million increase in research and development personnel costs, a $0.4 million increase in facility and overhead costs, and a $0.1 million increase in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 19.3% from March 31, 2020 to March 31, 2021.

Facility and overhead costs increased due to higher information technology spending to support our growth.

Professional fees increased due to an increase in consulting fees.

General and Administrative Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2021 2020 % Change

2 unchanged sentences

% of revenue 21.5 % 16.7 %

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

Personnel costs increased due to an increase in general and administrative personnel headcount by 30.7% from September 30, 2019 to September 30, 2020 coupled with a $2.2 million increase in stock-based compensation expense during the nine months ended September 30, 2020 which was primarily attributable to a stock option to purchase 700,000 shares of our Class A common stock granted to our Chief Executive Officer in May 2019.

General and administrative expense increased $6.0 million, or 45.7%, in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to a $5.2 million increase in general and administrative personnel costs and a $1.3 million increase in professional fees, which were offset by a $0.5 million decrease in facility and overhead costs.

Personnel costs increased due to the acceleration of $3.3 million in stock-based compensation expense stemming from the vesting of the 2019 CEO grant, coupled with an increase in general and administrative personnel headcount of 12.8% from March 31, 2020 to March 31, 2021.

Professional fees increased due to increased legal fees.

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

Other (Income) Expense, Net

Nine Months Ended September 30,

Facility and overhead costs decreased primarily due to reduced human resource costs during the three months ended March 31, 2021, combined with lower travel and entertainment related expenses as a result of our shift to largely remote work.

Other Expense, Net

Three Months Ended March 31,

2021 2020 % Change

(dollars in thousands)

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

Other expense, net $ 2,893 $ 3,114 (7) %

% of revenue 3.3 % 3.9 %

*** - Indicates a percentage that is not meaningful

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

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

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

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

Other expense, net decreased by $0.2 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to $3.0 million in foreign exchange losses in the three months ended March 31, 2021 compared to $3.5 million in foreign exchange losses in the three months ended March 31, 2020.

The decrease in foreign exchange losses was

primarily due to currency fluctuations of the Australian dollar, Swedish krona, Swiss franc, British Pound Sterling, Euro, and Singapore dollar versus the U.S.

dollar during the three months ended March 31, 2021 compared to the same period in 2020.

Interest Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2021 2020 % Change

2 unchanged sentences

% of revenue 0.1 % 0.2 %

Interest expense increased by $0.2 million, or 65.3%, in the nine months ended September 30, 2020 compared to the same period in 2019, primarily due to commitment fees on the letter of credit outstanding.

Interest expense decreased by $0.1 million in the three months ended March 31, 2021 compared to the same period in 2020, primarily due to lower commitment fees on the letter of credit outstanding.

Liquidity and Capital Resources

As of September 30, 2020, we ha d $251.1 million of cash and cash equivalents.

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

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

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

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

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and functions as well as platform enhancements and professional services offerings, the level of market acceptance of our applications, spending we may incur on our new headquarters, and the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic and its impact on our business.

The following table presents selected financial information and statistics as of March 31, 2021 and December 31, 2020 as well as for the three months ended March 31, 2021 and 2020 (in thousands):

March 31, 2021 December 31, 2020

Cash and cash equivalents $ 114,752 $ 112,462

Short-term investments and marketable securities 118,012 109,826

Property and equipment, net 34,682 35,404

Long-term investments 22,317 36,120

Working capital 220,465 209,532

Three Months Ended March 31,

Net cash used in operating activities $ (2,810) $ (3,859)

Net cash provided by (used in) investing activities 5,157 (6,340)

Net cash provided by financing activities 625 313

As of March 31, 2021, we had $114.8 million of cash and cash equivalents and $118.0 million of short-term investments and marketable securities.

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

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and functions as well as platform enhancements and professional services offerings, the level of market acceptance of our applications, spending we may incur on expansion of our headquarters, and the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic and its impact on our business.

In the event additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all.

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

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

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

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

Any additional equity financing may be dilutive to our existing stockholders.

We recently have, and in the future may continue to, invest or acquire stakes in complementary businesses, products, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources.

We recently have, and in the future may, enter into investments in or acquisitions of complementary businesses, products, or technologies, which could also require us to seek additional equity financing, incur

indebtedness, or use cash resources.

We have no present binding agreements or commitments to enter into any such acquisitions.

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

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

Nine Months Ended September 30,

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

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

Cash provided by financing activities 110,337 105,394

Sources of Funds

1 unchanged sentence

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

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

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

We also have the ability to draw upon a $20.0 million revolving line of credit which we entered into in November 2017.

The facility matures in November 2022.

2 unchanged sentences

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 (1) an adjusted quick ratio of at least 1.35 and (ii) minimum adjusted EBITDA in the amounts and for the periods set forth in the agreement.

The agreement contains certain customary affirmative and negative covenants and requires us to maintain (i) an adjusted quick ratio of at least 1.35 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 September 30, 2020.

As of September 30, 2020, we had not made any borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $11.2 million in connection with securing our leased office space.

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

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

We were in compliance with all covenants as of March 31, 2021.

As of March 31, 2021, we had not made any borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $11.2 million in connection with securing our leased office space.

Uses of Funds

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

In the past, we utilized cash to pay for the acquisition of an entity we believe to be complementary to our business, and we may pursue similar opportunities in the future.

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

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

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

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

Our uses of cash in 2021 to date have included modest capital expenditures while cash uses in the prior year through March 31, 2020 consisted primarily of the acquisition of Novayre.

Historical Cash Flows

Operating Activities

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

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

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

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

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

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

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

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $23.3 million decrease in prepaid expenses and other assets, primarily due to the receipt of the non-trade receivable resulting from our tenant improvement allowance.

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

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

There was also a $1.9 million decrease in accounts receivable due to increased cash collections and a $5.7 million increase in deferred rent, non-current, as a result of taking initial possession of the second phase of our new headquarters in February 2019 and recording an additional lease incentive obligation.

There was also a $2.3 million increase in deferred revenue as a result of increased subscription sales.

These increases were partially offset by a $3.9 million decrease in accounts payable and accrued expenses, primarily due to the timing of payments, a $6.2 million increase in deferred commissions due to increased sales, and a $2.2 million decrease in accrued compensation and related benefits primarily due to a decrease in accrued vacation expense because of our new paid-time off policy, which took effect on January 1, 2019.

There was also a $0.3 million decrease in other current liabilities.

For the three months ended March 31, 2021, net cash used in operating activities of $2.8 million consisted of a net loss of $13.6 million, offset by $2.1 million of cash provided by changes in working capital and $8.7 million in adjustments for non-cash items.

Adjustments for non-cash items consisted primarily of stock-based compensation of $7.9 million, depreciation and amortization expense of $1.3 million, and deferred income tax adjustments of $0.4 million.

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $12.7 million decrease in accounts receivable stemming from increased cash collections as well as the timing of billings, a $1.2 million increase in accounts payable and accrued expenses primarily due to the timing of payments, a $0.2 million increase in operating lease liabilities, and a $0.2 million increase in other current and non-current liabilities.

These increases to working capital were partially offset by a $7.2 million net decrease in deferred revenue as a result of decreased subscription sales, a $2.6 million increase in deferred commissions due to increased sales activity, a $2.0 million decrease in accrued compensation and related benefits as a result of lower employee benefit accruals for such costs as commissions and bonuses, and a $0.3 million increase in prepaid expenses and other assets primarily due to the timing of payments.

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

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

The increase in cash and cash equivalents resulting

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

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

Investing Activities

For the nine months ended September 30, 2020, net cash used in investing activities was $7.2 million which was primarily the result of $6.1 million in payments, net of cash acquired, related to the acquisition of Novayre.

For the three months ended March 31, 2021, net cash provided by investing activities was $5.2 million, which was due to $5.6 million in proceeds from the sale of investments, partially offset by $0.5 million in purchases of property and equipment.

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

In addition, there were approximately $0.2 million in purchases of property and equipment.

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

Financing Activities

For the nine months ended September 30, 2020, net cash provided by financing activities was $110.3 million, consisting of $108.2 million in proceeds from our underwritten public offering in June 2020, net of underwriting discounts and commissions and the payment of offering expenses, and $3.2 million in proceeds received from stock option exercises, partially offset by $1.1 million in principal payments on finance leases.

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

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

Contractual Obligations and Commitments

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

For the three months ended March 31, 2021, net cash provided by financing activities was $0.6 million, consisting entirely of proceeds received from stock option exercises.

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

Off-Balance Sheet Arrangements

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

As of March 31, 2021, we did not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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

In addition, we do not engage in trading activities involving non-exchange traded contracts.

We therefore believe we are not materially exposed to any financing, liquidity, market, or credit risks that could arise if we had engaged in these relationships.

Critical Accounting Policies and Estimates

As a result, we believe we are not materially exposed to any financing, liquidity, market, or credit risks that could arise if we had engaged in these relationships.

Critical Accounting Estimates

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

1 unchanged sentence

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

Significant estimates and judgments embedded in the consolidated financial statements for the periods presented include revenue recognition, stock-based compensation, the valuation of goodwill and intangible assets, leases, costs to obtain a contract with a customer, and income taxes.

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

Significant estimates and judgments embedded in the condensed consolidated financial statements for the periods presented include revenue recognition, income taxes and the related valuation allowance, stock-based compensation, the valuation of goodwill and intangible assets, valuation of financial instruments, leases, and costs to obtain a contract with a customer.

There have been no material changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 18, 2021.

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

Recent Accounting Pronouncements

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis