APPIAN CORP 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2020 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 18, 2021. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would,” or the negative or plural of these words or similar expressions or variations, including statements regarding our future financial and operating performance, anticipated expansion of the usage of partners to perform professional services, the increase of our subscriptions revenue as a percentage of total revenue, the fluctuation of gross margin in the short term and improvement of gross margin over time, our future capital requirements, and uncertain negative impacts that COVID-19 may have on our business, financial condition, results of operations, and changes in overall level of spending and volatility in the global economy. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions, and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein and those discussed in the section titled “Risk Factors,” set forth in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC on February 18, 2021 and in our other filings with the SEC. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. 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. Overview 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. Our customers have used applications built on our platform to launch new business lines, automate vital employee workflows, manage complex trading platforms, accelerate drug development, and build global procurement systems. With our platform, decision makers can reimagine their products, services, processes, and customer interactions by removing much of the complexity and many of the challenges associated with traditional approaches to software development. 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. Our customer contract terms generally vary from one to three years with most providing for payment in advance on an annual, quarterly, or monthly basis. 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 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. We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities. In addition, over time we expect professional services revenue as a percentage of total revenue to decline as we increasingly rely on strategic partners to help our customers deploy our software. We believe our 24 investment in professional services, including strategic partners building their practices around Appian, will drive increased adoption of our platform. 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 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. Recent Developments COVID-19 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 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 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 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. Key Factors Affecting Our Performance 25 The following are several key factors that affect our performance: • Market Adoption of Our Platform. Our ability to grow our customer base and drive market adoption of our platform is affected by the pace at which organizations digitally transform. We expect our revenue growth will be primarily driven by the pace of adoption and penetration of our platform. We offer a leading custom software automation platform and intend to continue to invest to expand our customer base. The degree to which prospective customers recognize the need for low-code software that enables organizations to digitally transform, and subsequently allocate budget dollars to purchase our software, will drive our ability to acquire new customers and increase sales to existing customers, which, in turn, will affect our future financial performance. • Growth of Our Customer Base. We believe we have a substantial opportunity to grow our customer base. We define a customer as an entity with an active subscription or maintenance and support contract related to a perpetual software license as of the specified measurement date. To the extent we contract with one or more entities under common control, we count those entities as separate customers. We have aggressively invested, and intend to continue to invest in, our sales force in order to drive sales to new customers. 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 differentiate ourselves within the increasingly competitive markets in which we participate. • Further Penetration of Existing Customers. Our sales force seeks to generate additional revenue from existing customers by adding new users to our platform. 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 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 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 Subscriptions and Professional Services Revenue. We believe our professional services have driven customer success and facilitated the adoption of our platform by customers. During the initial period of deployment by a customer, we generally provide a greater amount of support in building applications and training than later in the deployment, with a typical engagement extending from two to six months. 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. 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. In addition, we intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities. These partners perform professional services with respect to any new service contracts they sign. 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 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. 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. 26 Key Metrics We monitor the following metrics to help us measure and evaluate the effectiveness of our operations. All dollar amounts are presented in thousands. Cloud Subscription Revenue Three Months Ended March 31, 2021 2020 Cloud subscription revenue $ 39,053 $ 28,390 Cloud subscription revenue includes SaaS subscriptions bundled with maintenance and support and hosting services. As we generally sell our SaaS subscriptions on a per-user basis, our cloud subscription revenue for any customer is primarily determined by the number of users who access and utilize the applications built on our platform as well as the price paid. We believe increasing cloud subscription revenue is an indicator of the demand for our platform, the pace at which the market for our solutions is growing, the productivity of our sales force and strategic relationships in growing our customer base, and our ability to further penetrate our existing customer base. Cloud Subscription Revenue Retention Rate As of March 31, 2021 2020 Cloud subscription revenue retention rate 118 % 115 % A key factor to our success is the renewal and expansion of subscription agreements with our existing customers. We calculate this metric over a set of customers who have been with us for at least one full year. To calculate our cloud subscription revenue retention rate for a particular trailing 12-month period, we first establish the recurring cloud subscription revenue for the previous trailing 12-month period. This effectively represents recurring dollars we should expect in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period without any expansion or contraction. We subsequently measure the recurring cloud subscription revenue in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period. Cloud subscription revenue retention rate is then calculated by dividing the aggregate recurring cloud subscription revenue in the current trailing 12-month period by the previous trailing 12-month period. 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. 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 Revenue We generate revenue primarily through sales of subscriptions to our platform as well as professional services. We generally sell our software on a per-user basis and, to a lesser degree, non-user based single application licenses. We generally bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly, or monthly basis. In certain instances, we have had customers pay their entire contract value up front. Our revenue is comprised of the following: Subscriptions Subscriptions revenue is primarily derived from: • SaaS subscriptions bundled with maintenance and support and hosting services; and • On-premises term license subscriptions bundled with maintenance and support. 27 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. 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, 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, 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. Our agreements with our strategic partners have indefinite terms and may be terminated for convenience by either party. We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities. 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 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 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, including payroll and benefits for our technology operations and customer support teams, and allocated facility costs and overhead. We expect cost of revenue to continue to increase in absolute dollars for the foreseeable future as our customer base grows. 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. Gross Margin 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. Subscriptions Gross Margin 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 our business, and the timing of those investments is expected to cause gross margins to fluctuate in the short term but improve over time. 28 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 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 Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Salaries, bonuses, and other personnel-related costs are the most significant components of each of these expense categories. In general, our operating expenses are expected to continue to increase as we invest resources in growing our various teams. Sales and Marketing Expense 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 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 Research and development expense consists primarily of personnel costs for our employees who develop and enhance our platform, including salaries, bonuses, stock-based compensation, and other personnel costs. Also included are non-personnel costs such as subcontracting, consulting and professional fees to third party development resources, allocated facility costs, and overhead. Our research and development efforts are focused on enhancing the speed and power of our software platform. We expect research and development expenses to continue to increase as they are critical to maintain and improve the quality of applications and our competitive position. General and Administrative Expense General and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, and other personnel costs for our administrative, legal, information technology, human resources, finance, and accounting employees as well as our executives. 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. Other (Income) Expense Other (Income) Expense, Net 29 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 Interest expense consists primarily of interest on our finance leases and debt, unused credit facility fees, and commitment fees on our letters of credit. Results of Operations The following table sets forth our condensed consolidated statement of operations data (in thousands): Three Months Ended March 31, 2021 2020 Revenue Subscriptions $ 63,766 $ 50,436 Professional services 25,089 28,428 Total revenue 88,855 78,864 Cost of revenue (1) Subscriptions 5,854 5,383 Professional services 17,675 18,736 Total cost of revenue 23,529 24,119 Gross profit 65,326 54,745 Operating expenses (1) Sales and marketing 35,984 34,172 Research and development 20,690 16,038 General and administrative 19,142 13,141 Total operating expenses 75,816 63,351 Operating loss (10,490) (8,606) Other expense Other expense, net 2,893 3,114 Interest expense 81 143 Total other expense 2,974 3,257 Loss before income taxes (13,464) (11,863) 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 March 31, 2021 2020 Cost of revenue Subscriptions $ 297 $ 213 Professional services 641 212 Operating expenses Sales and marketing 1,108 753 Research and development 1,015 553 General and administrative 4,833 1,745 Total stock-based compensation expense $ 7,894 $ 3,476 30 The following table sets forth our condensed consolidated statement of operations data expressed as a percentage of total revenue: Three Months Ended March 31, 2021 2020 Revenue Subscriptions 71.8 % 64.0 % Professional services 28.2 36.0 Total revenue 100.0 100.0 Cost of revenue Subscriptions 6.6 6.8 Professional services 19.9 23.8 Total cost of revenue 26.5 30.6 Gross profit 73.5 69.4 Operating expenses Sales and marketing 40.5 43.3 Research and development 23.3 20.3 General and administrative 21.5 16.7 Total operating expenses 85.3 80.3 Operating loss (11.8) (10.9) Other expense Other expense, net 3.3 3.9 Interest expense 0.1 0.2 Total other expense 3.4 4.1 Loss before income taxes (15.2) (15.0) Income tax expense (benefit) 0.1 (0.2) Net loss (15.3) % (14.8) % Comparison of the Three Months Ended March 31, 2021 and 2020 Revenue Three Months Ended March 31, 2021 2020 % Change (dollars in thousands) Revenue Subscriptions $ 63,766 $ 50,436 26.4 % Professional services 25,089 28,428 (11.7) % Total revenue $ 88,855 $ 78,864 12.7 % 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 31 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 Three Months Ended March 31, 2021 2020 % Change (dollars in thousands) Cost of revenue Subscriptions $ 5,854 $ 5,383 8.7 % Professional services 17,675 18,736 (5.7) % Total cost of revenue $ 23,529 $ 24,119 (2.4) % Subscriptions gross margin 90.8 % 89.3 % Professional services gross margin 29.6 % 34.1 % Total gross margin 73.5 % 69.4 % 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 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 Three Months Ended March 31, 2021 2020 % Change (dollars in thousands) Sales and marketing $ 35,984 $ 34,172 5.3 % % of revenue 40.5 % 43.3 % 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 32 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 Three Months Ended March 31, 2021 2020 % Change (dollars in thousands) Research and development $ 20,690 $ 16,038 29.0 % % of revenue 23.3 % 20.3 % 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 Three Months Ended March 31, 2021 2020 % Change (dollars in thousands) General and administrative expense $ 19,142 $ 13,141 45.7 % % of revenue 21.5 % 16.7 % 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 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 expense, net $ 2,893 $ 3,114 (7) % % of revenue 3.3 % 3.9 % 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 33 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 Three Months Ended March 31, 2021 2020 % Change (dollars in thousands) Interest expense $ 81 $ 143 (43.4) % % of revenue 0.1 % 0.2 % 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 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): As of 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, 2021 2020 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 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, enter into investments in or acquisitions of complementary businesses, products, or technologies, which could also require us to seek additional equity financing, incur 34 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. Sources of Funds We have financed our operations in large part with equity and debt financing arrangements, including net proceeds of $77.8 million from our initial public offering in May 2017, net proceeds of $57.8 million from our underwritten public offering in August 2018, net proceeds of $101.3 million from our underwritten public offering in September 2019, and net proceeds of $107.9 million from our underwritten public offering in June 2020. In addition, we have financed our operations through sales of subscriptions and professional services and borrowings under our credit facilities. We also 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. We may elect whether amounts drawn on the revolving line of credit bear interest at a floating rate per annum equal to either the LIBOR or the Prime rate plus an additional interest rate margin that is determined by the availability of 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 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 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 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 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 35 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 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. Financing Activities 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 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. 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. GAAP requires us to make estimates and judgments that affect the amounts reported in our financial statements and accompanying notes. Although we believe the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates. 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 See Note 2 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements. 36