What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-06 · 187 added, 91 removed, 290 unchanged (49% of the section changed)

26 unchanged sentences

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.

Revenue from government agencies represented 19.8% and 20.4% of our total revenue in the three and six months ended June 30, 2021, respectively, as compared to 19.0% and 16.8% of our total revenue in the three and six months ended June 30, 2020, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three and six months ended June 30, 2021 or June 30, 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.

In the three and six months ended June 30, 2021, 35.3% and 33.7%, respectively, of our total revenue was generated from customers outside of the United States as compared to 36.8% and 35.0% in the three and six months ended June 30, 2020, respectively.

As of June 30, 2021, we operated in 12 countries.

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

7 unchanged sentences

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.

Through June 30, 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.

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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.

We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who can take up to 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

8 unchanged sentences

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.

Furthermore, we define a new customer as an entity that has entered into its first active subscription or maintenance and support contract within one calendar year of the specified measurement date while existing customers are defined as entities that have maintained an active subscription or maintenance and support contract for at least one calendar year from the specified measurement date.

To the extent we contract with one or more entities under common control, we count those entities as separate customers.

6 unchanged sentences

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.

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 or through 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.

8 unchanged sentences

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.

In addition, we continue to 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.

For the three and six months ended June 30, 2021, 68.6% and 70.2% of our revenue, respectively, was derived from sales of subscriptions while the remaining 31.4% and 29.8%, respectively, was derived from the sale of professional services.

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

• 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.

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.

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Cloud Subscription Revenue

Three Months Ended March 31,

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

2021 2020 2021 2020

Cloud subscription revenue $ 42,486 $ 29,580 $ 81,539 $ 57,970

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 generally sell our SaaS subscriptions on a per-user basis or through non-user based single application licenses.

As such, 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 or by the number of application licenses purchased, 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,

As of June 30,

Cloud subscription revenue retention rate 121 % 113 %

7 unchanged sentences

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.

Cloud subscription revenue retention rate increased year over year due to improved upsell rates in the latter half of 2020 that have continued into the first half of 2021.

Key Components of Results of Operations

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 sell our software on a per-user basis or through 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.

24 unchanged sentences

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.

The unpredictability of the timing of entering into significant professional services agreements sold on a standalone basis may cause significant fluctuations in our cost of professional services which, in turn, may impact 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.

2 unchanged sentences

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.

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 subscriptions gross margin to fluctuate in the short term but improve over time.

Professional Services Gross Margin

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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.

In the latter half of 2020, we reduced our usage of subcontractors, and the COVID-19 pandemic resulted in fewer in-person professional services engagements and deployments, both of which reduced certain classes of expenses and improved professional services margins.

However, those improved margins are not 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

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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.

Interest expense consists primarily of interest on our 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,

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

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

2021 2020 2021 2020

Subscriptions $ 56,946 $ 41,418 $ 120,712 $ 91,854

12 unchanged sentences

Operating loss (24,576) (12,095) (35,066) (20,701)

Other expense

Other expense, net 2,893 3,114

Other (income) expense

Other (income) expense, net (1,081) (682) 1,812 2,432

Interest expense 80 128 161 271

Total other expense 2,974 3,257

Total other (income) expense (1,001) (554) 1,973 2,703

Loss before income taxes (23,575) (11,541) (37,039) (23,404)

Income tax expense (benefit) 123 (194)

Income tax expense 250 274 373 80

Net loss $ (23,825) $ (11,815) $ (37,412) $ (23,484)

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

Three Months Ended March 31,

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

2021 2020 2021 2020

Cost of revenue

6 unchanged sentences

Total stock-based compensation expense $ 4,598 $ 3,614 $ 12,492 $ 7,090

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

Three Months Ended March 31,

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

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

2021 2020 2021 2020

Subscriptions 68.6 % 62.0 % 70.2 % 63.1 %

12 unchanged sentences

Operating loss (29.6) (18.1) (20.4) (14.2)

Other expense

Other expense, net 3.3 3.9

Other (income) expense

Other (income) expense, net (1.3) (1.0) 1.1 1.7

Interest expense 0.1 0.2 0.1 0.2

Total other expense 3.4 4.1

Total other (income) expense (1.2) (0.8) 1.1 1.9

Loss before income taxes (28.4) (17.3) (21.6) (16.1)

Income tax expense (benefit) 0.1 (0.2)

Income tax expense 0.3 0.4 0.2 0.1

Net loss (28.7) % (17.7) % (21.8) % (16.1) %

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

Three Months Ended March 31,

Comparison of the Three Months Ended June 30, 2021 and 2020

Three Months Ended June 30,

2021 2020 % Change

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Total revenue $ 82,999 $ 66,775 24.3 %

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.

Total revenue increased $16.2 million, or 24.3%, in the three months ended June 30, 2021 compared to the same period in 2020 due to an increase in our subscriptions revenue of $15.5 million, coupled with an increase in our professional services revenue of $0.7 million.

The increase in subscriptions revenue was driven largely by a $12.9 million increase in cloud subscription revenue and a $1.9 million increase in on-premises subscription revenue.

With respect to new versus existing customers, there was a $9.6 million increase in subscriptions revenue stemming from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $5.9 million was the result of sales of subscriptions to new customers.

The increase in professional services revenue was due primarily to a $9.7 million increase in sales to new customers, offset by a $9.0 million decrease in revenue from existing customers.

Professional services revenue was impacted by our increased usage of partners to perform professional services in the three months ended June 30, 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 June 30,

2021 2020 % Change

(dollars in thousands)

Cost of revenue

Subscriptions $ 6,860 $ 4,701 45.9 %

Professional services 18,975 16,455 15.3 %

Total cost of revenue $ 25,835 $ 21,156 22.1 %

Subscriptions gross margin 88.0 % 88.6 %

Professional services gross margin 27.2 % 35.1 %

Total gross margin 68.9 % 68.3 %

Cost of revenue increased $4.7 million, or 22.1%, in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to a $3.9 million increase in professional services and product support personnel costs, a $1.6 million increase in other cost of revenue, and a $0.3 million increase in facility and overhead costs.

These increases were partially offset by a $1.1 million decrease in contractor costs.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 19.8% from June 30, 2020 to June 30, 2021, coupled with a $0.6 million increase in stock-based compensation.

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in the three months ended June 30, 2021.

The increase in facility and overhead costs was due largely to an increase in certain allocated costs tied to our growth such as spending for offices, human resources costs, and information technology expenses.

Contractor costs decreased in the three months ended June 30, 2021 compared to the same period in 2020 due to a decrease in the usage of subcontractors for professional services engagements.

Subscriptions gross margin was 88.0% for the three months ended June 30, 2021 compared to 88.6% in the same period in 2020.

The decline was driven by increased hosting costs as sales of our cloud offering increased as well as increases in personnel costs, offset by an increase in subscriptions revenue during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

Professional services gross margin was 27.2% for the three months ended June 30, 2021 compared to 35.1% in the same period in 2020 due to higher personnel costs in the comparable periods.

Furthermore, fewer in-person professional services engagements and deployments during the three months ended June 30, 2020 led to temporarily improved margins in the prior year.

These impacts were partially offset by an increase in professional services revenue and a decrease in the usage of subcontractors for professional services engagements.

Given the higher percentage of subscriptions

revenue for the comparable periods, gross margin rose slightly to 68.9% in the three months ended June 30, 2021 as compared to 68.3% in the same period in 2020.

Sales and Marketing Expense

Three Months Ended June 30,

2021 2020 % Change

(dollars in thousands)

Sales and marketing $ 40,520 $ 29,086 39.3 %

% of revenue 48.8 % 43.6 %

Sales and marketing expense increased $11.4 million, or 39.3%, in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to a $6.1 million increase in sales and marketing personnel costs, a $4.1 million increase in marketing costs, and a $1.4 million increase in facility and overhead costs.

These increases were partially offset by a $0.2 million decrease in professional fees.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 17.4% from June 30, 2020 to June 30, 2021, increased sales commissions driven by our subscriptions revenue growth, and a $0.5 million increase in stock-based compensation expense.

Marketing costs increased due to enhanced spending and lead generation expenses associated with our annual user conference Appian World during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

Facility and overhead costs increased due to higher information technology spending to support our growth coupled with higher human resource costs and increased travel and entertainment expenses.

Professional fees decreased due to a decrease in the usage of subcontractors.

Research and Development Expense

Three Months Ended June 30,

2021 2020 % Change

(dollars in thousands)

Research and development $ 23,862 $ 17,178 38.9 %

% of revenue 28.7 % 25.7 %

Research and development expense increased $6.7 million, or 38.9%, in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to a $5.2 million increase in research and development personnel costs, a $1.1 million increase in facility and overhead costs, and a $0.3 million increase in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 18.5% from June 30, 2020 to June 30, 2021 as well as a $0.5 million increase in stock-based compensation expense.

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 June 30,

2021 2020 % Change

(dollars in thousands)

General and administrative expense $ 17,358 $ 11,450 51.6 %

% of revenue 20.9 % 17.1 %

General and administrative expense increased $5.9 million, or 51.6%, in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to a $2.7 million increase in professional fees, a $2.0 million increase in general and administrative personnel costs, and a $1.1 million increase in facility and overhead costs.

Professional fees increased due largely to increased legal fees.

Personnel costs increased due to an increase in general and administrative personnel headcount of 14.6% from June 30, 2020 to June 30, 2021, partially offset by a $0.6 million decrease in stock-based compensation expense.

Facility and overhead costs increased primarily due to an increase in certain allocated costs tied to our growth such as spending for offices, human resources costs, and information technology expenses.

Other Income, Net

Three Months Ended June 30,

2021 2020 % Change

(dollars in thousands)

Other income, net $ (1,081) $ (682) 58.5 %

% of revenue (1.3) % (1.0) %

Other income, net increased by $0.4 million in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to $1.0 million in foreign exchange gains in the three months ended June 30, 2021 compared to $0.6 million in foreign exchange gains in the three months ended June 30, 2020.

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

dollar during the three months ended June 30, 2021 compared to the same period in 2020.

Interest Expense

Three Months Ended June 30,

2021 2020 % Change

(dollars in thousands)

Interest expense $ 80 $ 128 (37.5) %

% of revenue 0.1 % 0.2 %

Interest expense decreased by a nominal amount in the three months ended June 30, 2021 compared to the same period in 2020, primarily due to lower commitment fees on the letter of credit outstanding.

Comparison of the Six Months Ended June 30, 2021 and 2020

Six Months Ended June 30,

2021 2020 % Change

(dollars in thousands)

Subscriptions $ 120,712 $ 91,854 31.4 %

Professional services 51,142 53,785 (4.9) %

Total revenue $ 171,854 $ 145,639 18.0 %

Total revenue increased $26.2 million, or 18.0%, in the six months ended June 30, 2021 compared to the same period in 2020 due to an increase in our subscriptions revenue of $28.9 million, partially offset by a decrease in our professional services revenue of $2.6 million.

The increase in subscriptions revenue was driven largely by a $23.6 million increase in cloud subscription revenue and a $4.0 million increase in on-premises subscription revenue.

With respect to new versus existing customers, there was a $17.9 million increase in subscriptions revenue stemming from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $11.0 million was the result of sales of subscriptions to new customers.

The decrease in professional services revenue was due primarily to a $19.8 million decrease in revenue from existing customers which was substantially offset by a $17.2 million increase in sales to new customers.

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.

Further contributing to the decrease in professional services revenue was our increased usage of partners to perform professional services in the six months ended June 30, 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,

Six Months Ended June 30,

2021 2020 % Change

7 unchanged sentences

Total gross margin 71.3 % 68.9 %

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.

Cost of revenue increased $4.1 million, or 9.0%, in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to a $6.2 million increase in professional services and product support personnel costs, coupled with a $2.3 million increase in other cost of revenue and a $0.2 million increase in facility and overhead costs.

These increases were partially offset by a $3.5 million decrease in contractor costs and a $1.2 million decrease in billable expenses.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 19.8% from June 30, 2020 to June 30, 2021, coupled with a $1.1 million increase in stock-based compensation.

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering grew in the six months ended June 30, 2021, while the increase in facility and overhead costs was due largely to an increase in certain allocated costs tied to our growth such as spending for offices, human resources costs, and information technology expenses.

Contractor costs decreased in the six months ended June 30, 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 as a result of lower travel and entertainment expenses pursuant to our shift to largely remote work.

Subscriptions gross margin increased to 89.5% for the six months ended June 30, 2021 compared to 89.0% in the same period in 2020 due to an increase in subscriptions revenue during the six months ended June 30, 2021 as compared to the six months ended June 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 decreased to 28.3% for the six months ended June 30, 2021 compared to 34.6% in the same period in 2020 due to higher personnel costs during the six months ended June 30, 2021 as well as a decrease in professional services revenue.

Additionally, fewer in-person professional services engagements and deployments during the six months ended June 30, 2020 led to temporarily improved margins in the prior year.

These impacts were partially offset by a decrease in the usage of subcontractors for professional services engagements.

Given the higher percentage of subscriptions revenue for the comparable periods and the aforementioned decline in professional services revenue, gross margin rose to 71.3% in the six months ended June 30, 2021 as compared to 68.9% in the same period in 2020.

Sales and Marketing Expense

Three Months Ended March 31,

Six Months Ended June 30,

2021 2020 % Change

2 unchanged sentences

% of revenue 44.5 % 43.4 %

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.

Sales and marketing expense increased $13.2 million, or 20.9%, in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to an $11.6 million increase in sales and marketing personnel costs, a $2.9 million increase in marketing costs, and a $0.1 million increase in professional fees.

These increases were partially offset by a $1.3 million decrease in facility and overhead costs.

$0.9 million increase in stock-based compensation expense.

Marketing costs increased due to enhanced spending and lead generation expenses associated with our annual user conference Appian World during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

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,

Six Months Ended June 30,

2021 2020 % Change

2 unchanged sentences

% of revenue 25.9 % 22.8 %

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.

Research and development expense increased $11.3 million, or 34.1%, in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to a $9.4 million increase in research and development personnel costs, a $1.5 million increase in facility and overhead costs, and a $0.4 million increase in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 18.5% from June 30, 2020 to June 30, 2021.

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

1 unchanged sentence

General and Administrative Expense

Three Months Ended March 31,

Six Months Ended June 30,

2021 2020 % Change

2 unchanged sentences

% of revenue 21.2 % 16.9 %

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.

General and administrative expense increased $11.9 million, or 48.4%, in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to a $7.2 million increase in general and administrative personnel costs, a $4.0 million increase in professional fees, and a $0.7 million increase in facility and overhead costs.

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.

Facility and overhead costs increased primarily due to higher information technology spending to support our growth during the six months ended June 30, 2021, along with higher human resources costs.

Other Expense, Net

Three Months Ended March 31,

Six Months Ended June 30,

2021 2020 % Change

2 unchanged sentences

% of revenue 1.1 % 1.7 %

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.

Other expense, net decreased by $0.6 million in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to $2.0 million in foreign exchange losses in the six months ended June 30, 2021 compared to $2.9 million in foreign exchange losses in the six months ended June 30, 2020, coupled with a $0.3 million decrease in interest income.

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

dollar during the six months ended June 30, 2021 compared to the same period in 2020.

Interest Expense

Three Months Ended March 31,

Six Months Ended June 30,

2021 2020 % Change

2 unchanged sentences

% 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.

Interest expense decreased by $0.1 million in the six months ended June 30, 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):

March 31, 2021 December 31, 2020

The following table presents selected financial information and statistics as of June 30, 2021 and December 31, 2020 as well as for the six months ended June 30, 2021 and 2020 (in thousands):

June 30, 2021 December 31, 2020

Cash and cash equivalents $ 131,279 $ 112,462

3 unchanged sentences

Working capital 213,480 209,532

Three Months Ended March 31,

Six Months Ended June 30,

Net cash used in operating activities $ (9,373) $ (6,957)

1 unchanged sentence

Net cash provided by financing activities 2,089 109,768

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.

As of June 30, 2021, we had $131.3 million of cash and cash equivalents and $111.3 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.

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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

indebtedness, or use cash resources.

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

On August 4, 2021, we completed the acquisition of Lana Labs GMBH, a developer of process mining software, for approximately $31.0 million, net of cash acquired and debt.

We financed the transaction with available cash on hand.

future, we may enter into investments in or acquisitions of similarly complementary businesses, products, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources.

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

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

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

We were in compliance with all covenants as of June 30, 2021.

As of June 30, 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.

In the past, we utilized cash to pay for acquisitions of entities 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.

Our uses of cash in 2021 to date have included modest capital expenditures as well as the acquisition of Lana Labs GMBH, while cash uses in the prior year through June 30, 2020 consisted primarily of the acquisition of Novayre.

Furthermore, in 2021 we executed a non-cancellable cloud hosting arrangement with Amazon Web Services, or AWS, that contains provisions for minimum purchase commitments.

Purchase commitments under the agreement total $131.0 million over five years, including $22.0 million in the first year, $25.0 million in the second year, and $28.0 million in each of the third, fourth, and fifth years.

The timing of payments under the agreement may vary, and the total amount of payments may exceed the minimum depending on the volume of services utilized.

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.

For the six months ended June 30, 2021, net cash used in operating activities of $9.4 million consisted of a net loss of $37.4 million, offset by $14.9 million in adjustments for non-cash items and $13.1 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted primarily of stock-based compensation of $12.5 million and depreciation and amortization expense of $2.6 million, partially offset by deferred income tax adjustments of $0.1 million.

The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $16.7 million decrease in accounts receivable stemming from increased cash collections as well as the timing of billings, a $3.0 million increase in accounts payable and accrued expenses primarily due to the timing of payments, a $2.8 million increase in accrued compensation and related benefits as a result of higher employee benefit accruals for such costs as commissions and bonuses, a $0.2 million decrease in prepaid expenses and other assets primarily due to the timing of payments, and a $0.1 million increase in operating lease liabilities.

These increases to working capital were partially offset by a $7.3 million increase in deferred commissions due

to increased sales activity, a $1.8 million net decrease in deferred revenue as a result of decreased subscription sales, and a $0.6 million decrease in other current and non-current liabilities.

For the six months ended June 30, 2020, net cash used in operating activities of $7.0 million consisted of a net loss of $23.5 million, offset by $10.1 million in adjustments for non-cash items and $6.4 million of cash provided by changes in working capital.

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

The increase in cash and cash equivalents resulting

from changes in working capital primarily consisted of a $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.

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

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

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.

For the six months ended June 30, 2021, net cash provided by investing activities was $26.6 million, which was due to $27.6 million in proceeds from the sale of investments, partially offset by $1.0 million in purchases of property and equipment.

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

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

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.

For the six months ended June 30, 2021, net cash provided by financing activities was $2.1 million, consisting entirely of proceeds received from stock option exercises.

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

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.

As of June 30, 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.

11 unchanged sentences

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