What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-08-05 · 150 added, 138 removed, 339 unchanged (46% of the section changed)

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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.

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 the COVID-19 pandemic, including the emergence of new variant strains of 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.

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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.

Our customers include financial services, government, life sciences, insurance, media, manufacturing, energy, healthcare, telecommunications, 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 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.

Revenue from government agencies represented 19.2% and 20.0% of our total revenue in the three and nine months ended September 30, 2021, respectively, as compared to 19.9% and 17.9% of our total revenue in the three and nine months ended September 30, 2020, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three and nine months ended September 30, 2021 or September 30, 2020.

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

We offer our platform globally.

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.

In the three and nine months ended September 30, 2021, 32.0% and 33.1%, respectively, of our total revenue was generated from customers outside of the United States as compared to 32.2% and 34.0% in the three and nine months ended September 30, 2020, respectively.

As of September 30, 2021, we operated in 13 countries.

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

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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.

The impact of COVID-19, including the emergence of new variant strains 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 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.

At the outset of the pandemic, 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.

In the third quarter of 2021, we announced an option allowing for our employees to return to offices in select jurisdictions if they elect to do so.

We remain focused on ensuring continuity for our customers, and we continue to conduct business as usual, with necessary or advisable modifications to employee travel, employee work locations, and marketing events.

Additionally, in the third quarter of 2021, the United States government announced a mandate requiring individuals and contractors who conduct business with the federal government become vaccinated against COVID-19.

While the requirements of the mandate continue to evolve, as of September 30, 2021 we do not anticipate the mandate will have a material impact on our operations.

Through September 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.

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.

The ultimate impact of COVID-19 and any variant strains thereof 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

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

For the three and six months ended June 30, 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.

For the three and nine months ended September 30, 2021, 72.8% and 71.1% of our revenue, respectively, was derived from sales of subscriptions while the remaining 27.2% and 28.9%, respectively, was derived from the sale of professional services.

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

• 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 June 30, Six Months Ended June 30,

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

2021 2020 2021 2020

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Cloud Subscription Revenue Retention Rate

As of June 30,

As of September 30,

Cloud subscription revenue retention rate 117 % 115 %

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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 that have continued into the first half of 2021.

Cloud subscription revenue retention rate increased year over year due to improved upsell rates in the first nine months of 2021 as compared to the first nine months of 2020.

Key Components of Results of Operations

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

subscriptions revenue and professional services revenue, subscription pricing, the costs associated with third-party hosting facilities, and the extent to which we expand our professional services to support future growth.

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

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

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.

In 2020, we lowered 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.

In 2021, these margins have begun to normalize but remain 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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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.

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.

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

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

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

2021 2020 2021 2020

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Operating loss (22,897) (7,515) (57,963) (28,216)

Other (income) expense

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

Other expense (income)

Other expense (income), net 2,329 (4,277) 4,141 (1,845)

Interest expense 72 119 233 390

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

Total other expense (income) 2,401 (4,158) 4,374 (1,455)

Loss before income taxes (25,298) (3,357) (62,337) (26,761)

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

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

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

2021 2020 2021 2020

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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,

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

2021 2020 2021 2020

13 unchanged sentences

Operating loss (24.8) (9.7) (21.9) (12.7)

Other (income) expense

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

Other expense (income)

Other expense (income), net 2.5 (5.5) 1.6 (0.8)

Interest expense 0.1 0.2 0.1 0.2

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

Total other expense (income) 2.6 (5.4) 1.7 (0.7)

Loss before income taxes (27.4) (4.3) (23.6) (12.0)

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Net loss (27.5) % (4.7) % (23.8) % (12.2) %

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

Three Months Ended June 30,

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

Three Months Ended September 30,

2021 2020 % Change

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Total revenue $ 92,417 $ 77,304 19.6 %

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.

Total revenue increased $15.1 million, or 19.6%, in the three months ended September 30, 2021 compared to the same period in 2020 due to an increase in our subscriptions revenue of $16.5 million, which was partially offset by a decrease in our professional services revenue of $1.4 million.

The increase in subscriptions revenue was driven largely by a $12.4 million increase in cloud subscription revenue and a $3.3 million increase in on-premises subscription revenue.

With respect to new versus existing customers, there was a $10.9 million increase in subscriptions revenue stemming from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $5.6 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.

The decrease in professional services revenue was due primarily to an $8.6 million decrease in revenue from existing customers which was substantially offset by a $7.2 million increase in sales to new customers.

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

Three Months Ended September 30,

2021 2020 % Change

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Total gross margin 71.3 % 72.1 %

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.

Cost of revenue increased $5.0 million, or 23.0%, in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $3.8 million increase in professional services and product support personnel costs, a $1.2 million increase in other cost of revenue, and a $0.7 million increase in facility and overhead costs.

These increases were partially offset by a $0.9 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.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 19.0% from September 30, 2020 to September 30, 2021, coupled with a $0.5 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 September 30, 2021.

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

Contractor costs decreased in the three months ended September 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 89.5% for the three months ended September 30, 2021 compared to 90.0% 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 September 30, 2021 as compared to the three months ended September 30, 2020.

Professional services gross margin was 22.9% for the three months

ended September 30, 2021 compared to 38.0% in the same period in 2020 due largely to higher personnel and human resources costs in the comparable periods coupled with a decline in professional services revenue.

Furthermore, fewer in-person professional services engagements and deployments during the three months ended September 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.

Due largely to the increase in professional services cost of revenue coupled with lower professional services revenue, gross margin fell slightly to 71.3% in the three months ended September 30, 2021 as compared to 72.1% in the same period in 2020.

Sales and Marketing Expense

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 % Change

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% of revenue 45.5 % 40.9 %

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.

Sales and marketing expense increased $10.4 million, or 33.0%, in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $7.4 million increase in sales and marketing personnel costs, a $1.6 million increase in facility and overhead costs, a $1.0 million increase in marketing costs, and a $0.5 million increase in professional fees.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 21.2% from September 30, 2020 to September 30, 2021, increased sales commissions driven by our subscriptions revenue growth, and a $1.0 million increase in stock-based compensation expense.

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.

Marketing costs increased due to an increase in the number of marketing events held during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 as well as increased spending on marketing materials.

Professional fees increased due to an increase in the use of third-party marketing consultants.

Research and Development Expense

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 % Change

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% of revenue 28.7 % 23.5 %

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.

Research and development expense increased $8.4 million, or 46.1%, in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $6.8 million increase in research and development personnel costs, a $1.2 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 33.3% from September 30, 2020 to September 30, 2021 as well as a $0.6 million increase in stock-based compensation expense.

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

Professional fees increased due to an increase in consulting fees.

General and Administrative Expense

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 % Change

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% of revenue 21.9 % 17.4 %

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,

General and administrative expense increased $6.7 million, or 50.0%, in the three months ended September 30, 2021 compared to the same period in 2020, primarily due to a $4.2 million increase in professional fees, a $2.1 million increase in general and administrative personnel costs, and a $0.3 million increase in facility and overhead costs.

Professional fees increased due largely to higher legal fees incurred in connection with two separate lawsuits, one involving reciprocal false advertising and related claims with a competitor and one involving an effort to enforce our intellectual property.

Personnel costs increased due to an increase in general and administrative personnel headcount of 12.2% from September 30, 2020 to September 30, 2021, partially offset by a $0.5 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 information technology spending, human resources costs, and office-related expenses.

In addition, amortization expense increased $0.2 million as a result of an increase in intangible assets stemming from our acquisition of Lana Labs.

Other Expense (Income), Net

Three Months Ended September 30,

2021 2020 % Change

(dollars in thousands)

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

Other expense (income), net $ 2,329 $ (4,277) ***

% of revenue 2.5 % (5.5) %

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.

*** - Indicates a percentage that is not meaningful

Other expense was $2.3 million in the three months ended September 30, 2021 compared to other income of $4.3 million in the three months ended September 30, 2020.

This change was primarily due to $2.3 million in foreign exchange losses in the three months ended September 30, 2021 as compared to $3.3 million in foreign exchange gains in the three months ended September 30, 2020.

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

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

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

Interest Expense

Three Months Ended June 30,

Three Months Ended September 30,

2021 2020 % Change

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% 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,

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

Comparison of the Nine Months Ended September 30, 2021 and 2020

Nine Months Ended September 30,

2021 2020 % Change

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Total revenue $ 264,271 $ 222,943 18.5 %

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.

Total revenue increased $41.3 million, or 18.5%, in the nine months ended September 30, 2021 compared to the same period in 2020 due to an increase in our subscriptions revenue of $45.3 million, partially offset by a decrease in our professional services revenue of $4.0 million.

The increase in subscriptions revenue was driven largely by a $36.0 million increase in cloud subscription revenue and a $7.3 million increase in on-premises subscription revenue.

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The decrease in professional services revenue was due primarily to a $23.8 million decrease in revenue from existing customers which was substantially offset by a $19.8 million increase in sales to new customers.

Further contributing to the decrease in professional services revenue was our increased usage of partners to perform professional services in the 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.

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

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 % Change

7 unchanged sentences

Total gross margin 71.3 % 70.0 %

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.

Cost of revenue increased $9.0 million, or 13.5%, in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $10.0 million increase in professional services and product support personnel costs, coupled with a $3.6 million increase in other cost of revenue and a $0.9 million increase in facility and overhead costs.

These increases were partially offset by a $4.3 million decrease in contractor costs and a $1.1 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.

The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering grew in the nine months ended September 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 nine months ended September 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 a shift to remote work that began in the second quarter of 2020.

Subscriptions gross margin slightly increased to 89.5% for the nine months ended September 30, 2021 compared to 89.4% in the same period in 2020 due to an increase in subscriptions revenue during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, which was 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 26.5% for the nine months ended September 30, 2021 compared to 35.7% in the same period in 2020 due to higher personnel costs during the nine months ended September 30, 2021 as well as a decrease in professional services revenue.

Additionally, fewer in-person professional services engagements and deployments during the nine months ended September 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.

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 nine months ended September 30, 2021 as compared to 70.0% in the same period in 2020.

Sales and Marketing Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 % Change

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% of revenue 44.9 % 42.6 %

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.

Sales and marketing expense increased $23.7 million, or 25.0%, in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $19.0 million increase in sales and marketing personnel costs, a $3.8 million increase in marketing costs, a $0.6 million increase in professional fees, and a $0.3 million increase in facility and overhead costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 21.2% from September 30, 2020 to September 30, 2021, increased sales commissions driven by our subscriptions revenue growth, and a $1.9 million increase in stock-based compensation expense.

Marketing costs increased due to an increase in the number of marketing events held during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 as well as increased spending on marketing materials.

Professional fees increased due to an increase in the use of third-party marketing consultants.

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

The increases in these costs were partially offset by decreased travel and entertainment expenses pursuant to a shift to remote work that began in the second quarter of 2020.

Research and Development Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 % Change

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% of revenue 26.9 % 23.0 %

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.

Research and development expense increased $19.7 million, or 38.3%, in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $16.2 million increase in research and development personnel costs, a $2.7 million increase in facility and overhead costs, and a $0.8 million increase in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 33.3% from September 30, 2020 to September 30, 2021 as well as a $1.5 million increase in stock-based compensation expense.

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

Professional fees increased due to an increase in consulting fees.

General and Administrative Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 % Change

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% of revenue 21.5 % 17.1 %

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.

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 14.6% from June 30, 2020 to June 30, 2021.

Professional fees increased due to increased legal fees.

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

Six Months Ended June 30,

General and administrative expense increased $18.7 million, or 49.0%, in the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to a $9.3 million increase in general and administrative personnel costs, an $8.2 million increase in professional fees, and a $1.0 million increase in facility and overhead costs.

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

Other Expense (Income), Net

Nine Months Ended September 30,

2021 2020 % Change

(dollars in thousands)

Other expense, net $ 1,812 $ 2,432 (25.5) %

Other expense (income), net $ 4,141 $ (1,845) ***

% of revenue 1.6 % (0.8) %

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.

*** - Indicates a percentage that is not meaningful

Other expense was $4.1 million in the nine months ended September 30, 2021 compared to other income of $1.8 million in the nine months ended September 30, 2020.

This change was primarily due to $4.3 million in foreign exchange losses in the nine months ended September 30, 2021 compared to $0.4 million in foreign exchange gains in the nine months ended September 30, 2020, coupled with a $0.3 million decrease in interest income.

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

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

dollar during the nine months ended September 30, 2021 compared to the same period in 2020.

Interest Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2021 2020 % Change

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% of revenue 0.1 % 0.2 %

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.

Interest expense decreased by $0.2 million in the nine months ended September 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 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

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

September 30, 2021 December 31, 2020

Cash and cash equivalents $ 127,122 $ 112,462

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Working capital 168,149 209,532

Six Months Ended June 30,

Nine Months Ended September 30,

Net cash used in operating activities $ (34,498) $ (13,453)

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Net cash provided by financing activities 2,375 110,337

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.

As of September 30, 2021, we had $127.1 million of cash and cash equivalents and $61.4 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.

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.

In August 2021, we completed the acquisition of Lana Labs GmbH, or Lana Labs, a developer of process mining software, for approximately $30.7 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.

In the 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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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 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 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.

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

As of September 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 acquisitions of entities we believe to be complementary to our business, and we may pursue similar opportunities in the future.

Historically, we have also 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 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.

Our uses of cash in 2021 to date have included the acquisition of Lana Labs, capital expenditures, and modest leasehold improvements related to the expansion of our headquarters.

Cash uses in the prior year through September 30, 2020 consisted primarily of the acquisition of Novayre.

Furthermore, in 2021 we executed a non-cancellable cloud hosting arrangement with Amazon Web Services 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.

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Operating Activities

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.

For the nine months ended September 30, 2021, net cash used in operating activities of $34.5 million consisted of a net loss of $62.8 million, offset by $21.3 million in adjustments for non-cash items and $6.9 million of cash provided by changes in working capital.

Adjustments for non-cash items consisted primarily of stock-based compensation of $17.7 million, depreciation and amortization expense of $4.1 million, losses on the disposal of property and equipment of $0.1 million, and bad debt expense of $0.1 million.

These adjustments were partially offset by deferred income tax adjustments of $0.5 million.

The increase in cash, cash equivalents, and restricted cash resulting from changes in working capital primarily consisted of a $10.8 million increase in accounts payable and accrued expenses primarily due to the timing of payments, a $6.8 million net increase in deferred revenue as a result of increased subscription sales, a $5.8 million increase in accrued compensation and related benefits as a result of higher employee benefit accruals for such costs as commissions and bonuses, a $2.9 million increase in other current and non-current liabilities due to the establishment of the escrow liability stemming from the holdback agreement enacted pursuant to our acquisition of Lana Labs, and a $2.7 million decrease in prepaid expenses and other assets primarily due to the timing of payments.

These increases to working capital were partially offset by an $11.6 million increase in deferred commissions due to increased sales activity, a $10.0 million increase in accounts receivable stemming from the timing of billings and collections in the third quarter, and a $0.5 million decrease in operating lease liabilities.

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

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

The 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.

The decrease in cash, cash equivalents, and restricted cash resulting from changes in working capital primarily consisted of a $22.6 million increase in accounts receivable stemming from increased sales as well as the timing of billings and collections, a $4.3 million increase in deferred commissions due to increased sales activity, and a $2.5 million decrease in accounts payable and accrued expenses primarily due to the timing of payments.

These increases to working capital were partially offset by a $10.5 million increase in deferred revenue as a result of increased subscription sales, a $5.8 million increase in accrued compensation and related benefits as a result of higher employee benefit accruals such as vacation and bonuses, a $4.5 million decrease in prepaid expenses and other assets primarily due to the timing of payments, a $3.4 million increase in operating lease liabilities as a result of recognizing a new right-of-use

liability related to the expanded occupancy of our headquarters building, and a $3.0 million increase in other liabilities due to the deferral of social security tax payments pursuant to the provisions of the CARES Act.

Investing Activities

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.

For the nine months ended September 30, 2021, net cash provided by investing activities was $51.4 million, consisting of $84.6 million in proceeds from the sale of investments, partially offset by $30.7 million in payments, net of cash acquired, related to the acquisition of Lana Labs and $2.5 million in purchases of property and equipment.

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

In addition, there were approximately $1.0 million in purchases of property and equipment.

Financing Activities

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.

For the nine months ended September 30, 2021, net cash provided by financing activities was $2.4 million, consisting entirely of proceeds received from stock option exercises.

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

Off-Balance Sheet Arrangements

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.

As of September 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.

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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.

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

Recent Accounting Pronouncements

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis