What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-04 · 145 added, 242 removed, 247 unchanged (61% 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 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.

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

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

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

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

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

Our customers have used applications built on our platform to launch new business lines, automate vital employee workflows, manage complex trading platforms, accelerate drug development, and build global procurement systems.

We provide a low-code platform that accelerates the creation of high-impact business applications and workflows, enabling our customers to automate the most important aspects of their business.

Global organizations use our applications to improve customer experience, achieve operational excellence, and simplify global risk management and compliance.

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

Our customers have used workflows and applications built on our platform to launch new business lines, automate vital employee workflows, manage complex trading platforms, accelerate drug development, and build global procurement systems.

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

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

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

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

We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities.

In addition, over time we expect professional services revenue as a percentage of total revenue to decline as we increasingly rely on strategic partners to help our customers deploy our software.

We believe our

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, 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 19.2% 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.

We believe our 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, insurance, manufacturing, energy, healthcare, telecommunications, and transportation organizations.

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

Revenue from government agencies represented 18.1% and 20.9% of our total revenue in the three months ended March 31, 2022 and 2021, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three months ended March 31, 2022 or 2021.

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

We offer our platform globally.

In the three and nine months ended September 30, 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.

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

In the three months ended March 31, 2022 and 2021, 33.5% and 32.2%, respectively, of our total revenue was generated from customers outside of the United States.

As of March 31, 2022, we operated in 13 countries.

We believe we have a significant opportunity to grow our international footprint, and we are investing in new geographies, including through investment in direct and indirect sales channels, professional services, and customer support and implementation partners.

Recent Developments

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.

Beginning in late 2019 and continuing into 2022, the outbreak of the novel coronavirus disease, or COVID-19, 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, including the emergence of new variant strains of COVID-19, on the economy and our business continues to be a fluid situation.

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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.

Through March 31, 2022, 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 2022 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 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.

We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who can take anywhere from six months to a 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

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We expect our revenue growth will be primarily driven by the pace of adoption and penetration of our platform.

We offer a leading custom software automation platform and intend to continue to invest to expand our customer base.

We offer a leading custom software platform and intend to continue to invest to expand our customer base.

The degree to which prospective customers recognize the need for low-code software that enables organizations to digitally transform, and subsequently allocate budget dollars to purchase our software, will drive our ability to acquire new customers and increase sales to existing customers, which, in turn, will affect our future financial performance.

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We believe we have a substantial opportunity to grow our customer base.

We define a customer as an entity with an active subscription or maintenance and support contract related to a perpetual software license as of the specified measurement date.

We define a customer as an entity with an active subscription or maintenance and support contract 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.

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

Legacy customers from entities acquired in business combinations are not counted as new customers until they enter into a new active subscription or maintenance and support contract with us subsequent to the completion of the business combination.

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

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

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

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• Further Penetration of Existing Customers.

Our sales force seeks to generate additional revenue from existing customers by adding new users to our platform.

Our sales team seeks to generate additional revenue from existing customers by adding new users to our platform.

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

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

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

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

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

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

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

• Mix of Subscriptions and Professional Services Revenue.

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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.

These partners perform professional services with respect to any new service contracts they originate.

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

For the three and nine months ended September 30, 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.

For the three months ended March 31, 2022 and 2021, 73.3% and 71.8% of our revenue, respectively, was derived from sales of subscriptions while the remaining 26.7% and 28.2%, 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.

We have made, and plan to continue to make, investments for long-term growth, including investment in our platform and infrastructure to continuously maximize their power and speed, 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.

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Cloud Subscription Revenue

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

2021 2020 2021 2020

Three Months Ended March 31,

Cloud subscription revenue $ 53,379 $ 39,053

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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.

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 team 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 September 30,

As of March 31,

Cloud subscription revenue retention rate 117 % 118 %

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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 first nine months of 2021 as compared to the first nine months of 2020.

Key Components of Results of Operations

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

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

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

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

Our agreements with our strategic partners have indefinite terms and may be terminated for convenience by either party.

We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities.

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

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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.

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.

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

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

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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 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.

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.

Beginning 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 and continuing into 2022, these margins have declined 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

Operating expenses consist of sales and marketing, research and development, and general and administrative expenses.

Salaries, bonuses, and other personnel-related costs are the most significant components of each of these expense categories.

In general, our operating expenses are expected to continue to increase as we invest resources in growing our various teams.

Personnel-related costs such as salaries, bonuses, commissions, payroll tax payments, and stock-based compensation expense are the most significant components of each of these expense categories.

Other components of each category include professional fees for third-party services such as contract labor, legal, development resources, and consulting as well as allocated facility and overhead, which can include, among other types of costs, travel and entertainment expenditures, human resources costs such as placement fees, referral bonuses, training costs, and employee relations spending, office-related expenditures, and information technology costs for such items as infrastructure, software, and cloud computing services.

In general, our operating expenses are expected to continue to increase in absolute dollars as we invest resources in growing our various teams.

Sales and Marketing Expense

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

Additionally, as the COVID-19 pandemic improves and certain restrictions are loosened, we would expect certain classes of expense such as travel and entertainment and in-person marketing events to increase relative to recent years.

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

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Our research and development efforts are focused on enhancing the speed and power of our software platform.

We expect research and development expenses to continue to increase as they are critical to maintain and improve the quality of applications and our competitive position.

We expect research and development expense to continue to increase in absolute dollars as such costs are critical to maintain and improve the quality of applications and our competitive position.

General and Administrative Expense

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

Additional expenses included in this category are non-personnel costs such as

travel-related expenses, contracting and professional fees, audit fees, tax service and legal fees, insurance and other corporate expenses, allocated facility costs and overhead, bad debt expenses, and depreciation and amortization costs.

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

Other (Income) Expense

Other (Income) Expense, Net

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

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

Absent certain non-recurring legal expenses incurred in 2022 and prior years, we expect our general and administrative expense to increase in absolute dollars as we continue to support our growth.

Other Expense

Other Expense, Net

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

Interest Expense

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Subscriptions $ 83,720 $ 63,766

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Professional services (1)

22,710 17,675

Total cost of revenue 30,916 23,529

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Sales and marketing (1)

45,916 35,984

Research and development (1)

29,839 20,690

General and administrative (1)

31,461 19,142

Total operating expenses 107,216 75,816

Operating loss (23,866) (10,490)

Other expense (income)

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

Other expense

Other expense, net 787 2,893

Interest expense 74 81

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

Total other expense 861 2,974

Loss before income taxes (24,727) (13,464)

Income tax expense 86 255 459 335

Income tax (benefit) expense (1,573) 123

Net loss $ (23,154) $ (13,587)

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

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

2021 2020 2021 2020

Three Months Ended March 31,

Cost of revenue

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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 September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Subscriptions 73.3 % 71.8 %

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Operating loss (20.9) (11.8)

Other expense (income)

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

Other expense

Other expense, net 0.7 3.3

Interest expense 0.1 0.1

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

Total other expense 0.8 3.3

Loss before income taxes (21.6) (15.2)

Income tax expense 0.1 0.3 0.2 0.2

Income tax (benefit) expense (1.4) 0.1

Net loss (20.3) % (15.3) %

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

Three Months Ended September 30,

Comparison of the Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31,

2022 2021 % Change

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Total revenue $ 114,266 $ 88,855 28.6 %

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.

Total revenue increased $25.4 million, or 28.6%, in the three months ended March 31, 2022 compared to the same period in 2021 due to an increase in our subscriptions revenue of $20.0 million and an increase in our professional services revenue of $5.5 million.

The increase in subscriptions revenue was driven largely by a $14.3 million increase in cloud subscription revenue and a $4.9 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 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.

With respect to new versus existing customers, there was a $12.7 million increase in subscriptions revenue stemming from expanded deployments and corresponding sales of additional subscriptions to existing customers while $7.1 million of the increase was the result of sales of subscriptions to new customers.

The remainder of the increase is attributable to revenue recognized from Lana Labs.

The increase in professional services revenue was due primarily to a $6.8 million increase in sales to new customers, which was partially offset by a $1.3 million

decrease in revenue from existing customers.

Professional services revenue was also impacted by the level of usage of partners to perform professional services in the three months ended March 31, 2022 as compared to the same period in 2021.

Cost of Revenue

Three Months Ended September 30,

Three Months Ended March 31,

2022 2021 % Change

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Total gross margin 72.9 % 73.5 %

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 19.0% 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.

Cost of revenue increased $7.4 million, or 31.4%, in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a $5.1 million increase in professional services and product support personnel costs, a $1.6 million increase in other cost of revenue, a $0.4 million increase in facility and overhead costs, a $0.2 million increase in contractor costs, and a $0.1 million increase in billable expenses.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 20.4% from March 31, 2021 to March 31, 2022, coupled with a $0.3 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 March 31, 2022.

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 September 30,

2021 2020 % Change

(dollars in thousands)

Sales and marketing $ 42,071 $ 31,633 33.0 %

% of revenue 45.5 % 40.9 %

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.

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 September 30,

2021 2020 % Change

(dollars in thousands)

Research and development $ 26,510 $ 18,150 46.1 %

% of revenue 28.7 % 23.5 %

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 September 30,

2021 2020 % Change

(dollars in thousands)

General and administrative expense $ 20,226 $ 13,485 50.0 %

% of revenue 21.9 % 17.4 %

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

% of revenue 2.5 % (5.5) %

*** - 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 September 30,

2021 2020 % Change

(dollars in thousands)

Interest expense $ 72 $ 119 (39.5) %

% of revenue 0.1 % 0.2 %

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

(dollars in thousands)

Subscriptions $ 187,952 $ 142,614 31.8 %

Professional services 76,319 80,329 (5.0) %

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

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.

With respect to new versus existing customers, there was a $33.0 million increase in subscriptions revenue stemming from expanded deployments and corresponding sales of additional subscriptions to existing customers while the remaining increase of $12.4 million was the result of sales of subscriptions to new customers.

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 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

Nine Months Ended September 30,

2021 2020 % Change

(dollars in thousands)

Cost of revenue

Subscriptions $ 19,806 $ 15,185 30.4 %

Professional services 56,065 51,641 8.6 %

Total cost of revenue $ 75,871 $ 66,826 13.5 %

Subscriptions gross margin 89.5 % 89.4 %

Professional services gross margin 26.5 % 35.7 %

Total gross margin 71.3 % 70.0 %

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.

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

Contractor costs increased in the three months ended March 31, 2022 compared to the same period in 2021 due to an increase in the usage of subcontractors and consultants for professional services engagements.

Billable expenses increased primarily due to an increase in travel and entertainment related expenses in the three months ended March 31, 2022 as a result of more in-person engagements compared to three months ended March 31, 2021.

Subscriptions gross margin slightly decreased to 90.2% for the three months ended March 31, 2022 compared to 90.8% in the same period in 2021 due to increased hosting costs as sales of our cloud offering increased and became a larger proportion of our overall subscriptions revenue.

This increase in hosting costs was partially offset by an increase in subscriptions revenue.

Professional services gross margin decreased to 25.7% for the three months ended March 31, 2022 compared to 29.6% in the same period in 2021 due largely to higher personnel and human resources costs in the comparable periods, partially offset by an increase in professional services revenue.

Furthermore, fewer in-person professional services engagements and deployments during the three months ended March 31, 2021 as compared to the three months ended March 31, 2022 led to temporarily improved margins in the prior year.

Due largely to the increase in professional services cost of revenue, gross margin fell slightly to 72.9% in the three months ended March 31, 2022 as compared to 73.5% in the same period in 2021.

Sales and Marketing Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2022 2021 % Change

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% of revenue 40.2 % 40.5 %

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.

Sales and marketing expense increased $9.9 million, or 27.6%, in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a $7.0 million increase in sales and marketing personnel costs, a $2.8 million increase in facility and overhead costs, and a $0.7 million increase in marketing costs, which were partially offset by a $0.5 million decrease in professional fees.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 19.7% from March 31, 2021 to March 31, 2022, increased sales commissions driven by our revenue growth, and a $0.7 million

increase in stock-based compensation expense.

Facility and overhead costs increased due to increases in certain allocated costs tied directly to our growth such as spending for offices, human resources costs, and information technology infrastructure.

Additionally, travel and entertainment expenses increased due to a higher number of in-person engagements and events relative to the prior year and an increase in the number of employees returning to offices in some of our jurisdictions.

Marketing costs increased due to an increase in the number of marketing events held during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, including spending on our annual user conference Appian World, which resumed its in-person format in April 2022.

Additionally, marketing costs increased due to an increase in spending on advertising campaigns.

Professional fees decreased due to a decrease in the use of third-party sales and marketing consultants for certain initiatives.

Research and Development Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2022 2021 % Change

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% of revenue 26.1 % 23.3 %

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.

Research and development expense increased $9.1 million, or 44.2%, in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a $7.4 million increase in research and development personnel costs, a $1.0 million increase in facility and overhead costs, and a $0.7 million increase in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 28.7% from March 31, 2021 to March 31, 2022, coupled with a $1.3 million increase in stock-based compensation expense.

Professional fees increased due to an increase in consulting fees stemming from higher usage of external resources to assist in our platform development efforts.

General and Administrative Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2022 2021 % Change

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% of revenue 27.5 % 21.5 %

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.

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 12.2% from September 30, 2020 to September 30, 2021.

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,

General and administrative expense increased $12.3 million, or 64.4%, in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to a $10.7 million increase in professional fees and a $3.1 million increase in facility and overhead costs, partially offset by a $1.5 million decrease in general and administrative personnel costs.

Professional fees increased due 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.

Facility and overhead costs increased primarily due to an increase in certain allocated costs tied to our growth such as insurance premiums, information technology spending, human resources costs, and office-related expenses.

Personnel costs decreased due to a $3.2 million decrease in stock-based compensation, which stemmed from the accelerated recognition of expense pursuant to the vesting of the 2019 CEO grant during the three months ended March 31, 2021.

This decrease was partially offset by an increase in general and administrative personnel headcount of 19.7% from March 31, 2021 to March 31, 2022.

Other Expense, Net

Three Months Ended March 31,

2022 2021 % Change

(dollars in thousands)

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

Other expense, net $ 787 $ 2,893 (72.8) %

% of revenue 0.7 % 3.3 %

*** - 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.

Other expense, net was $0.8 million in the three months ended March 31, 2022 compared to other expense, net of $2.9 million in the three months ended March 31, 2021.

This change was primarily due to $1.9 million in foreign exchange losses in the three months ended March 31, 2022 as compared to $3.0 million in foreign exchange losses in the three months ended March 31, 2021, coupled with a $1.0 million in other income stemming from a payment received from a local government pursuant to the company meeting certain economic development criteria.

Interest Expense

Nine Months Ended September 30,

Three Months Ended March 31,

2022 2021 % Change

2 unchanged sentences

% of revenue 0.1 % 0.1 %

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.

Interest expense decreased by a nominal amount in the three months ended March 31, 2022 compared to the same period in 2021, 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 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

The following table presents selected financial information and statistics as of March 31, 2022 and December 31, 2021 as well as for the three months ended March 31, 2022 and 2021 (in thousands):

March 31, 2022 December 31, 2021

Cash and cash equivalents $ 106,795 $ 100,796

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Working capital* 131,457 121,752

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash used in operating activities $ (20,604) $ (2,810)

Net cash provided by (used in) investing activities 51,390 (7,174)

Net cash provided by investing activities 2,099 5,157

Net cash provided by financing activities 24,404 625

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.

* Exclusive of the current portion of restricted cash

As of March 31, 2022, we had $106.8 million of cash and cash equivalents and $53.4 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.

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

We expect future sources of funds to consist primarily of cash generated from sales of subscriptions and the related professional services.

We may also elect to raise additional sources of funding through draws on our existing line of credit, entering into new debt financing arrangements, or conducting additional public offerings.

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

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

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

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

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

1 unchanged sentence

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

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.

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.

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

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

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

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

The facility matures in November 2022.

We may elect whether amounts drawn on the revolving line of credit bear interest at a floating rate per annum equal to either the LIBOR or the Prime rate plus an additional interest rate margin that is determined by the availability of borrowings under the revolving line of credit.

The additional interest rate margin will range from 2.00% to 2.50% in the case of LIBOR advances and from 1.00% to 1.50% in the case of Prime rate advances.

The revolving line of credit

contains an unused facility fee in an amount between 0.15% and 0.25% of the average unused portion of the revolving line of credit, which is payable quarterly.

The agreement contains certain customary affirmative and negative covenants and requires us to maintain (i) an adjusted quick ratio of at least 1.35 and (ii) minimum adjusted EBITDA in the amounts and for the periods set forth in the agreement.

In December 2021, we executed the first loan modification agreement which extended the revolving line of credit's maturity date from November 2022 to November 2025 and amended certain borrowing terms and financial covenants, and in January 2022, we executed the second loan modification agreement to increase the aggregate amount of funds our foreign subsidiaries are allowed to maintain outside of the United States.

Under the amended agreement, we may elect whether amounts drawn on the revolving line of credit bear interest on the outstanding principal amount at a rate per annum equal to either a) the Prime rate plus an additional interest rate margin or b) the secured overnight financing rate (“SOFR”) plus an additional interest rate margin that is determined by the availability of the borrowings under the revolving line of credit.

The additional interest rate margin will range from 0.75% to 1.25% in the case of Prime rate advances and from 1.75% to 2.25% in the case of SOFR advances.

The revolving line of credit contains an unused facility fee up to 0.20% of the average unused portion of the revolving line of credit, which is payable quarterly.

The agreement contains certain customary affirmative and negative covenants and requires us to maintain (i) an adjusted quick ratio of at least 1.35 to 1.00 subject to a net cash threshold as set forth in the agreement and (ii) minimum adjusted EBITDA, in the amounts and for the periods set forth in the agreement.

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

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

We were in compliance with all covenants as of March 31, 2022.

As of March 31, 2022, we had no outstanding borrowings under this revolving line of credit, and we had outstanding letters of credit totaling $11.2 million in connection with securing our leased office space.

Uses of Funds

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

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.

Historically, we have also utilized cash to pay for the acquisition 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 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.

Our uses of cash in 2022 to date have included capital expenditures related to the expansion of our headquarters.

Cash uses in the prior year through March 31, 2021 also consisted primarily of modest capital expenditures.

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

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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.

Spending under this agreement for the three months ended March 31, 2022 totaled $7.8 million.

Historical Cash Flows

Operating Activities

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.

For the three months ended March 31, 2022, net cash used in operating activities of $20.6 million consisted of a net loss of $23.2 million and $5.2 million of cash used from changes in working capital, partially offset by $7.8 million in adjustments for non-cash items.

Adjustments for non-cash items consisted primarily of stock-based compensation of $6.9 million, depreciation and amortization expense of $1.8 million, and changes in the fair value of available-for-sale investment securities of $0.1 million.

These adjustments were partially offset by deferred income tax adjustments of $1.1 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 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.

The decrease in cash, cash equivalents, and restricted cash resulting from changes in working capital primarily consisted of a $6.8 million decrease in accrued compensation and related benefits as a result of comparatively higher declines in certain year-end employee benefit accruals such as bonuses, payroll taxes, and commissions, a $3.8 million net decrease in deferred revenue as a result of decreased subscription sales, a $3.6 million increase in prepaid expenses and other assets primarily due to higher prepayments under the AWS cloud hosting arrangement as well as the timing of other payments, a $1.4 million increase in deferred commissions due to increased sales activity combined with the timing of order completions, and a $0.5 million decrease in operating lease liabilities.

These decreases to working capital were partially offset by a $8.4 million decrease in accounts receivable stemming from increased cash collections year over year as well as the timing of billings and a $2.3 million increase in accounts payable and accrued expenses primarily due to the timing of payments.

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 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, cash equivalents, and restricted cash 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.

Investing Activities

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.

For the three months ended March 31, 2022, net cash provided by investing activities was $2.1 million, consisting of $21.7 million in proceeds from the sale of investments, partially offset by $16.2 million in purchases of investments and $3.4 million in purchases of property and equipment.

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.

Financing Activities

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 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.

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

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

For the three months ended March 31, 2022, net cash provided by financing activities was $24.4 million, consisting entirely of proceeds received from stock option exercises.

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.

Critical Accounting Estimates

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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, 2021, filed with the SEC on February 17, 2022.

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.

Furthermore, while the pandemic has been moving toward a controlled stage in the United States, 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