What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-09 · 199 added, 106 removed, 330 unchanged (48% of the section changed)

9 unchanged sentences

Appian is a software company that automates business processes.

The Appian Platform includes everything you need to design, automate, and optimize even the most complex processes from start to finish.

The Appian AI-Powered Process Platform includes everything you need to design, automate, and optimize even the most complex processes, from start to finish.

The world's most innovative organizations trust Appian to improve their workflows, unify data, and optimize operations—resulting in better growth and superior customer experiences.

4 unchanged sentences

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, Accenture, PwC, EY, Infosys, Wipro, and Deloitte, which allow them to refer customers to us in order to purchase subscriptions and then our partners provide professional services directly to the customers using our platform.

We have several strategic partnerships, including with KPMG, Accenture, PwC, EY, Infosys, Wipro, and Deloitte, which allow them to refer customers to us in order to purchase subscriptions.

Our partners then 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.

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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 20.5% and 18.1% of our total revenue for the three months ended March 31, 2023 and 2022, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three months ended March 31, 2023 or 2022.

Revenue from government agencies represented 20.1% and 20.3% of our total revenue for the three and six months ended June 30, 2023, respectively as compared to 18.2% of our total revenue in each of the three and six months ended June 30, 2022.

No single end-customer accounted for more than 10% of our total revenue in the three and six months ended June 30, 2023 or 2022.

We offer our platform globally.

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

In the three months ended March 31, 2023 and 2022, 33.4% and 33.5%, respectively, of our total revenue was generated from customers outside of the United States.

As of March 31, 2023, we operated in 15 countries.

In the three and six months ended June 30, 2023, 38.4% and 35.8%, respectively, of our total revenue was generated from customers outside of the United States as compared to 35.0% and 34.2% in the three and six months ended June 30, 2022, respectively.

As of June 30, 2023, we operated in 16 countries.

We believe we have a significant opportunity to continue 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.

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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 our software platform 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.

The degree to which prospective customers recognize the need for our platform, and subsequently allocate budget dollars to purchase our software, will drive our ability to acquire new customers and increase sales to existing customers, which, in turn, will affect our future financial performance.

• Growth of Our Customer Base.

10 unchanged sentences

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.

Generally, the development of new

applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue.

Many of our customers begin by building a single

application and then grow to build dozens of applications on our platform.

Generally, the development of new applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue.

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

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

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

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

• Mix of Subscriptions and Professional Services Revenue.

7 unchanged sentences

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

For the three months ended March 31, 2023 and 2022, 73.2% and 73.3% of our revenue, respectively, was derived from sales of subscriptions while the remaining 26.8% and 26.7%, respectively, was derived from the sale of professional services.

For the six months ended June 30, 2023 and 2022, 73.3% and 71.5% of our revenue, respectively, was derived from sales of subscriptions while the remaining 26.7% and 28.5%, respectively, was derived from the sale of professional services.

• Investments in Growth.

5 unchanged sentences

Cloud Subscription Revenue

Three Months Ended March 31,

2023 2022 % Change

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

2023 2022 % Change 2023 2022 % Change

Cloud subscription revenue $ 74,442 $ 57,083 30.4 % $ 144,134 $ 110,462 30.5 %

3 unchanged sentences

Cloud Subscription Revenue Retention Rate

As of March 31,

As of June 30,

Cloud subscription revenue retention rate 115 % 116 %

42 unchanged sentences

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, software development resources, and consulting as well as allocated overhead costs, which can include, among other types of costs, facility 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.

Other components of each operating expense category include professional fees for third-party services such as contract labor, legal, software development resources, and consulting.

In addition, operating expenses include allocated overhead costs, which are primarily comprised of, facility costs, travel and entertainment expenditures, certain human resources costs (referral bonuses, training costs, and employee relations spending), office-related expenditures, and certain information technology costs (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 although at a more measured rate than prior years.

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Subscriptions $ 93,794 $ 76,668 $ 192,751 $ 160,388

3 unchanged sentences

Subscriptions (1)

10,779 8,528 21,227 16,751

Professional services (1)

19 unchanged sentences

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Cost of revenue

7 unchanged sentences

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Subscriptions 73.4 % 69.7 % 73.3 % 71.5 %

20 unchanged sentences

* Totals may not foot due to rounding.

Comparison of the Three Months Ended March 31, 2023 and 2022

Three Months Ended March 31,

Comparison of the Three Months Ended June 30, 2023 and 2022

Three Months Ended June 30,

2023 2022 $ Change % Change

3 unchanged sentences

Total revenue $ 127,715 $ 110,063 $ 17,652 16.0 %

Total revenue increased $21.0 million, or 18.4%, in the three months ended March 31, 2023 compared to the same period in 2022 due to an increase in our subscriptions revenue of $15.2 million and an increase in our professional services revenue of $5.7 million.

Total revenue increased $17.7 million, or 16.0%, in the three months ended June 30, 2023 compared to the same period in 2022 due to an increase in our subscriptions revenue of $17.1 million and an increase in our professional services revenue of $0.5 million.

The increase in subscriptions revenue was driven by a $17.4 million increase in cloud subscription revenue and a $0.8 million increase in maintenance and support revenue, both of which were partially offset by a $1.1 million decrease in on-premises subscription revenue.

3 unchanged sentences

Cost of Revenue

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change % Change

7 unchanged sentences

Total gross margin 71.2 % 69.8 %

Cost of revenue increased $5.2 million, or 16.7%, in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $2.7 million increase in professional services and product support personnel costs, a $1.4 million increase in hosting costs, a $0.5 million increase in contractor costs, and a $0.3 million increase in travel and entertainment expenses.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 12.7% from March 31, 2022 to March 31, 2023 in addition to increased wages and fringe benefits, coupled with a $0.6 million increase in stock-based compensation expense.

Hosting costs increased as sales of our cloud offering increased in the three months ended March 31, 2023.

Contractor costs increased in the three months ended March 31, 2023 compared to the same period in 2022 due to an increase in the usage of subcontractors and consultants for professional services engagements.

Subscriptions gross margin slightly decreased to 89.4% for the three months ended March 31, 2023 compared to 90.2% in the same period in 2022 due to increased hosting costs as sales of our cloud offering increased.

The increase in hosting costs was partially offset by an increase in subscriptions revenue during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Professional services gross margin increased to 29.3% for the three months ended March 31, 2023 compared to 25.7% in the same period in 2022 due largely to the aforementioned increase in professional services revenue.

The increase in professional services revenue was partially offset by higher personnel and other allocated costs such as human resources, information technology, and office-related spending in the comparable periods.

Gross margin rose slightly to 73.3% for the three months ended March 31, 2023 compared to 72.9% for the three months ended March 31, 2022.

Cost of revenue increased $3.6 million, or 10.7%, in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $1.9 million increase in professional services and product support personnel costs and a $1.7 million increase in hosting costs.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 9.9% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits and a $0.1 million increase in stock-based compensation expense.

Hosting costs increased as sales of our cloud offering increased in the three months ended June 30, 2023.

Subscriptions gross margin slightly decreased to 88.5% for the three months ended June 30, 2023 compared to 88.9% in the same period in 2022 due to increased hosting costs as sales of our cloud offering increased.

The increase in hosting costs was partially offset by an increase in subscriptions revenue during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Professional services gross margin decreased to 23.2% for the three months ended June 30, 2023 compared to 25.8% in the same period in 2022 due largely to the aforementioned increase in professional services personnel costs, which was partially offset by an increase in professional services revenue in the comparable periods.

Gross margin increased to 71.2% for the three months ended June 30, 2023 compared to 69.8% for the three months ended June 30, 2022, driven by more gross profit from subscriptions.

Sales and Marketing Expense

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change % Change

2 unchanged sentences

% of revenue 49.0 % 51.0 %

Sales and marketing expense increased $17.2 million, or 37.4%, in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $15.2 million increase in sales and marketing personnel costs and a $2.7 million increase in overhead costs, which were partially offset by a $0.7 million decrease in marketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 29.0% from March 31, 2022 to March 31, 2023 in addition to increased wages and fringe benefits, a $3.6 million

increase in severance costs, a $2.7 million increase in commissions expense due to increased sales, and a $0.7 million increase in stock-based compensation expense.

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 expense increased due to a higher number of in-person engagements and events as compared to the prior year.

Marketing costs decreased primarily due to a decrease in advertising expense stemming from a decrease in the number of advertising campaigns launched in the three months ended March 31, 2023 relative to the three months ended March 31, 2022.

Sales and marketing expense increased $6.4 million, or 11.4%, in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $7.6 million increase in sales and marketing personnel costs, a $0.3 million increase in overhead costs, and a $0.2 million increase in professional fees, which were partially offset by a $1.7 million decrease in marketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 17.3% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits, a $2.6 million increase in commissions expense due to increased sales, a $0.9 million increase in severance costs, and a $0.5 million increase in stock-based compensation expense.

Overhead costs increased primarily due to expenditures for an internal sales and marketing event.

These increases were partially offset by a

decrease in travel and entertainment expense due to a lower number of in-person engagements and events as compared to the prior year.

Marketing costs decreased primarily due to a decrease in advertising expense stemming from a decrease in the number of advertising campaigns launched in the three months ended June 30, 2023 relative to the three months ended June 30, 2022, as well as a decrease in the cost of marketing events, primarily Appian World.

Research and Development Expense

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change % Change

2 unchanged sentences

% of revenue 31.1 % 30.7 %

Research and development expense increased $11.8 million, or 39.5%, in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to an $11.9 million increase in research and development personnel costs and a $0.1 million increase in overhead costs.

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

Personnel costs increased due to an increase in research and development personnel headcount of 31.5% from March 31, 2022 to March 31, 2023 in addition to increased wages and fringe benefits coupled with a $1.3 million increase in stock-based compensation expense and a $0.2 million increase in severance costs.

Overhead costs increased due to increases in certain allocated costs tied directly to our growth.

Professional fees decreased due to a decrease in consulting fees stemming from a lower usage of external resources to assist in our platform development efforts relative to the prior year.

Research and development expense increased $5.9 million, or 17.4%, in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $5.8 million increase in research and development personnel costs.

Personnel costs increased due to an increase in research and development personnel headcount of 14.4% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits and a $0.8 million increase in severance costs.

These personnel costs were partially offset by a $0.2 million decrease in stock-based compensation expense.

General and Administrative Expense

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change % Change

2 unchanged sentences

% of revenue 22.9 % 26.8 %

General and administrative expense decreased $1.8 million, or 5.6%, in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to an $8.5 million decrease in professional fees.

General and administrative expense decreased $0.3 million, or 1.0%, in the three months ended June 30, 2023 compared to the same period in 2022 primarily due to a $5.3 million decrease in professional fees.

This decrease was partially offset by a $4.4 million increase in general and administrative personnel costs and a $0.5 million increase in overhead costs.

Professional fees decreased due to a $9.9 million decline in legal fees incurred relative to the three months ended March 31, 2022, which was partially offset by a $1.2 million increase in consulting fees.

Personnel costs increased due to an increase in general and administrative personnel headcount of 27.2% from March 31, 2022 to March 31, 2023 in addition to increased wages and fringe benefits, as well as a $1.5 million increase in stock-based compensation expense.

Overhead costs increased primarily due to an increase in certain allocated costs tied to our growth such as information technology spending and office-related expenses.

Professional fees decreased due to a $6.2 million decline in legal fees incurred relative to the three months ended June 30, 2022, which was partially offset by a $0.6 million increase in consulting fees.

Personnel costs increased due to an increase in general and administrative personnel headcount of 5.9% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits as well as a $1.5 million increase in stock-based compensation expense.

Overhead costs increased primarily due to an increase in lease expense resulting from an expansion of our corporate headquarters.

Other Non-Operating (Income) Expense, Net

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change % Change

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*** Indicates a percentage that is not meaningful.

Other income, net was $2.7 million in the three months ended March 31, 2023 compared to other expense, net of $0.8 million in the three months ended March 31, 2022.

This change was primarily due to $0.6 million in foreign exchange gains in the three months ended March 31, 2023 as compared to $1.9 million in foreign exchange losses in the three months ended March 31, 2022 as well as a $2.0 million increase in interest income in the three months ended March 31, 2023 related to our investments.

Other income, net was $3.9 million in the three months ended June 30, 2023 compared to other expense, net of $6.2 million in the three months ended June 30, 2022.

This change was primarily due to $1.2 million in foreign

exchange gains in the three months ended June 30, 2023 as compared to $6.5 million in foreign exchange losses in the three months ended June 30, 2022 as well as a $2.5 million increase in interest income in the three months ended June 30, 2023 relative to the prior year related to our increase in short-term investments from investment of our credit facility proceeds.

Interest Expense

Three Months Ended March 31,

Three Months Ended June 30,

2023 2022 $ Change % Change

3 unchanged sentences

*** Indicates a percentage that is not meaningful.

Interest expense increased $3.0 million in the three months ended March 31, 2023 as compared to the corresponding period in 2022 primarily due to interest expense on the new term loan facility we entered into during the fourth quarter of 2022.

Interest expense increased $4.7 million in the three months ended June 30, 2023 as compared to the corresponding period in 2022 primarily due to interest expense incurred on the new credit facility borrowings that we entered into during the fourth quarter of 2022.

Comparison of the Six Months Ended June 30, 2023 and 2022

Six Months Ended June 30,

2023 2022 $ Change % Change

(dollars in thousands)

Subscriptions $ 192,751 $ 160,388 $ 32,363 20.2 %

Professional services 70,199 63,941 6,258 9.8 %

Total revenue $ 262,950 $ 224,329 $ 38,621 17.2 %

Total revenue increased $38.6 million, or 17.2%, in the six months ended June 30, 2023 compared to the same period in 2022 due to an increase in our subscriptions revenue of $32.4 million and an increase in our professional services revenue of $6.3 million.

The increase in subscriptions revenue was driven by a $33.7 million increase in cloud subscription revenue and a $1.3 million increase in maintenance and support revenue, both of which were partially offset by a $2.6 million decrease in on-premises subscription revenue.

With respect to new versus existing customers, there was a $14.2 million increase in subscriptions revenue stemming from sales of subscriptions to new customers, while the remaining $18.2 million of the increase was attributable to expanded deployments and corresponding sales of additional subscriptions to existing customers.

The increase in professional services revenue was due primarily to a $12.2 million increase in sales to new customers, which was partially offset by a $5.9 million decrease in revenue from existing customers.

Cost of Revenue

Six Months Ended June 30,

2023 2022 $ Change % Change

(dollars in thousands)

Cost of revenue

Subscriptions $ 21,227 $ 16,751 $ 4,476 26.7 %

Professional services 51,711 47,563 4,148 8.7 %

Total cost of revenue $ 72,938 $ 64,314 $ 8,624 13.4 %

Subscriptions gross margin 89.0 % 89.6 %

Professional services gross margin 26.3 % 25.6 %

Total gross margin 72.3 % 71.3 %

Cost of revenue increased $8.6 million, or 13.4%, in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $4.7 million increase in professional services and product support personnel costs, a $3.2 million increase in hosting costs, a $0.4 million increase in contractor costs, and a $0.4 million increase in travel and entertainment expenses.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 9.9% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits and a $0.8 million increase in stock-based compensation expense.

Hosting costs increased as sales of our cloud offering increased in the six months ended June 30, 2023.

Contractor costs increased in the six months ended June 30, 2023 compared to the same period in 2022 due to an increase in the usage of subcontractors and consultants for professional services engagements, while travel and entertainment expenses increased due to a larger number of in-person engagements, events, and other business-related traveling.

Subscriptions gross margin decreased to 89.0% for the six months ended June 30, 2023 as compared to 89.6% for the six months ended June 30, 2022 as an increase in subscriptions revenue was offset by an increase in hosting costs.

Professional services gross margin increased to 26.3% for the six months ended June 30, 2023 compared to 25.6% in the same period in 2022 due largely to the aforementioned increase in professional services revenue.

Gross margin rose to 72.3% for the six months ended June 30, 2023 compared to 71.3% for the six months ended June 30, 2022.

Sales and Marketing Expense

Six Months Ended June 30,

2023 2022 $ Change % Change

(dollars in thousands)

Sales and marketing $ 125,671 $ 102,192 $ 23,479 23.0 %

% of revenue 47.8 % 45.6 %

Sales and marketing expense increased $23.5 million, or 23.0%, in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $22.8 million increase in sales and marketing personnel costs, a $2.9 million increase in allocated overhead costs, and a $0.2 million increase in professional fees, all of which were partially offset by a $2.4 million decrease in marketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 17.3% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits, a $5.3 million increase in commissions expense due to increased sales, a $4.5 million increase in severance costs, and a $1.2 million increase in stock-based compensation expense.

Overhead costs increased primarily due to expenditures for internal sales and marketing events and 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 expense increased due to a higher number of in-

person engagements and events as compared to the prior year.

Marketing costs decreased primarily due to a decrease in advertising expense stemming from a decrease in the number of advertising campaigns launched in the six months ended June 30, 2023 relative to the six months ended June 30, 2022, as well as decreases in cost of marketing events, primarily Appian World.

Research and Development Expense

Six Months Ended June 30,

2023 2022 $ Change % Change

(dollars in thousands)

Research and development $ 81,367 $ 63,778 $ 17,589 27.6 %

% of revenue 30.9 % 28.4 %

Research and development expense increased $17.6 million, or 27.6%, in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $17.7 million increase in research and development personnel costs.

General and Administrative Expense

Six Months Ended June 30,

2023 2022 $ Change % Change

(dollars in thousands)

General and administrative expense $ 58,902 $ 60,658 $ (1,756) (2.9) %

% of revenue 22.4 % 27.0 %

General and administrative expense decreased $1.8 million, or 2.9%, in the six months ended June 30, 2023 compared to the same period in 2022 primarily due to a $13.8 million decrease in professional fees.

This decrease was partially offset by a $10.0 million increase in general and administrative personnel costs and a $2.0 million increase in allocated overhead costs.

Professional fees decreased due to a $16.1 million decline in legal fees incurred relative to the six months ended June 30, 2023, which was partially offset by a $1.8 million increase in consulting fees.

Personnel costs increased due to an increase in general and administrative personnel headcount of 5.9% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits, as well as a $3.0 million increase in stock-based compensation expense.

Overhead costs increased primarily due to an increase in certain allocated costs tied to our growth, primarily an increase in lease expense resulting from an expansion of our corporate headquarters and an increase in bad debt expense.

Other Non-Operating (Income) Expense, Net

Six Months Ended June 30,

2023 2022 $ Change % Change

(dollars in thousands)

Other (income) expense, net $ (6,576) $ 6,940 $ (13,516) ***

% of revenue (2.5) % 3.1 %

*** Indicates a percentage that is not meaningful.

Other income, net was $6.6 million in the six months ended June 30, 2023 compared to other expense, net of $6.9 million in the six months ended June 30, 2022.

This change was primarily due to $1.9 million in foreign exchange gains in the six months ended June 30, 2023 as compared to $8.4 million in foreign exchange losses in

the six months ended June 30, 2022 as well as a $4.5 million increase in interest income in the six months ended June 30, 2023 related to our increase in short-term investments from the credit facility proceeds.

Interest Expense

Six Months Ended June 30,

2023 2022 $ Change % Change

(dollars in thousands)

Interest expense $ 7,873 $ 134 $ 7,739 ***

% of revenue 3.0 % 0.1 %

*** Indicates a percentage that is not meaningful.

Interest expense increased $7.9 million in the six months ended June 30, 2023 as compared to the corresponding period in 2022 primarily due to interest expense incurred on the new credit facility borrowings that we entered into during the fourth quarter of 2022.

Non-GAAP Financial Measures

8 unchanged sentences

While these items may be recurring in nature and should not be disregarded in the evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods as these items can vary significantly from period to period depending on specific underlying transactions or events that may occur.

Therefore, while we may incur or recognize these types of expenses in the future, the Company believes removing these items for purposes of calculating the non-

GAAP financial measures provides investors with a more focused presentation of our ongoing operating performance.

We also discuss adjusted EBITDA, a non-GAAP financial performance measure we believe offers a useful view of the overall operation of its businesses.

Therefore, while we may incur or recognize these types of expenses in the future, the Company believes removing these items for purposes of calculating the non-GAAP financial measures provides investors with a more focused presentation of our ongoing operating performance.

We also discuss adjusted EBITDA, a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our business.

We define adjusted EBITDA as net loss before (1) other non-operating (income) expenses, net, (2) interest expense, (3) income tax expense (benefit), (4) depreciation and amortization, (5) stock-based compensation expense, (6) litigation expenses directly associated with the Pegasystems cases, and (7) severance costs.

4 unchanged sentences

The following tables reconcile our non-GAAP measures to their nearest comparable GAAP measures.

The reconciliation of GAAP operating loss to non-GAAP operating loss for the three months ended March 31, 2023 and 2022 is as follows (in thousands):

Three Months Ended March 31,

GAAP operating loss $ (35,266) $ (23,866)

Stock-based compensation expense 11,056 6,943

Litigation expenses 1,842 11,792

Severance costs 4,204 —

Non-GAAP operating loss $ (18,164) $ (5,131)

The following table reconciles GAAP net loss to non-GAAP net loss for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31,

GAAP net loss $ (36,829) $ (23,154)

Stock-based compensation expense 11,056 6,943

Litigation expenses 1,842 11,792

Severance costs 4,204 —

Non-GAAP net loss $ (19,727) $ (4,419)

The following table sets forth non-GAAP net loss per share for the three months ended March 31, 2023 and 2022 (in thousands except per share data):

Three Months Ended March 31,

Non-GAAP net loss $ (19,727) $ (4,419)

Weighted average shares used to compute net loss per share, basic and diluted 72,869 72,217

Non-GAAP net loss per share, basic and diluted $ (0.27) $ (0.06)

GAAP basic and diluted weighted average shares outstanding were equal to non-GAAP basic and diluted weighted average shares outstanding for each of the three months ended March 31, 2023 and 2022.

The following table reconciles GAAP net loss per share to non-GAAP net loss per share for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

GAAP net loss per share, basic and diluted $ (0.51) (0.32)

Non-GAAP adjustments to net loss per share 0.24 0.26

Non-GAAP net loss per share, basic and diluted $ (0.27) $ (0.06)

The following table reconciles GAAP net loss to adjusted EBITDA for the three months ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31,

The reconciliation of GAAP operating loss to non-GAAP operating loss for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands):

GAAP Measure Stock-Based Compensation Litigation Expenses Severance Costs Non-GAAP Measure

Three Months Ended June 30, 2023

Subscriptions cost of revenue $ 10,779 $ (230) $ — $ (19) $ 10,530

Professional services cost of revenue 26,066 (1,472) — (35) 24,559

Total cost of revenue 36,845 (1,702) — (54) 35,089

Total operating expense 131,532 (9,446) (347) (2,041) 119,698

Operating loss (40,662) 11,148 347 2,095 (27,072)

Income tax expense 824 221 7 42 1,094

Net loss (42,355) 11,369 354 2,137 (28,495)

Net loss per share, basic and diluted $ (0.58) $ 0.16 $ — $ 0.03 $ (0.39)

Six Months Ended June 30, 2023

Subscriptions cost of revenue $ 21,227 $ (502) $ — $ (30) $ 20,695

Professional services cost of revenue 51,711 (3,063) — (158) 48,490

Total cost of revenue 72,938 (3,565) — (188) 69,185

Total operating expense 265,940 (18,639) (2,189) (6,111) 239,001

Operating loss (75,928) 22,204 2,189 6,299 (45,236)

Income tax expense 1,959 563 56 160 2,738

Net loss (79,184) 22,767 2,245 6,459 (47,713)

Net loss per share, basic and diluted $ (1.09) $ 0.31 $ 0.03 $ 0.09 $ (0.65)

GAAP Measure Stock-Based Compensation Litigation Expenses Non-GAAP Measure

Three Months Ended June 30, 2022

Subscriptions cost of revenue $ 8,528 $ (249) $ — $ 8,279

Professional services cost of revenue 24,765 (1,330) — 23,435

Total cost of revenue 33,293 (1,579) — 31,714

Total operating expense 119,517 (7,569) (6,831) 105,117

Operating loss (42,747) 9,148 6,831 (26,768)

Net loss (49,354) 9,148 6,831 (33,375)

Net loss per share, basic and diluted $ (0.68) $ 0.13 $ 0.09 $ (0.46)

Six Months Ended June 30, 2022

Subscriptions cost of revenue $ 16,751 $ (428) $ — $ 16,323

Professional services cost of revenue 47,563 (2,387) — 45,176

Total cost of revenue 64,314 (2,815) — 61,499

Total operating expense 226,628 (13,276) (18,623) 194,729

Operating loss (66,613) 16,091 18,623 (31,899)

Net loss (72,508) 16,091 18,623 (37,794)

Net loss per share, basic and diluted $ (1.00) $ 0.22 $ 0.26 $ (0.52)

The following table reconciles GAAP net loss to adjusted EBITDA for the three and six months ended June 30, 2023 and 2022 (in thousands):

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

2023 2022 2023 2022

GAAP net loss $ (42,355) $ (49,354) $ (79,184) $ (72,508)

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Liquidity and Capital Resources

The following table presents selected financial information and statistics pertaining to liquidity and capital resources as of March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

The following table presents selected financial information and statistics pertaining to liquidity and capital resources as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

Cash and cash equivalents $ 171,530 $ 148,132

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* Defined as current assets net of current liabilities, excluding the current portion of restricted cash.

As of March 31, 2023, we had $198.7 million of cash and cash equivalents and $55.8 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.

As of June 30, 2023, we had $171.5 million of cash and cash equivalents and $65.4 million of short-term investments and marketable securities.

We have in the past, and may in the future 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.

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We have historically financed our operations in large part with equity financing arrangements.

Through 2022, we have completed four public offerings and received net proceeds of $344.8 million.

Through June 30, 2023, we have completed four public offerings and received net proceeds of $344.8 million.

Outside of equity offerings, we have financed our operations through sales of subscriptions and professional services.

To further help strengthen our financial position and support our growth initiatives, in 2022 we entered into a Senior Secured Credit Facilities Credit Agreement, or the Credit Agreement, which provides for a five-year term loan facility in an aggregate principal amount of $150.0 million and, in addition, up to $75.0 million for a revolving credit facility, including a letter of credit sub-facility in the aggregate availability amount of $15.0 million and a swingline sub-facility in the aggregate availability amount of $10.0 million (as a sublimit of the revolving loan facility).

On February 21, 2023, we executed the second amendment to the credit agreement which increased the aggregate principal amount of the term loan facility by $30.0 million and the limit of the revolving credit facility by $15.0 million.

The Credit Agreement matures on November 3, 2027.

We will use the proceeds from the $150.0 million term loan to fund the continued growth of our business and support our working capital requirements.

We were in compliance with all covenants as of March 31, 2023.

We were in compliance with all covenants as of June 30, 2023.

We believe, based on our current financial forecasts and trends, that we will remain compliant with all covenants for the foreseeable future.

As of March 31, 2023, we had used borrowing capacity of $62.0 million under our $75.0 million revolving credit facility, and we had outstanding letters of credit totaling $12.0 million in connection with securing our leased office space.

As of June 30, 2023, we had used borrowing capacity of $62.0 million under our $75.0 million revolving credit facility, and we had outstanding letters of credit totaling $11.9 million in connection with securing our leased office space.

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

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Outside of cash used in operations, other uses of cash in 2023 to date have included capital expenditures related to the expansion of our headquarters, repayments of existing debt, and purchases of investments.

Non-operating cash uses in the prior year through March 31, 2022 consisted primarily of capital expenditures related to the expansion of our headquarters.

Non-operating cash uses in the prior year through June 30, 2022 consisted primarily of capital expenditures related to the expansion of our headquarters.

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

Specifically, purchase commitments under the agreement total $131.0 million over five years.

The agreement, which is in its second year, contains minimum spending requirements of $25.0 million in the second year and $28.0 million in each of the third, fourth, and fifth years.

The agreement, which is in its second year as of June 30, 2023, contains minimum spending requirements of $25.0 million in the second year and $28.0 million in each of the third, fourth, and fifth years.

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

Spending under this agreement for the three months ended March 31, 2023 and 2022, totaled $9.4 million and $7.8 million, respectively.

Spending under this agreement for the three and six months ended June 30, 2023, totaled $9.1 million and $18.5 million, respectively.

Spending under this agreement for the three and six months ended June 30, 2022 totaled $8.1 million and $15.9 million, respectively.

We expect to meet our minimum purchase commitments for the remainder of the contract term.

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operations were sold to HSBC UK Bank, Plc (“HSBC”).

We have access to all of our cash, cash equivalents, and investments that were in accounts previously held by SVB, and we do not expect a material impact to our ongoing operations stemming from the SVB matter.

We believe the financial institutions holding our cash deposits are financially sound.

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Historical Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

2023 2022 $ Change % Change

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Operating Activities

Net cash used by operating activities was $25.3 million for the three months ended March 31, 2023 as compared to $20.6 million used by operating activities for the three months ended March 31, 2022.

The increase in net cash used by operating activities was primarily due to a $13.7 million increase in net losses, most notably driven by the increase in operating expenses as discussed above.

The increase in net losses was partially offset by a decrease in cash flows used by working capital of $2.7 million.

This change in working capital was comprised primarily of a $9.2 million increase from accounts receivable due to collections from large renewals that occurred in the fourth quarter of 2022, partially offset by an increase in disbursements from accounts payable and accrued expenses of $4.2 million driven by the timing of vendor payments.

Net cash used by operating activities was $37.2 million for the six months ended June 30, 2023 as compared to $50.3 million used by operating activities for the six months ended June 30, 2022.

The decrease in net cash used by operating activities was primarily due to stronger collections from accounts receivable across the comparative periods.

In addition, there was a decline in legal fees during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, specifically attributable to two separate lawsuits involving an effort to enforce our intellectual property and to defend against reciprocal false advertising claim with Pegasystems.

Investing Activities

Net cash used by investing activities was $12.3 million for the three months ended March 31, 2023 as compared to $2.1 million in net cash provided by investing activities for the three months ended March 31, 2022.

This change was primarily driven by a $7.9 million increase in purchases of investments, a $5.4 million decrease in proceeds from the sale of investments, and a $1.0 million increase in capital expenditures.

Net cash used by investing activities was $25.4 million for the six months ended June 30, 2023 as compared to $0.6 million in net cash provided by investing activities for the six months ended June 30, 2022.

This change was primarily driven by a $22.2 million increase in purchases of investments, a $3.1 million increase in capital expenditures, and a $0.6 million decrease in proceeds from the sale of investments.

Financing Activities

Net cash provided by financing activities was $88.1 million for the three months ended March 31, 2023 as compared to $24.4 million of net cash provided by financing activities for the three months ended March 31, 2022.

The increase in net cash provided by financing activities was primarily due to a $92.0 million increase in proceeds from borrowings during the three months ended March 31, 2023.

Net cash provided by financing activities was $85.7 million for the six months ended June 30, 2023 as compared to $25.0 million of net cash provided by financing activities for the six months ended June 30, 2022.

The increase in net cash provided by financing activities was primarily due to a $92.0 million increase in proceeds from

borrowings during the six months ended June 30, 2023.

This increase was partially offset by a $24.5 million decrease in proceeds received from the exercise of stock options, a $4.8 million increase in payments for employee tax withholdings associated with the net settlement of stock awards, and a $1.7 million increase in debt repayments.

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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