What changed in this filing

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Item 1. Financial Statements

2023-11-02 compared with 2023-08-03 · 142 added, 114 removed, 482 unchanged (35% of the section changed)

3 unchanged sentences

(in thousands, except par value and share data)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Current assets

27 unchanged sentences

Long-term debt 142,016 115,379

Operating lease liabilities 60,079 57,225

Non-current operating lease liabilities 60,339 57,225

Deferred revenue 3,243 5,556

3 unchanged sentences

Class A common stock—par value $ 0.0001 ;

500,000,000 shares authorized and 41,615,737 shares issued and outstanding as of June 30, 2023;

500,000,000 shares authorized and 41,726,634 shares issued and outstanding as of September 30, 2023;

500,000,000 shares authorized and 41,320,091 shares issued and outstanding as of December 31, 2022

Class B common stock—par value $ 0.0001 ;

100,000,000 shares authorized and 31,497,596 shares issued and outstanding as of June 30, 2023;

100,000,000 shares authorized and 31,497,396 shares issued and outstanding as of September 30, 2023;

100,000,000 shares authorized and 31,497,796 shares issued and outstanding as of December 31, 2022

8 unchanged sentences

(unaudited, in thousands, except per share data)

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

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

2023 2022 2023 2022

14 unchanged sentences

Other non-operating expense

Other (income) expense, net ( 3,886 ) 6,153 ( 6,576 ) 6,940

Other expense (income), net 1,939 5,876 ( 4,637 ) 12,815

Interest expense 4,917 89 12,790 222

11 unchanged sentences

(unaudited, in thousands)

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

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

2023 2022 2023 2022

2 unchanged sentences

Foreign currency translation adjustments 1,060 308 ( 2,813 ) 3,032

Unrealized (losses) gains on available-for-sale securities ( 45 ) ( 83 ) 1 ( 194 )

Unrealized gains (losses) on available-for-sale securities

9 59 10 ( 135 )

Total other comprehensive loss, net of income taxes $ ( 21,182 ) $ ( 43,629 ) $ ( 104,238 ) $ ( 113,606 )

21 unchanged sentences

Balance, June 30, 2023 73,113,333 7 579,378 ( 11,118 ) ( 487,635 ) 80,632

Net loss — — — — ( 22,251 ) ( 22,251 )

Issuance of common stock to directors 3,936 — — — — —

Vesting of restricted stock units 92,722 — ( 2,465 ) — — ( 2,465 )

Exercise of stock options 14,039 — 105 — — 105

Stock-based compensation expense — — 11,011 — — 11,011

Other comprehensive income — — — 1,069 — 1,069

Balance, September 30, 2023

73,224,030 $ 7 $ 588,029 $ ( 10,049 ) $ ( 509,886 ) $ 68,101

17 unchanged sentences

Balance, June 30, 2022 72,444,514 7 538,249 ( 3,157 ) ( 330,039 ) 205,060

Net loss — — — — ( 43,996 ) ( 43,996 )

Issuance of common stock to directors 4,613 — — — — —

Vesting of restricted stock units 67,164 — — — — —

Exercise of stock options 24,604 — 175 — — 175

Stock-based compensation expense — — 11,336 — — 11,336

Other comprehensive income

— — — 367 — 367

Balance, September 30, 2022

72,540,895 $ 7 $ 549,760 $ ( 2,790 ) $ ( 374,035 ) $ 172,942

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2 unchanged sentences

(unaudited, in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

2 unchanged sentences

Stock-based compensation 33,215 27,427

Depreciation and amortization 4,705 3,573

Depreciation expense and amortization of intangible assets 7,046 5,332

Bad debt expense 690 561

15 unchanged sentences

Purchases of property and equipment ( 8,278 ) ( 5,861 )

Net cash (used by) provided by investing activities ( 25,372 ) 574

Net cash provided by investing activities

Cash flows from financing activities

6 unchanged sentences

Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash ( 679 ) ( 1,694 )

Net increase (decrease) in cash, cash equivalents, and restricted cash 23,421 ( 24,862 )

Net decrease in cash, cash equivalents, and restricted cash ( 19,620 ) ( 50,105 )

Cash, cash equivalents, and restricted cash at beginning of period 150,381 103,960

10 unchanged sentences

Appian Corporation (together with its subsidiaries, “Appian,” the “Company,” “we,” or “our”) is a software company that automates business processes.

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 Appian AI 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.

7 unchanged sentences

The results of operations for the current period are not necessarily indicative of the results for the full year or the results for any future periods.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2023.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2023.

Use of Estimates

2 unchanged sentences

Although we believe the estimates we use are reasonable, due to the inherent uncertainty involved in making these estimates, actual results reported in future periods could differ from those estimates.

Significant estimates embedded in the condensed consolidated financial statements include, but are not limited to, revenue recognition, income taxes and the related valuation allowance established against deferred tax assets, costs to obtain a contract with a customer, and stock-based compensation.

Significant estimates embedded in the condensed consolidated financial statements include, but are not limited to, revenue recognition, income taxes and the related valuation allowance established against deferred tax assets, the amortization of deferred commissions, the amortization period of the cost to obtain the judgment preservation insurance (see Note 12), and stock-based compensation.

Principles of Consolidation

8 unchanged sentences

Cost of professional services revenue includes all direct and indirect costs to deliver our professional services and training, including employee compensation for our global professional services and training personnel, third-party contractor costs, allocated facility costs and overhead, and the costs of billable expenses such as travel and lodging.

The unpredictability of the timing of providing services related to significant professional services agreements sold on a standalone basis may cause significant fluctuations in our quarterly financial results.

Concentration of Credit and Customer Risk

Our financial instruments exposed to concentration of credit and customer risk consist primarily of cash, cash equivalents, restricted cash, accounts receivable, and our short- and long-term investments.

Our financial instruments exposed to concentration of credit and customer risk consist primarily of cash, cash equivalents, accounts receivable, and our short- and long-term investments.

Deposits held with banks may exceed the amount of insurance provided on such deposits;

1 unchanged sentence

With regard to our customers, credit evaluation and account monitoring procedures are used to minimize the risk of loss.

Revenue generated from government agencies represented 20.1 % and 20.3 % of our revenue for the three and six months ended June 30, 2023, respectively, of which the top three U.S.

federal government agencies generated 4.6 % and 4.4 % of our revenue for the three and six months ended June 30, 2023, respectively.

Additionally, 38.4 % and 35.8 % of our revenue during the three and six months ended June 30, 2023, respectively, was generated from international customers.

Revenue generated from government agencies represented 18.2 % of our revenue for the three and six months ended June 30, 2022, of which the top three U.S.

federal government agencies generated 5.2 % and 4.8 % of our revenue for the three and six months ended June 30, 2022, respectively.

Additionally, 35.0 % and 34.2 % of our revenue during the three and six months ended June 30, 2022, respectively, was generated from international customers.

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.

Revenue generated from government agencies represented 21.1 % and 20.6 % of our revenue for the three and nine months ended September 30, 2023, respectively, of which the top three U.S.

federal government agencies generated 4.6 % and 4.3 % of our revenue for the three and nine months ended September 30, 2023, respectively.

Additionally, 35.3 % and 35.6 % of our revenue during the three and nine months ended September 30, 2023, respectively, was generated from international customers.

Revenue generated from government agencies represented 21.2 % and 19.2 % of our revenue for the three and nine months ended September 30, 2022, respectively, of which the top three U.S.

federal government agencies generated 5.5 % and 4.8 % of our revenue for the three and nine months ended September 30, 2022, respectively.

Additionally, 31.3 % and 33.2 % of our revenue during the three and nine months ended September 30, 2022, respectively, was generated from international customers.

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

Cash, Cash Equivalents, and Restricted Cash

1 unchanged sentence

Restricted cash consists of cash designated to settle an escrow liability stemming from a holdback agreement enacted pursuant to our acquisition of Lana Labs GmbH.

We paid 25 % of the balance on September 28, 2022, and the remaining 75 % of the balance is due on August 11, 2023.

We paid 25 % of the balance on September 28, 2022 and the remaining 75 % of the balance on August 11, 2023.

The following table presents a reconciliation of cash, cash equivalents, and restricted cash as presented in the consolidated statements of cash flows (in thousands):

June 30, 2023 December 31, 2022 June 30, 2022 December 31, 2021

September 30, 2023 December 31, 2022 September 30, 2022 December 31, 2021

Cash and cash equivalents $ 130,761 $ 148,132 $ 51,802 $ 100,796

7 unchanged sentences

If the financial condition of our customers were to deteriorate, resulting in their inability to make required payments, additional provisions for doubtful accounts would be required and would increase bad debt expense.

The allowance for doubtful accounts totaled $ 2.2 million and $ 2.1 million as of June 30, 2023 and December 31, 2022, respectively.

Assets Recognized from the Costs to Obtain a Contract with a Customer

The allowance for doubtful accounts totaled $ 2.3 million and $ 2.1 million as of September 30, 2023 and December 31, 2022, respectively.

Deferred Commissions

We capitalize costs of obtaining a contract with a customer, which consists of sales commissions paid to our sales team, that are incremental costs to obtaining customer contracts.

These costs are recorded as deferred commissions in the consolidated balance sheets.

Costs to obtain a contract for a new customer or upsell are amortized over an estimated economic life of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals.

Costs to obtain a contract for a new customer or upsell an existing customer are amortized over an estimated economic life of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals.

Commissions paid relating to contract renewals are deferred and amortized over the related renewal period.

We determine the estimated economic life based on both qualitative and quantitative factors such as expected renewals, product life cycles, contractual terms, and customer attrition.

We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the estimated economic life.

Commissions paid relating to contract renewals are deferred and amortized over the related renewal period.

We also capitalize the incremental fringe benefits associated with commission expenses paid to our direct sales team.

We also capitalize the incremental payroll taxes associated with commission expenses paid to our direct sales team.

Costs to obtain a contract for professional services arrangements are expensed as incurred as the contractual period of our professional services arrangements are one year or less.

Amortization associated with deferred commission is recorded to sales and marketing expense in our consolidated statements of operations.

Total commission expense was $ 11.3 million and $ 22.3 million for the three and six months ended June 30, 2023, respectively.

Total commission expense was $ 8.7 million and $ 16.9 million for the three and six months ended June 30, 2022, respectively.

Amortization associated with deferred commissions is recorded to sales and marketing expense in our consolidated statements of operations.

Total commission expense was $ 11.3 million and $ 33.5 million for the three and nine months ended September 30, 2023, respectively.

Total commission expense was $ 9.5 million and $ 26.5 million for the three and nine months ended September 30, 2022, respectively.

Property and Equipment

3 unchanged sentences

The following table outlines the useful lives of our major asset categories:

Asset Category Useful Life (in years)

Useful Life (in years)

Computer software 3

4 unchanged sentences

Severance Costs

In 2023, we have incurred severance costs related to involuntary reductions in our workforce designed to right-size our employee base and improve operations.

Severance costs totaled $ 2.1 million and $ 6.3 million for the three and six months ended June 30, 2023, respectively.

During the first and second quarter of 2023, we incurred severance costs related to involuntary reductions in our workforce designed to right-size our employee base and improve operations.

No such similar actions occurred during the three months ended September 30, 2023.

Severance costs in the first and second quarter totaled $ 6.3 million.

The majority of the costs incurred will be paid to the impacted employees by December 31, 2023.

Recent Accounting Pronouncements

3 unchanged sentences

Revenue Recognition

The following table summarizes revenue recorded during the three and six months ended June 30, 2023 and 2022 (in thousands):

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

The following table summarizes revenue recorded during the three and nine months ended September 30, 2023 and 2022 (in thousands):

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

2023 2022 2023 2022

7 unchanged sentences

We primarily sell products and services that fall into the categories discussed below.

Each category contains one or more performance obligations that are either (1) capable of being distinct (i.e., the customer can benefit from the product or service on its own or together with readily available resources, including those purchased separately from us) and distinct within the context of the contract (i.e., separately identified from other promises in the

contract) or (2) a series of distinct products or services that are substantially the same and have the same pattern of transfer to the customer.

Each category contains one or more performance obligations that are either (1) capable of being distinct (i.e., the customer can benefit from

the product or service on its own or together with readily available resources, including those purchased separately from us) and distinct within the context of the contract (i.e., separately identified from other promises in the contract) or (2) a series of distinct products or services that are substantially the same and have the same pattern of transfer to the customer.

Our term license subscriptions are delivered at a point in time while our cloud subscriptions, maintenance and support, and professional services are delivered over time.

26 unchanged sentences

Consulting services are regularly sold on a standalone basis and either (1) under a fixed-fee arrangement or (2) on a time and materials basis.

Consulting services contracts are considered separate performance obligations because they do not integrate with each other or with other products and services to deliver a combined output to the customer, do not modify or customize (or are not modified or customized by) each other or other products and services, and do not affect the customer's ability to use the other consulting offerings or other products and services.

customer's ability to use the other consulting offerings or other products and services.

Revenue under consulting contracts is recognized over time as services are delivered.

For time and materials-based consulting contracts, we

have elected the practical expedient of recognizing revenue upon invoicing since the invoiced amount corresponds directly to the value of our service to date.

For time and materials-based consulting contracts, we have elected the practical expedient of recognizing revenue upon invoicing since the invoiced amount corresponds directly to the value of our service to date.

Training Services

6 unchanged sentences

Variable consideration is included in the transaction price to the extent it is probable a significant reversal will not occur.

The amount of variable consideration excluded from the transaction price for the three and six months ended June 30, 2023 and 2022 was insignificant.

The amount of variable consideration excluded from the transaction price for the three and nine months ended September 30, 2023 and 2022 was insignificant.

Our estimates of variable consideration are also subject to subsequent true-up adjustments and may result in changes to transaction prices;

16 unchanged sentences

Contract assets are transferred to accounts receivable when the right to invoice becomes unconditional.

As of June 30, 2023 and December 31, 2022, contract assets of $ 12.9 million and $ 14.3 million, respectively, are included in the Prepaid expenses and other current assets and Other assets line items in our consolidated balance sheets.

As of September 30,

2023 and December 31, 2022, contract assets of $ 12.1 million and $ 14.3 million, respectively, are included in the Prepaid expenses and other current assets and Other assets line items in our consolidated balance sheets.

Contract liabilities consist of deferred revenue and include payments received in advance of the satisfaction of performance obligations.

1 unchanged sentence

Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.

For the six months ended June 30, 2023, we recognized $ 141.3 million of revenue that was included in the deferred revenue balance as of December 31, 2022.

For the nine months ended September 30, 2023, we recognized $ 177.9 million of revenue that was included in the deferred revenue balance as of December 31, 2022.

Transaction Price Allocated to the Remaining Performance Obligations

As of June 30, 2023, we had an aggregate transaction price of $ 383.8 million allocated to unsatisfied performance obligations.

As of September 30, 2023, we had an aggregate transaction price of $ 391.9 million allocated to unsatisfied performance obligations.

We expect to recognize $ 262.4 million of this balance as revenue over the next 12 months with the remaining amount recognized thereafter.

As of June 30, 2023, our lease portfolio consists entirely of operating leases, most of which are for corporate offices.

As of September 30, 2023, our lease portfolio consists entirely of operating leases, most of which are for corporate offices.

Our operating leases have remaining lease terms with various expiration dates through 2031, and some leases include options to extend the term for up to an additional 10 years.

2 unchanged sentences

Variable lease payment amounts that cannot be determined at the commencement of the lease such as maintenance costs, utilities, and service charges, are not included in right-of-use (“ROU”) assets or lease liabilities but rather are expensed as incurred and recorded as variable lease expense.

The following table sets forth the components of lease expense for the three and six months ended June 30, 2023 and 2022 (in thousands):

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

We often receive customary incentives from our landlords such as tenant improvement allowances (“TIAs”) and rent abatement periods, which effectively reduce total lease payments owed for the leases.

The following table sets forth the components of lease expense for the three and nine months ended September 30, 2023 and 2022 (in thousands, exclusive of sublease income):

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

2023 2022 2023 2022

3 unchanged sentences

Total $ 4,020 $ 2,830 $ 11,084 $ 8,180

Sublease income totaled $ 0.3 million and $ 0.7 million for the three and six months ended June 30, 2023, respectively.

Sublease income totaled $ 0.3 million and $ 1.0 million for the three and nine months ended September 30, 2023, respectively.

Supplemental Lease Information

Supplemental balance sheet information related to operating leases as of June 30, 2023 and December 31, 2022 is presented in the following table (in thousands, except for lease term and discount rate):

June 30, 2023 December 31, 2022

Supplemental balance sheet information related to operating leases as of September 30, 2023 and December 31, 2022 is presented in the following table (in thousands, except for lease term and discount rate):

September 30, 2023 December 31, 2022

Right-of-use assets for operating leases $ 40,501 $ 37,248

4 unchanged sentences

Weighted average discount rate 9.4 % 9.4 %

Supplemental cash flow and expense information related to operating leases for the three and six months ended June 30, 2023 and 2022 is shown below (in thousands):

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

Supplemental cash flow and expense information related to operating leases for the three and nine months ended September 30, 2023 and 2022 is shown below (in thousands):

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

2023 2022 2023 2022

2 unchanged sentences

Interest expense on operating lease liabilities 1,667 1,332 4,714 3,957

A summary of our future minimum lease commitments under non-cancellable operating leases as of June 30, 2023 is shown below (in thousands):

For the three and nine months ended September 30, 2023, TIA reimbursements totaled $ 1.0 million and $ 2.6 million, respectively.

There were no TIA reimbursements for the three months ended September 30, 2022, while TIA reimbursements totaled $ 2.0 million for the nine months ended September 30, 2022.

A summary of our future minimum lease commitments under non-cancellable operating leases as of September 30, 2023 is shown below (in thousands):

Operating Leases

2023 (excluding the six months ended June 30, 2023)

2023 (excluding the nine months ended September 30, 2023)

Thereafter 47,285

3 unchanged sentences

Goodwill and Intangible Assets

The following table details the changes in goodwill during the six months ended June 30, 2023 and fiscal year ended December 31, 2022 (in thousands):

The following table details the changes in goodwill during the nine months ended September 30, 2023 and fiscal year ended December 31, 2022 (in thousands):

Carrying Amount

3 unchanged sentences

Foreign currency translation adjustments ( 358 )

Balance as of June 30, 2023

Intangible assets, net consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):

June 30, 2023 December 31, 2022

Balance as of September 30, 2023

Intangible assets, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):

September 30, 2023 December 31, 2022

Developed technology $ 6,799 $ 6,893

Customer relationships 1,085 1,073

Customer relationships - Process mining and RPA

Intangible assets, gross 7,710 7,966

1 unchanged sentence

Intangible assets, net $ 4,092 $ 5,251

Intangible amortization expense was $ 0.4 million and $ 0.7 million for the three and six months ended June 30, 2023, respectively.

Intangible amortization expense was $ 0.4 million and $ 0.8 million for the three and six months ended June 30, 2022, respectively.

As of June 30, 2023, the weighted average remaining amortization periods for developed technology, non-RPA customer relationships, and RPA customer relationships were approximately 3.0 years, 8.2 years, and 6.5 years, respectively.

The following table shows the projected annual amortization expense related to amortizable intangible assets as of June 30, 2023:

Intangible amortization expense was $ 0.4 million and $ 1.1 million for the three and nine months ended September 30, 2023, respectively.

Intangible amortization expense was $ 0.4 million and $ 1.1 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2023, the weighted average remaining amortization periods for developed technology, process mining customer relationships, and RPA customer relationships were approximately 2.7 years, 7.9 years, and 6.3 years, respectively.

The following table shows the projected annual amortization expense related to amortizable intangible assets as of September 30, 2023 (in thousands):

Projected Amortization

2023 (excluding the six months ended June 30, 2023)

2023 (excluding the nine months ended September 30, 2023)

Thereafter 290

1 unchanged sentence

Property and Equipment, net

Property and equipment, net consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):

June 30, 2023 December 31, 2022

Property and equipment, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):

September 30, 2023 December 31, 2022

Leasehold improvements $ 51,190 $ 45,959

6 unchanged sentences

Property and equipment, net $ 42,444 $ 41,855

Depreciation expense totaled $ 2.0 million and $ 4.0 million for the three and six months ended June 30, 2023, respectively.

Depreciation expense totaled $ 1.4 million and $ 2.8 million for the three and six months ended June 30, 2022, respectively.

We had no disposals or retirements during the three months ended June 30, 2023 and disposed of $ 1.4 million worth of fully depreciated property and equipment during the six months ended June 30, 2023.

There were no disposals or retirements during the three and six months ended June 30, 2022.

Depreciation expense totaled $ 2.0 million and $ 5.9 million for the three and nine months ended September 30, 2023, respectively.

Depreciation expense totaled $ 1.4 million and $ 4.2 million for the three and nine months ended September 30, 2022, respectively.

We had no disposals or retirements during the three months ended September 30, 2023 and disposed of $ 1.4 million worth of fully depreciated property and equipment during the nine months ended September 30, 2023.

There were no disposals or retirements during the three and nine months ended September 30, 2022.

Accrued Expenses

Accrued expenses consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):

June 30, 2023 December 31, 2022

Accrued expenses consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):

September 30, 2023 December 31, 2022

Hosting costs $ 3,344 $ 2,802

16 unchanged sentences

During the final two years of the Credit Agreement, the interest rate margin ranges from 0.5 % to 2.5 % in the case of Base Rate advances and from 1.5 % to 3.5 % in the case of Term SOFR advances, depending on our debt to consolidated adjusted EBITDA leverage ratio (as defined in the Credit Agreement).

In addition, the Credit Agreement contains other customary representations, warranties and covenants, including covenants by us limiting additional indebtedness, guaranties, liens, fundamental changes, mergers and consolidations, dispositions of assets, investments, paying dividends on capital stock or redeeming, repurchasing or retiring capital stock, or prepaying certain junior indebtedness and preferred stock, certain corporate changes, and transactions with affiliates.

In addition, the Credit Agreement contains other customary representations, warranties, and covenants, including covenants by us limiting additional indebtedness, guaranties, liens, fundamental changes, mergers and consolidations, dispositions of assets, investments, paying dividends on capital stock or redeeming, repurchasing, or retiring capital stock, prepaying certain junior indebtedness and preferred stock, certain corporate changes, and transactions with affiliates.

The Credit Agreement also provides for customary events of default, including but not limited to, non-payment, breaches or defaults in the performance of covenants, insolvency, bankruptcy, and the occurrence of a material adverse effect on us.

The following table summarizes outstanding debt balances (in thousands):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Borrowings under revolving credit facility expiring November 3, 2027

3 unchanged sentences

Debt, current $ 65,431 $ 2,740

Long-term debt, net of current portion 142,874 115,379

Long-term debt

142,016 115,379

Total debt $ 207,447 $ 118,119

1 unchanged sentence

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

As of June 30, 2023, we had $ 62.0 million outstanding 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.

As of September 30, 2023, we had $ 62.0 million outstanding 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.

The provision for income taxes is based upon the estimated annual effective tax rates for the year applied to the current period income before tax plus the tax effect of any significant or unusual items, discrete events, or changes in tax law.

1 unchanged sentence

Fluctuations in the distribution of pre-tax income among our operating subsidiaries can lead to fluctuations of the effective tax rate in the condensed consolidated financial statements.

For the three and six months ended June 30, 2023, the actual effective tax rates were ( 2.0 )% and ( 2.5 )%, respectively.

For the three and six months ended June 30, 2022, the actual effective tax rates were ( 0.8 )% and 1.6 %, respectively.

The tax benefit recognized in the six months ended June 30, 2022 was primarily driven by a discrete benefit of $ 1.1 million related to the release of a valuation allowance for Lana Labs GmbH as a result of post-acquisition tax planning and the merger of German subsidiaries.

As of June 30, 2023, our net unrecognized tax benefits totaled $ 4.5 million, which if recognized would result in no net effect on the effective tax rate due to a valuation allowance.

For the three and nine months ended September 30, 2023, the actual effective tax rates were ( 0.8 )% and ( 2.2 )%, respectively.

For the three and nine months ended September 30, 2022, the actual effective tax rates were ( 0.6 )% and 0.8 %, respectively.

The tax benefit recognized in the nine months ended September 30, 2022 was primarily driven by a discrete benefit of $ 1.1 million related to the release of a valuation allowance for Lana Labs GmbH as a result of post-acquisition tax planning and the merger of our German subsidiaries.

As of September 30, 2023, our net unrecognized tax benefits totaled $ 4.5 million, which if recognized would result in no net effect on the effective tax rate due to a valuation allowance.

The amount of reasonably possible unrecognized tax benefits that could decrease over the next 12 months due to the expiration of certain statutes of limitations or settlements of tax audits is not material to our condensed consolidated financial statements.

2 unchanged sentences

Due to our net operating loss carryforwards, the tax years 2016 through 2022 remain open to examination by the major taxing jurisdictions to which we are subject.

There are no open examinations that would have a meaningful impact to our condensed consolidated financial statements.

There are no open examinations that would have a meaningful impact on our condensed consolidated financial statements.

Stock-Based Compensation

7 unchanged sentences

We account for forfeitures of our stock-based awards as they occur rather than estimating expected forfeitures.

As of June 30, 2023, the total compensation cost related to unvested stock options not yet recognized, which relates exclusively to the 2022 CEO option grant, was $ 13.5 million and will be recognized over a weighted average period of 2.7 years.

As of September 30, 2023, the total compensation cost related to unvested stock options not yet recognized, which relates exclusively to the 2022 CEO option grant, was $ 12.2 million and will be recognized over a weighted average period of 2.4 years.

Total unrecognized compensation cost related to unvested RSUs was approximately $ 45.9 million, which will be recognized over a weighted average period of 1.4 years.

The following table summarizes the components of our stock-based compensation expense for the three and six months ended June 30, 2023 and 2022 (in thousands):

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

The following table summarizes the components of our stock-based compensation expense for the three and nine months ended September 30, 2023 and 2022 (in thousands):

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

2023 2022 2023 2022

12 unchanged sentences

As we reported net losses for all periods presented, all outstanding shares would be considered antidilutive if they were to be assumed as vested or exercised.

The following outstanding securities, prior to the use of the treasury stock method, have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been antidilutive to earnings per share:

Three and Six Months Ended June 30,

Three and Nine Months Ended September 30,

Stock options 2,611,247 2,733,884

Non-vested restricted stock units 1,133,039 1,419,174

Commitments and Contingencies

Commitments, Contingencies, and Other Matters

Minimum Purchase Commitments

In July 2021, we executed a non-cancellable cloud hosting arrangement with Amazon Web Services (“AWS”) that contains provisions for minimum purchase commitments.

We have a non-cancellable cloud hosting arrangement with Amazon Web Services (“AWS”) 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 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.

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.

The agreement, which started July 2021 and is now in its third year as of September 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.

Spending under this agreement for the three and nine months ended September 30, 2023 totaled $ 9.3 million and $ 27.8 million, respectively.

Spending under this agreement for the three and nine months ended September 30, 2022 totaled $ 9.0 million and $ 24.8 million, respectively.

The timing of payments under the agreement may vary.

19 unchanged sentences

Pegasystems is not required to pay us the judgment, attorney’s fees, or post-judgment interest until all appeals are exhausted.

We cannot predict the outcome of any appeals or the time it will take to resolve them.

We cannot predict the outcome of any appeals or the exact time it will take to resolve them.

Consistent with other judgments, there is no guarantee we will be able to collect all or any portion of the judgment.

Consequently, we will not record the award in our consolidated financial statements until all contingencies are resolved and we collect on the judgment.

Judgment Preservation Insurance

On September 1, 2023, we entered into a Judgment Preservation Insurance (“JPI”) policy in connection with our $ 2.036 billion judgment against Pegasystems.

The total cost of the policy was $ 57.3 million comprised of the premium, a one-time broker fee, and Virginia lines tax, and provides up to $ 500.0 million of coverage.

Total cost of the policy was capitalized and will be amortized on a straight-line basis over the estimated length of the appeals process.

As of September 30, 2023, we estimate the length of the appeals process solely for amortization purposes to be approximately three years .

Amortization expense associated with judgment preservation insurance premium is recorded to general and administrative expenses in our consolidated statements of operations.

Judgment preservation insurance amortization expense was $ 1.5 million for the three and nine months ended September 30, 2023.

As of September 30, 2023, $ 18.1 million is classified as ‘Prepaid expenses and other current assets’ and $ 37.7 million is classified as 'Other assets’ on our consolidated balance sheet.

Other Legal Matters

5 unchanged sentences

Our reportable segment determination is based on our management and internal reporting structure, the nature of the subscriptions and services we offer, and the financial information that is evaluated regularly by our chief operation decision maker.

The following table summarizes revenue by geography for the three and six months ended June 30, 2023 and 2022 (in thousands):

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

The following table summarizes revenue by geography for the three and nine months ended September 30, 2023 and 2022 (in thousands):

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

2023 2022 2023 2022

3 unchanged sentences

With respect to geographic information, revenue is attributed to respective geographies based on the contracting address of the customer.

There were no individual international countries from which more than 10% of our total revenue was attributable for the three and six months ended June 30, 2023 or 2022.

Substantially all of our long-lived assets were held in the United States as of June 30, 2023 and December 31, 2022.

Substantially all of our long-lived assets were held in the United States as of September 30, 2023 and December 31, 2022.

Investments and Fair Value Measurements

3 unchanged sentences

The three tiers are defined as follows:

Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;

Inputs, other than quoted prices in active markets, that are observable either directly or indirectly;

Unobservable inputs for which there is little or no market data and which require us to develop our own estimates and assumptions reflecting those that a market participant would use.

• Level 1 - Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;

• Level 2 - Inputs, other than quoted prices in active markets, that are observable either directly or indirectly;

• Level 3 - Unobservable inputs for which there is little or no market data and which require us to develop our own estimates and assumptions reflecting those that a market participant would use.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

There were no instruments measured at fair value on a recurring basis using significant unobservable inputs as of June 30, 2023 and December 31, 2022.

There were no instruments measured at fair value on a recurring basis using significant unobservable inputs as of September 30, 2023 and December 31, 2022.

The valuation techniques that may be used to measure fair value are as follows:

2 unchanged sentences

• Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (i.e., replacement cost).

The carrying amounts of our cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate fair value as of June 30, 2023 and December 31, 2022 because of the relatively short duration of these instruments.

The carrying amounts of our cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses approximate fair value as of September 30, 2023 and December 31, 2022 because of the relatively short duration of these instruments.

Additionally, the carrying value of our debt associated with the term loan facility approximates fair value because the interest rates are variable and reset on relatively short durations to the then market rates.

1 unchanged sentence

Changes in the fair value of available-for-sale securities, excluding other-than-temporary impairments, are recorded in Other comprehensive income (loss).

The components of our investments as of June 30, 2023 are as follows (in thousands):

As of June 30, 2023

The components of our investments as of September 30, 2023 are as follows (in thousands):

As of September 30, 2023

Fair Value Measurement Balance Sheet Classification

3 unchanged sentences

Commercial paper Level 2 12,042 — 12,042 — 12,042

Corporate bonds Level 2 2,457 ( 1 ) 2,456 — 2,456

Agency bonds Level 2 9,694 ( 2 ) 9,692 — 9,692

10 unchanged sentences

Total investments $ 87,354 $ ( 22 ) $ 87,332 $ 39,469 $ 47,863

There were no Level 3 assets held at any point during the three and six months ended June 30, 2023 and 2022.

Additionally, there were no transfers between Levels 1 and 2 during the six months ended June 30, 2023 and 2022.

I nterest income on our investments totaled $ 2.7 million and $ 4.7 million for the three and six months ended June 30, 2023, respectively.

I nterest income on our investments totaled $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2022, respectively.

The amortized cost basis and fair value of debt securities as of June 30, 2023, by contractual maturity, are as follows (in thousands):

As of June 30, 2023

There were no Level 3 assets held at any point during the three and nine months ended September 30, 2023 and 2022.

Additionally, there were no transfers between Levels 1 and 2 during the nine months ended September 30, 2023 and 2022.

Interest income on our investments totaled $ 2.4 million and $ 7.1 million for the three and nine months ended September 30, 2023, respectively.

I nterest income on our investments totaled $ 0.2 million and $ 0.5 million for the three and nine months ended September 30, 2022, respectively.

The amortized cost basis and fair value of debt securities as of September 30, 2023, by contractual maturity, are as follows (in thousands):

As of September 30, 2023

Cost Basis Fair Value

3 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements