APPIAN CORP 10-Q

Item 1. FINANCIAL STATEMENTS APPIAN CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except par value and share data) As of September 30, 2023 December 31, 2022 (unaudited) Assets Current assets Cash and cash equivalents $ 130,761 $ 148,132 Short-term investments and marketable securities 38,726 47,863 Accounts receivable, net of allowance of $ 2,268 and $ 2,125 , respectively 133,548 165,964 Deferred commissions, current 31,107 30,196 Prepaid expenses and other current assets 51,230 28,093 Restricted cash, current — 2,249 Total current assets 385,372 422,497 Property and equipment, net of accumulated depreciation of $ 22,972 and $ 18,864 , respectively 42,444 41,855 Goodwill 25,991 26,349 Intangible assets, net of accumulated amortization of $ 3,618 and $ 2,715 , respectively 4,092 5,251 Right-of-use assets for operating leases 40,501 37,248 Deferred commissions, net of current portion 54,932 55,788 Deferred tax assets 2,688 1,940 Other assets 41,018 3,286 Total assets $ 597,038 $ 594,214 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 5,956 $ 7,997 Accrued expenses 11,275 12,227 Accrued compensation and related benefits 33,866 40,718 Deferred revenue 194,602 194,768 Debt 65,431 2,740 Operating lease liabilities 11,003 8,681 Other current liabilities 1,119 3,121 Total current liabilities 323,252 270,252 Long-term debt 142,016 115,379 Non-current operating lease liabilities 60,339 57,225 Deferred revenue 3,243 5,556 Deferred tax liabilities 87 102 Total liabilities 528,937 448,514 Stockholders’ equity Class A common stock—par value $ 0.0001 ; 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 4 4 Class B common stock—par value $ 0.0001 ; 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 3 3 Additional paid-in capital 588,029 561,390 Accumulated other comprehensive loss ( 10,049 ) ( 7,246 ) Accumulated deficit ( 509,886 ) ( 408,451 ) Total stockholders’ equity 68,101 145,700 Total liabilities and stockholders’ equity $ 597,038 $ 594,214 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 APPIAN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue Subscriptions $ 103,803 $ 86,520 $ 296,554 $ 246,908 Professional services 33,291 31,356 103,490 95,297 Total revenue 137,094 117,876 400,044 342,205 Cost of revenue Subscriptions 11,265 9,313 32,492 26,065 Professional services 24,804 24,447 76,515 72,011 Total cost of revenue 36,069 33,760 109,007 98,076 Gross profit 101,025 84,116 291,037 244,129 Operating expenses Sales and marketing 55,667 54,912 181,338 157,104 Research and development 37,135 37,623 118,502 101,401 General and administrative 23,440 29,357 82,342 90,014 Total operating expenses 116,242 121,892 382,182 348,519 Operating loss ( 15,217 ) ( 37,776 ) ( 91,145 ) ( 104,390 ) Other non-operating expense Other expense (income), net 1,939 5,876 ( 4,637 ) 12,815 Interest expense 4,917 89 12,790 222 Total other non-operating expense 6,856 5,965 8,153 13,037 Loss before income taxes ( 22,073 ) ( 43,741 ) ( 99,298 ) ( 117,427 ) Income tax expense (benefit) 178 255 2,137 ( 924 ) Net loss $ ( 22,251 ) $ ( 43,996 ) $ ( 101,435 ) $ ( 116,503 ) Net loss per share: Basic and diluted $ ( 0.30 ) $ ( 0.61 ) $ ( 1.39 ) $ ( 1.61 ) Weighted average common shares outstanding: Basic and diluted 73,178 72,503 73,032 72,372 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 APPIAN CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited, in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net loss $ ( 22,251 ) $ ( 43,996 ) $ ( 101,435 ) $ ( 116,503 ) Comprehensive loss, net of income taxes Foreign currency translation adjustments 1,060 308 ( 2,813 ) 3,032 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 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 APPIAN CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited, in thousands, except share data) Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity Common Stock Shares Amount Balance, December 31, 2022 72,817,887 $ 7 $ 561,390 $ ( 7,246 ) $ ( 408,451 ) $ 145,700 Net loss — — — — ( 36,829 ) ( 36,829 ) Issuance of common stock to directors 6,713 — — — — — Vesting of restricted stock units 111,296 — ( 2,959 ) — — ( 2,959 ) Exercise of stock options 19,483 — 131 — — 131 Stock-based compensation expense — — 11,056 — — 11,056 Other comprehensive loss — — — ( 700 ) — ( 700 ) Balance, March 31, 2023 72,955,379 7 569,618 ( 7,946 ) ( 445,280 ) 116,399 Net loss — — — — ( 42,355 ) ( 42,355 ) Issuance of common stock to directors 4,928 — — — — — Vesting of restricted stock units 99,836 — ( 1,816 ) — — ( 1,816 ) Exercise of stock options 53,190 — 428 — — 428 Stock-based compensation expense — — 11,148 — — 11,148 Other comprehensive loss — — — ( 3,172 ) — ( 3,172 ) 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 6 Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders' Equity Common Stock Shares Amount Balance, December 31, 2021 71,462,094 $ 7 $ 497,128 $ ( 5,687 ) $ ( 257,531 ) $ 233,917 Net loss — — — — ( 23,154 ) ( 23,154 ) Issuance of common stock to directors 2,395 — — — — — Vesting of restricted stock units 47,038 — — — — — Exercise of stock options 815,833 — 24,404 — — 24,404 Stock-based compensation expense — — 6,943 — — 6,943 Other comprehensive income — — — 646 — 646 Balance, March 31, 2022 72,327,360 7 528,475 ( 5,041 ) ( 280,685 ) 242,756 Net loss — — — — ( 49,354 ) ( 49,354 ) Issuance of common stock to directors 2,565 — — — — — Vesting of restricted stock units 52,634 — — — — — Exercise of stock options 61,955 — 626 — — 626 Stock-based compensation expense — — 9,148 — — 9,148 Other comprehensive income — — — 1,884 — 1,884 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. 7 APPIAN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities Net loss $ ( 101,435 ) $ ( 116,503 ) Adjustments to reconcile net loss to net cash used by operating activities Stock-based compensation 33,215 27,427 Depreciation expense and amortization of intangible assets 7,046 5,332 Bad debt expense 690 561 Amortization of debt issuance costs 342 — Deferred income taxes ( 808 ) ( 1,549 ) Changes in assets and liabilities Accounts receivable 30,665 ( 9,114 ) Prepaid expenses and other assets ( 61,555 ) ( 6,723 ) Deferred commissions ( 56 ) ( 5,715 ) Accounts payable and accrued expenses ( 657 ) ( 3,654 ) Accrued compensation and related benefits ( 6,671 ) 1,634 Other current and non-current liabilities ( 2,026 ) ( 383 ) Deferred revenue ( 3,186 ) 15,414 Operating lease assets and liabilities 2,238 ( 685 ) Net cash used by operating activities ( 102,198 ) ( 93,958 ) Cash flows from investing activities Purchases of investments ( 53,443 ) ( 31,214 ) Proceeds from investments 62,590 57,417 Purchases of property and equipment ( 8,278 ) ( 5,861 ) Net cash provided by investing activities 869 20,342 Cash flows from financing activities Proceeds from borrowings 92,000 — Debt repayments ( 2,625 ) — Payments for debt issuance costs ( 411 ) — Payments for employee taxes related to the net share settlement of equity awards ( 7,240 ) — Proceeds from exercise of common stock options 664 25,205 Net cash provided by financing activities 82,388 25,205 Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash ( 679 ) ( 1,694 ) 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 Cash, cash equivalents, and restricted cash at end of period $ 130,761 $ 53,855 Supplemental disclosure of cash flow information Cash paid for interest $ 11,960 $ 243 Cash paid for income taxes $ 2,944 $ 749 Supplemental disclosure of non-cash investing and financing activities Accrued capital expenditures $ 27 $ 317 The accompanying notes are an integral part of these unaudited consolidated financial statements. 8 APPIAN CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Description of Business Appian Corporation (together with its subsidiaries, “Appian,” the “Company,” “we,” or “our”) is a software company that automates business processes. 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. We are headquartered in McLean, Virginia and operate both in the U.S. and internationally, including Australia, Canada, France, Germany, India, Italy, Japan, Mexico, the Netherlands, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. 2. Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial reporting. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity, and cash flows. 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 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 The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. 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, 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 The accompanying condensed consolidated financial statements include the accounts of Appian and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition Refer to Note 3 for a detailed discussion on specific revenue recognition principles related to our major revenue streams. 9 Cost of Revenue Subscriptions Cost of subscriptions revenue consists primarily of fees paid to our third-party managed hosting providers and other third-party service providers, personnel costs such as payroll and benefits for our technology operations and customer support teams, amortization of developed technology, and allocated facility costs and overhead. Professional Services 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. Concentration of Credit and Customer Risk 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; however, we believe the financial institutions holding our cash deposits are financially sound and, accordingly, minimal credit risk exists with respect to these balances. 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 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 We consider all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase, as well as overnight repurchase agreements, to be cash equivalents. 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 on August 11, 2023. 10 The following table presents a reconciliation of cash, cash equivalents, and restricted cash as presented in the consolidated statements of cash flows (in thousands): As of September 30, 2023 December 31, 2022 September 30, 2022 December 31, 2021 Cash and cash equivalents $ 130,761 $ 148,132 $ 51,802 $ 100,796 Restricted cash, current — 2,249 2,053 791 Restricted cash, net of current portion — — — 2,373 Total cash, cash equivalents, and restricted cash $ 130,761 $ 150,381 $ 53,855 $ 103,960 Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectability of accounts and incorporates an estimation of expected lifetime credit losses on our receivables. We regularly review the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, customer creditworthiness, and current economic trends. 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 $ 2.3 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 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. 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 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 Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Significant additions or improvements extending the useful life of an asset are capitalized, while repairs and maintenance costs which do not significantly improve the related assets or extend their useful lives are charged to expense as incurred. 11 The following table outlines the useful lives of our major asset categories: Useful Life (in years) Computer software 3 Computer hardware 3 Equipment 5 Office furniture and fixtures 10 Leasehold improvements (a) (a) Leasehold improvements have an estimated useful life of the shorter of the useful life of the assets or the lease term. Severance Costs 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 Adopted We did not adopt any new accounting guidance in 2023 that had a material impact on our condensed consolidated financial statements or disclosures. Not Yet Adopted There is no pending accounting guidance that we expect to have a material impact on our condensed consolidated financial statements or disclosures. 3. Revenue Revenue Recognition 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 Cloud subscriptions $ 77,247 $ 60,621 $ 221,381 $ 171,083 Term license subscriptions 20,026 19,773 56,176 58,543 Maintenance and support 6,530 6,126 18,997 17,282 Total subscriptions 103,803 86,520 296,554 246,908 Professional services 33,291 31,356 103,490 95,297 Total revenue $ 137,094 $ 117,876 $ 400,044 $ 342,205 Performance Obligations and Timing of Revenue Recognition 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 12 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. Subscriptions Revenue Subscriptions revenue is primarily related to (1) cloud subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support. We generally charge subscription fees on a per-user basis or through non-user based single application licenses. We bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly, or monthly basis. In certain instances, our customers have paid their entire contract up front. Cloud Subscriptions We generate cloud-based subscriptions revenue primarily from the sales of subscriptions to access our cloud offering, together with related support services to our customers. We perform all required maintenance and support for our cloud offering. Revenue is recognized on a ratable basis over the contract term beginning on the date the service is made available to the customer. Our cloud-based subscription contracts generally have a term of one to three years in length. We bill customers and collect payment for subscriptions to our platform in advance, and they are non-cancellable. Term License Subscriptions Our term license subscription revenue is derived from customers with on-premises installations of our platform. The majority of our contracts are one year in length. Although term license subscriptions are sold with maintenance and support, the software is fully functional at the beginning of the subscription and is considered a distinct performance obligation. If a cloud-based subscription includes the right for the customer to take possession of the license, the revenue is treated as a term license. Revenue from term license subscriptions is recognized when control of the software license has transferred to the customer, which is the later of delivery or commencement of the contract term. Maintenance and Support Maintenance and support subscriptions include both technical support and when-and-if-available software upgrades, which are treated as a single performance obligation as they are considered a series of distinct services that are substantially the same and have the same duration and measure of progress. Revenue from maintenance and support is recognized ratably over the contract period, which is the period over which the customer has continuous access to maintenance and support. Professional Services Revenue Our professional services revenue is comprised of fees for consulting services, including application development and deployment assistance as well as training services related to our platform. Our professional services are considered distinct performance obligations when sold standalone or with other products. Consulting Services We sell consulting services to assist customers in planning and executing the deployment of our software. Customers are not required to use consulting services to fully benefit from the software. 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 13 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. Training Services We sell various training services to our customers. Training services are sold in the form of prepaid training credits that are redeemed based on a fixed rate per course. Training revenue is recognized when the associated training services are delivered. Significant Judgments and Estimates Determining the Transaction Price The transaction price is the total amount of consideration we expect to receive in exchange for the service offerings in a contract and may include both fixed and variable components. 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 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; however, such true-up adjustments are not expected to be material. Allocating the Transaction Price Based on Standalone Selling Prices (“SSP”) We allocate the transaction price to each performance obligation in a contract based on its relative SSP. The SSP is the observable price at which we sell the product or service separately. In the absence of observable pricing, we estimate SSP using the residual approach. We establish SSP as follows: 1. Cloud subscriptions - Given the highly variable selling price of our cloud subscriptions, we establish the SSP of our cloud subscriptions using a residual approach after first determining the SSP of consulting and training services. We have concluded the residual approach to estimating the SSP of our cloud subscriptions is an appropriate allocation of the transaction price. 2. Term license subscriptions - Given the highly variable selling price of our term license subscriptions, we have established the SSP of term license subscriptions using a residual approach after first determining the SSP of maintenance and support. Maintenance and support is sold on a standalone basis in conjunction with renewals of our legacy perpetual software licenses and within a narrow range of the net license fee. Because an economic relationship exists between the license and maintenance and support, we have concluded the residual approach to estimating the SSP of term license subscriptions is an appropriate allocation of the transaction price. 3. Maintenance and support - We establish the SSP of maintenance and support as a percentage of the stated net subscription fee based on observable pricing of maintenance and support renewals from our legacy perpetual software licenses. 4. Consulting and training services - The SSP of consulting and training services is established based on the observable pricing of standalone sales within each geographic region where the services are sold. Contract Balances Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. Contract assets primarily relate to unbilled amounts for contracts with customers for which the amount of revenue recognized exceeds the amount billed to the customer. Contract assets are transferred to accounts receivable when the right to invoice becomes unconditional. As of September 30, 14 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. Deferred revenue is then recognized as the revenue recognition criteria are met. 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 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 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. 4. Leases 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. Lease Costs Expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. We have lease agreements which require payments for lease and non-lease components (i.e., common area maintenance) that are accounted for as a single lease component. 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. 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 Operating lease cost $ 2,359 $ 1,708 $ 6,650 $ 4,968 Short-term lease cost 350 170 1,138 334 Variable lease cost 1,311 952 3,296 2,878 Total $ 4,020 $ 2,830 $ 11,084 $ 8,180 Sublease income totaled $ 0.3 million and $ 1.0 million for the three and nine months ended September 30, 2023, respectively. 15 Supplemental Lease Information 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 Operating lease liabilities, current $ 11,003 $ 8,681 Operating lease liabilities, net of current portion 60,339 57,225 Total operating lease liabilities $ 71,342 $ 65,906 Weighted average remaining lease term (in years) 7.7 8.4 Weighted average discount rate 9.4 % 9.4 % 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 Operating cash outflows for operating leases $ 2,223 $ 2,099 $ 6,374 $ 6,258 Amortization of operating lease right-of-use assets 693 364 1,936 995 Interest expense on operating lease liabilities 1,667 1,332 4,714 3,957 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. 16 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 nine months ended September 30, 2023) $ 3,223 2024 13,269 2025 12,924 2026 13,245 2027 13,501 Thereafter 47,285 Total lease payments 103,447 Less: imputed interest ( 32,105 ) Total $ 71,342 5. Goodwill and Intangible Assets 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 Balance as of December 31, 2021 $ 27,795 Foreign currency translation adjustments ( 1,446 ) Balance as of December 31, 2022 26,349 Foreign currency translation adjustments ( 358 ) Balance as of September 30, 2023 $ 25,991 Intangible assets, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands): As of September 30, 2023 December 31, 2022 Developed technology $ 6,799 $ 6,893 Customer relationships - Process mining and RPA 911 1,073 Intangible assets, gross 7,710 7,966 Less: accumulated amortization ( 3,618 ) ( 2,715 ) Intangible assets, net $ 4,092 $ 5,251 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. 17 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 nine months ended September 30, 2023) $ 363 2024 1,451 2025 1,154 2026 743 2027 91 Thereafter 290 Total projected amortization expense $ 4,092 6. Property and Equipment, net Property and equipment, net consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands): As of September 30, 2023 December 31, 2022 Leasehold improvements $ 51,190 $ 45,959 Office furniture and fixtures 3,804 3,476 Computer hardware 9,410 9,689 Computer software 820 1,353 Equipment 192 242 Property and equipment, gross 65,416 60,719 Less: accumulated depreciation ( 22,972 ) ( 18,864 ) Property and equipment, net $ 42,444 $ 41,855 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. 18 7. Accrued Expenses Accrued expenses consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands): As of September 30, 2023 December 31, 2022 Hosting costs $ 3,344 $ 2,802 Legal costs 246 475 Marketing and tradeshow expenses 1,133 1,000 Third party license fees 957 1,223 Contract labor costs 953 1,465 Reimbursable employee expenses 848 1,004 Audit and tax expenses 949 911 Capital expenditures 27 744 Other accrued expenses 2,818 2,603 Total $ 11,275 $ 12,227 8. Debt Senior Secured Credit Facilities Credit Agreement We have a Senior Secured Credit Facilities Credit Agreement (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). The Credit Agreement matures on November 3, 2027. We will use the proceeds from the $ 150.0 million term loan and access to the revolving credit facility to fund the continued growth of our business and support our working capital requirements. Under the agreement, we may elect whether amounts drawn bear interest on the outstanding principal amount at a rate per annum equal to either (a) the higher of the Prime rate or the Federal Funds Effective (“Base Rate”) rate plus 0.50 % or (b) the forward-looking term rate based on the secured overnight financing rate (“Term SOFR”). An additional interest rate margin is added to the elected interest rates. During the first three years of the Credit Agreement, the additional interest rate margin ranges from 1.50 % to 2.50 % in the case of Base Rate advances or from 2.50 % to 3.50 % in the case of Term SOFR advances, depending on our debt to recurring revenue leverage ratio (as defined in the Credit Agreement). 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, 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. 19 The following table summarizes outstanding debt balances (in thousands): As of September 30, 2023 December 31, 2022 Borrowings under revolving credit facility expiring November 3, 2027 $ 62,000 $ — Secured term loan facility 146,750 119,375 Less: Debt issuance costs ( 1,303 ) ( 1,256 ) Total debt, net of debt issuance costs $ 207,447 $ 118,119 Debt, current $ 65,431 $ 2,740 Long-term debt 142,016 115,379 Total debt $ 207,447 $ 118,119 We were in compliance with all covenants contained in the Credit Agreement. We believe, based on our current financial forecasts and trends, that we will remain compliant with all covenants for the foreseeable future. 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. 9. Income Taxes 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. Our operating subsidiaries are exposed to statutory effective tax rates ranging from zero to approximately 35 %. 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 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. We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions. 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 on our condensed consolidated financial statements. 10. Stock-Based Compensation We account for stock-based compensation expense related to stock-based awards based on the estimated fair value of the award on the grant date. We calculate the fair value of stock options containing only a service condition using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) is based on the closing market price of our common stock on the Nasdaq Global Market on the date of grant. For service-based awards such as RSUs, stock-based compensation expense is recognized on a straight-line basis over the requisite service period. 20 In June 2022, our Board of Directors granted to our Chief Executive Officer (“CEO”) a stock option award that is eligible to vest based on the achievement of various stock price appreciation targets. This 2022 CEO option grant is our only stock-based award that vests based on the achievement of market conditions. For awards with market-based conditions, compensation expense is measured using a Monte Carlo simulation and expense is recognized using the accelerated attribution method over the derived service period based on the expected market performance as of the grant date. We account for forfeitures of our stock-based awards as they occur rather than estimating expected forfeitures. 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 nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Cost of revenue Subscriptions $ 211 $ 284 $ 713 $ 712 Professional services 1,535 1,401 4,598 3,788 Operating expenses Sales and marketing 3,245 2,667 8,462 6,721 Research and development 2,930 3,454 9,466 8,831 General and administrative 3,090 3,530 9,976 7,375 Total stock-based compensation expense $ 11,011 $ 11,336 $ 33,215 $ 27,427 11. Basic and Diluted Loss per Share Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the reporting period. Diluted loss per share is computed similar to basic, except the weighted average number of common shares outstanding is increased to include additional outstanding shares from the assumed exercise of stock options and vesting of RSUs, if dilutive. The dilutive effect, if any, of convertible shares is calculated using the treasury stock method. 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: Three and Nine Months Ended September 30, 2023 2022 Stock options 2,611,247 2,733,884 Non-vested restricted stock units 1,133,039 1,419,174 21 12. Commitments, Contingencies, and Other Matters 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 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. However, we expect to meet our minimum purchase commitments for the remainder of the contract term. Exclusive of the AWS contract, we have other non-cancellable agreements for subscription software products that contain provisions stipulating minimum purchase commitments. However, the annual purchase commitments under these contracts are, individually and in the aggregate, immaterial to our condensed consolidated financial statements. Pegasystems Litigation On May 29, 2020, we filed a civil complaint against Pegasystems, Inc. (“Pegasystems”) and Youyong Zou, a Virginia resident, in the Circuit Court for Fairfax County, Virginia. Appian Corp v. Pegasystems Inc. & Youyong Zou, No. 2020-07216 (Fairfax Cty. Ct.). On May 10, 2022, we announced the jury awarded us $ 2.036 billion in damages for misappropriation of our trade secrets and $ 1 in damages for violating the Virginia Computer Crimes Act. Pegasystems filed several post-trial motions seeking relief in the form of reducing the damages award or setting aside the jury’s verdict and either granting a new trial or entering judgment in Pegasystems’ favor. All of these motions were denied, and final judgment was entered by the Court on September 15, 2022. The final judgment reaffirmed the $ 2.036 billion in damages and also ordered Pegasystems to pay Appian $ 23.6 million in attorney's fees associated with the case as well as statutory post-judgment interest on the judgment at an annual rate of 6 %, or approximately $ 122.0 million per year. Defendant Youyong Zou has satisfied the judgment of $ 5,000 (plus interest) against him in lieu of appealing that judgment. On September 15, 2022, Pegasystems filed a notice of appeal, and on February 6, 2023, Pegasystems filed its opening brief with the Court of Appeals of Virginia. On March 29, 2023, we filed our response brief. Pegasystems filed a reply brief on May 3, 2023. The timeline of the case is solely within the control of the Court of Appeals until it rules. 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 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. 22 Other Legal Matters From time to time, we are subject to legal, regulatory, and other proceedings and claims that arise in the ordinary course of business. Other than as disclosed elsewhere in this Quarterly Report, we are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. 13. Segment and Geographic Information We operate one operating and reportable segment, representing our consolidated business that helps organizations build applications and workflows rapidly with our low-code platform to maximize their resources and improve business results. 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 nine months ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Domestic $ 88,743 $ 81,004 $ 257,442 $ 228,610 International 48,351 36,872 142,602 113,595 Total $ 137,094 $ 117,876 $ 400,044 $ 342,205 With respect to geographic information, revenue is attributed to respective geographies based on the contracting address of the customer. Substantially all of our long-lived assets were held in the United States as of September 30, 2023 and December 31, 2022. 14. Investments and Fair Value Measurements Fair Value Measurements U.S. GAAP establishes a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires us to use observable inputs when available and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows: • 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; and • 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 September 30, 2023 and December 31, 2022. 23 The valuation techniques that may be used to measure fair value are as follows: • Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; • Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts; and • 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 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. Investments Our investment portfolio consists largely of debt investments classified as available-for-sale. 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 September 30, 2023 are as follows (in thousands): As of September 30, 2023 Fair Value Measurement Balance Sheet Classification Fair Value Level Cost Basis Unrealized Gains (Losses) Market Value Cash and Cash Equivalents Short-term Investments and Marketable Securities Money market fund Level 1 $ 21,034 $ — $ 21,034 $ 21,034 $ — U.S. Treasury bonds Level 1 17,002 ( 10 ) 16,992 — 16,992 Commercial paper Level 2 12,042 — 12,042 — 12,042 Agency bonds Level 2 9,694 ( 2 ) 9,692 — 9,692 Total investments $ 59,772 $ ( 12 ) $ 59,760 $ 21,034 $ 38,726 At December 31, 2022, our investments consisted of the following (in thousands): 24 As of December 31, 2022 Fair Value Measurement Balance Sheet Classification Fair Value Level Cost Basis Unrealized Gains (Losses) Market Value Cash and Cash Equivalents Short-term Investments and Marketable Securities Money market fund Level 1 $ 39,469 $ — $ 39,469 $ 39,469 $ — U.S. Treasury bonds Level 1 9,396 ( 13 ) 9,383 — 9,383 Commercial paper Level 2 26,704 — 26,704 — 26,704 Corporate bonds Level 2 9,353 ( 12 ) 9,341 — 9,341 Agency bonds Level 2 2,432 3 2,435 — 2,435 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 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 Due in one year or less $ 59,772 $ 59,760 Total investments $ 59,772 $ 59,760 Actual maturities may differ from the contractual maturities in the table above because borrowers have the right to call or prepay certain obligations. 25