Appian Earnings 2020-09-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

appn-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38098

APPIAN CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware						54-1956084
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

7950 Jones Branch Drive McLean, VA						22102
(Address of principal executive offices)						(Zip Code)

Registrant’s telephone number, including area code: (703) 442-8844

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Class A Common Stock	APPN	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Small reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 2, 2020, there were 37,834,226 shares of the registrant’s Class A common stock and 32,214,666 shares of the registrant’s Class B common stock, each with a par value of $0.0001 per share, outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and September 30, 2019 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2020 and September 30, 2019 (unaudited)	5
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and September 30, 2019 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	46
Signature		47

PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

APPIAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


	As of
	September 30, 2020		December 31, 2019
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	251,088	$	159,755
Accounts receivable, net of allowance of $1,200 and $600 as of September 30, 2020 and December 31, 2019, respectively	89,219		70,408
Deferred commissions, current	16,292		14,543
Prepaid expenses and other current assets	25,909		32,955
Total current assets	382,508		277,661
Property and equipment, net	36,415		39,554
Goodwill	4,637		—
Intangible assets, net of accumulated amortization of $307 as of September 30, 2020	1,765		—
Operating right-of-use assets	30,855		24,205
Deferred commissions, net of current portion	31,580		28,979
Deferred tax assets	654		494
Other assets	4,042		592
Total assets	$	492,456	$	371,485
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	4,630	$	5,222
Accrued expenses	6,287		7,488
Accrued compensation and related benefits	16,615		10,691
Deferred revenue, current	96,902		82,201
Operating lease liabilities, current	6,592		3,836
Finance lease liabilities, current	1,549		1,447
Other current liabilities	319		1,395
Total current liabilities	132,894		112,280
Operating lease liabilities, net of current portion	51,727		44,416
Finance lease liabilities, net of current portion	1,192		2,375
Deferred revenue, net of current portion	4,371		7,139
Deferred tax liabilities	461		38
Other non-current liabilities	4,069		—
Total liabilities	194,714		166,248
Stockholders’ equity
Class A common stock—par value $0.0001; 500,000,000 shares authorized and 37,805,423 shares issued and outstanding as of September 30, 2020; 500,000,000 shares authorized and 34,525,386 shares issued and outstanding as of December 31, 2019	4		3
Class B common stock—par value $0.0001; 100,000,000 shares authorized and 32,214,766 shares issued and outstanding as of September 30, 2020; 100,000,000 shares authorized and 32,942,636 shares issued and outstanding as of December 31, 2019	3		3
Additional paid-in capital	462,686		340,929
Accumulated other comprehensive loss	(2,442)		(285)
Accumulated deficit	(162,509)		(135,413)
Total stockholders’ equity	297,742		205,237
Total liabilities and stockholders’ equity	$	492,456	$	371,485

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

APPIAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue
Subscriptions	$	50,760	$	37,774	$	142,614	$	109,191
Professional services	26,544		28,381		80,329		82,543
Total revenue	77,304		66,155		222,943		191,734
Cost of revenue
Subscriptions	5,101		4,484		15,185		12,105
Professional services	16,450		19,467		51,641		58,963
Total cost of revenue	21,551		23,951		66,826		71,068
Gross profit	55,753		42,204		156,117		120,666
Operating expenses
Sales and marketing	31,633		27,603		94,891		86,186
Research and development	18,150		15,697		51,366		42,418
General and administrative	13,485		11,191		38,076		29,468
Total operating expenses	63,268		54,491		184,333		158,072
Operating loss	(7,515)		(12,287)		(28,216)		(37,406)
Other (income) expense
Other (income) expense, net	(4,277)		2,262		(1,845)		1,881
Interest expense	119		96		390		236
Total other (income) expense	(4,158)		2,358		(1,455)		2,117
Loss before income taxes	(3,357)		(14,645)		(26,761)		(39,523)
Income tax expense	255		5		335		394
Net loss	$	(3,612)	$	(14,650)	$	(27,096)	$	(39,917)
Net loss per share:
Basic and diluted	$	(0.05)	$	(0.22)	$	(0.39)	$	(0.62)
Weighted average common shares outstanding:
Basic and diluted	69,923,553		65,508,113		68,611,994		64,860,342

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

APPIAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited, in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss	$	(3,612)	$	(14,650)	$	(27,096)	$	(39,917)
Comprehensive income (loss), net of income taxes:
Foreign currency translation adjustment	(1,960)		680		(2,157)		486
Total other comprehensive loss, net of income taxes	$	(5,572)	$	(13,970)	$	(29,253)	$	(39,431)

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

APPIAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(unaudited, in thousands, except share data)


						Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity
	Common Stock			Additional Paid-In Capital				Accumulated Deficit
	Shares	Amount
Balance, January 1, 2020	67,468,022	$	6	$	340,929	$	(285)	$	(135,413)	$	205,237
Net loss	—	—		—		—		(11,669)		(11,669)
Issuance of common stock to directors	1,946	—		—		—		—		—
Vesting of restricted stock units	46,031	—		—		—		—		—
Exercise of stock options	129,082	—		670		—		—		670
Stock-based compensation expense	—	—		3,476		—		—		3,476
Other comprehensive income	—	—		—		17		—		17
Balance, March 31, 2020	67,645,081	6		345,075		(268)		(147,082)		197,731
Net loss	—	—		—		—		(11,815)		(11,815)
Issuance of common stock from public offering, net of issuance costs	1,931,206	1		107,914		—		—		107,915
Issuance of common stock to directors	2,296	—		—		—		—		—
Vesting of restricted stock units	13,567	—		—		—		—		—
Exercise of stock options	248,165	—		1,571		—		—		1,571
Stock-based compensation expense	—	—		3,614		—		—		3,614
Other comprehensive loss	—	—		—		(214)		—		(214)
Balance, June 30, 2020	69,840,315	7		458,174		(482)		(158,897)		298,802
Net loss	—	—		—		—		(3,612)		(3,612)
Issuance of common stock to directors	2,417	—		—		—		—		—
Vesting of restricted stock units	33,641	—		—		—		—		—
Exercise of stock options	143,816	—		934		—		—		934
Stock-based compensation expense	—	—		3,578		—		—		3,578
Other comprehensive loss	—	—		—		(1,960)		—		(1,960)
Balance, September 30, 2020	70,020,189	$	7	$	462,686	$	(2,442)	$	(162,509)	$	297,742

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


						Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity
	Common Stock			Additional Paid-In Capital				Accumulated Deficit
	Shares	Amount
Balance, January 1, 2019	63,916,437	$	6	$	218,284	$	542	$	(145,640)	$	73,192
Cumulative effect of adoption of ASC 606	—	—		—		—		60,941		60,941
Net loss	—	—		—		—		(15,216)		(15,216)
Issuance of common stock to directors	3,461	—		—		—		—		—
Vesting of restricted stock units	278,680	—		—		—		—		—
Exercise of stock options	482,444	—		1,073		—		—		1,073
Stock-based compensation expense	—	—		7,225		—		—		7,225
Other comprehensive income	—	—		—		296		—		296
Balance, March 31, 2019	64,681,022	6		226,582		838		(99,915)		127,511
Net loss	—	—		—		—		(10,051)		(10,051)
Issuance of common stock to directors	2,684	—		—		—		—		—
Vesting of restricted stock units	6,010	—		—		—		—		—
Exercise of stock options	147,852	—		914		—		—		914
Stock-based compensation expense	—	—		2,689		—		—		2,689
Other comprehensive loss	—	—		—		(490)		—		(490)
Balance, June 30, 2019	64,837,568	6		230,185		348		(109,966)		120,573
Net loss	—	—		—		—		(14,650)		(14,650)
Issuance of common stock from public offering, net of issuance costs	1,825,000	—		101,303		—		—		101,303
Issuance of common stock to directors	2,563	—		—		—		—		—
Vesting of restricted stock units	94,772	—		—		—		—		—
Exercise of stock options	387,095	—		2,065		—		—		2,065
Stock-based compensation expense	—	—		3,141		—		—		3,141
Other comprehensive income	—	—		—		680		—		680
Balance, September 30, 2019	67,146,998	$	6	$	336,694	$	1,028	$	(124,616)	$	213,112

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

APPIAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(27,096)	$	(39,917)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,485		3,273
Bad debt expense	778		98
Loss on disposal of property and equipment	22		146
Deferred income taxes	(162)		(191)
Stock-based compensation	10,668		13,055
Changes in assets and liabilities:
Accounts receivable	(22,594)		1,854
Prepaid expenses and other assets	4,491		23,280
Deferred commissions	(4,349)		(6,192)
Accounts payable and accrued expenses	(2,456)		(3,909)
Accrued compensation and related benefits	5,844		(2,159)
Other liabilities	2,963		(251)
Deferred revenue	10,531		2,315
Operating lease liabilities	3,422		—
Deferred rent, non-current	—		5,718
Net cash used in operating activities	(13,453)		(2,880)
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired	(6,138)		—
Purchases of property and equipment	(1,036)		(31,430)
Net cash used in investing activities	(7,174)		(31,430)
Cash flows from financing activities:
Principal payments on finance leases	(1,080)		(299)
Proceeds from public offerings, net of underwriting discounts	108,260		101,653
Payments of costs related to public offerings	(18)		(12)
Proceeds from exercise of common stock options	3,175		4,052
Net cash provided by financing activities	110,337		105,394
Effect of foreign exchange rate changes on cash and cash equivalents	1,623		(460)
Net increase in cash and cash equivalents	91,333		70,624
Cash and cash equivalents, beginning of period	159,755		94,930
Cash and cash equivalents, end of period	$	251,088	$	165,554
Supplemental disclosure of cash flow information:
Cash paid for interest	$	116	$	250
Cash paid for income taxes	$	630	$	236
Supplemental disclosure of non-cash financing information:
Capital lease obligations to acquire new office furniture and fixtures and computer hardware	$	—	$	4,491

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

APPIAN CORPORATION AND SUBSIDIARIES

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”) provides a low-code automation platform that accelerates the creation of high-impact business applications, enabling our customers to automate the most important aspects of their business. Global organizations use our applications to improve customer experience, achieve operational excellence, and simplify global risk management and compliance. We were incorporated in the state of Delaware in August 1999. We are headquartered in McLean, Virginia and operate in Canada, Switzerland, the United Kingdom, France, Germany, the Netherlands, Italy, Australia, Spain, Singapore, and Sweden.

2. Significant 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 information. 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 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, 2019, filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2020.

We adopted ASC 606, the new revenue recognition guidance, on January 1, 2019 using the modified retrospective method. Under this method of adoption, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit and applied the new standard only to contracts that were not completed prior to January 1, 2019.

Because we were an emerging growth company until December 31, 2019, the Jumpstart Our Business Startups Act allowed us to delay adoption of certain accounting standards such as ASC 606 and ASC 842 until such time they were made applicable to private companies. We elected to use this extended transition period, and accordingly, did not report revenues under ASC 606 or leases under ASC 842 in our Quarterly Reports on Form 10-Q during 2019. Refer to our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 20, 2020, for a complete reconciliation of our revenues under the old and new guidance. Prior period amounts in this Form 10-Q have been recast as if we had reported under ASC 606 for the applicable periods.

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 revenue recognition, income taxes and the related valuation allowance, the valuation of goodwill and intangible assets, leases, costs to obtain a contract with a customer, and stock-based compensation.

The ongoing outbreak of the novel coronavirus disease ("COVID-19") has resulted in the declaration of a global pandemic and introduced a level of disruption and uncertainty into the financial markets and global economy. While we continue to monitor the developments surrounding the pandemic, as of the date of issuance of these financial statements, we are not aware of any specific events or circumstances that would require us to update our estimates, assumptions, and judgments or revise the carrying value of our assets or liabilities. We cannot estimate the impacts COVID-19 will have on our business going forward as such impacts will be largely dependent upon a number of factors outside of our control including the extent and duration of the outbreak as well as any mitigating actions which may be undertaken by global governments and the general public.

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

Public Offering

In June 2020, we completed an underwritten public offering of 2,500,000 shares of our Class A common stock, of which 1,931,206 shares of Class A common stock were sold by us and 568,794 shares of Class A common stock were sold by existing stockholders. The underwriter purchased the shares from us and the selling stockholders at a price of $56.50 per share. Our net proceeds from the offering were $107.9 million, after deducting underwriting discounts and commissions and offering expenses. We did not receive any of the proceeds from the sale of shares by the selling stockholders.

Revenue Recognition

Refer to Note 3 for a detailed discussion on specific revenue recognition principles related to our major revenue streams.

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, 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, travel costs, third-party contractor costs, and allocated facility costs and overhead.

Concentration of Credit and Customer Risk

Our financial instruments exposed to concentration of credit and customer risk consist primarily of cash and cash equivalents and trade accounts receivable. Deposits held with banks may exceed the amount of insurance provided on such deposits. 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. We believe no additional credit risk beyond amounts provided for collection loss are inherent in accounts receivable. Revenue generated from government agencies represented 19.9% and 17.9% of our revenue for the three and nine months ended September 30, 2020, respectively, of which the top three federal government agencies generated 8.7% and 7.4% of our revenue for the three and nine months ended September 30, 2020, respectively. Additionally, 32.2% and 34.0% of our revenue during the three and nine months ended September 30, 2020, respectively, was generated from foreign customers. When accounted for under ASC 606, revenue generated from government agencies represented 19.5% and 18.0% of our revenue for three and nine months ended September 30, 2019, respectively, of which the top three federal government agencies generated 8.6% and 7.2% of our revenue for the three and nine months ended September 30, 2019, respectively. Additionally, 31.0% and 31.9% of our revenue during the three and nine months ended September 30, 2019, respectively, was generated from foreign customers.

Cash and Cash Equivalents

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 investments, to be cash equivalents.

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. There was a $0.6 million increase in the allowance for doubtful accounts from December 31, 2019 to September 30, 2020.

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

We capitalize the incremental costs of obtaining a contract with a customer, including sales commissions paid to our direct sales force that are incremental costs to obtaining customer contracts. These costs are recorded as deferred commissions in the condensed 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. 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 force. 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 commission expense is recorded to sales and marketing costs in our condensed consolidated statements of operations. Commission expense was $5.6 million and $16.7 million for the three and nine months ended September 30, 2020, respectively. Commission expense was $3.6 million and $10.2 million for the three and nine months ended September 30, 2019, respectively.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. 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.

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


Asset Category						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.

Impairment of Long-Lived Assets

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Long-lived assets and certain intangible assets are reviewed for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable through undiscounted cash flows from the use of the assets. If such assets are considered to be impaired, the assets are written down to their estimated fair value. No indicators of impairment were identified for the three and nine months ended September 30, 2020 and 2019.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value as of September 30, 2020 and December 31, 2019 because of the relatively short duration of these instruments.

We use 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, which require us to develop our own assumptions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs

There were no instruments measured at fair value on a recurring basis using significant unobservable inputs as of September 30, 2020 and December 31, 2019.

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. For performance-based awards, stock-based compensation expense is recognized using the accelerated attribution method based on the probability of satisfying the performance condition. For awards that contain market conditions, compensation expense is measured using a Monte Carlo simulation and 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 as they occur rather than estimating expected forfeitures.

Leases

Refer to Note 4 for a detailed discussion on our policies specific to leasing arrangements.

Recent Accounting Pronouncements

Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) ("ASU 2016-13"), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adopting the standard did not have a material impact on our condensed consolidated financial statements.

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which eliminates, modifies, and adds disclosure requirements for fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adopting the standard did not have a material impact on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adopting the standard did not have a material impact on our condensed consolidated financial statements.

3. Revenue

Revenue Recognition

We generate subscriptions revenue primarily through the sale of software as a service ("SaaS") subscriptions bundled with maintenance and support and hosting services as well as term license subscriptions bundled with maintenance and support. We generate professional services revenue from fees for our consulting services, including application development and deployment assistance as well as training related to our platform.

The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2020 and 2019 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
SaaS subscriptions	$	34,312	$	24,573	$	92,282	$	68,647
Term license subscriptions	11,830		9,199		37,002		28,859
Maintenance and support	4,618		4,002		13,330		11,685
Professional services	26,544		28,381		80,329		82,543
Total revenue	$	77,304	$	66,155	$	222,943	$	191,734

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 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 SaaS subscriptions, maintenance and support, and professional services are delivered over time.

Subscriptions Revenue

Subscriptions revenue is primarily related to (1) SaaS 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 and, to a lesser degree, 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.

SaaS Subscriptions

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We generate cloud-based subscription 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-premise installations of our platform pursuant to contracts that were historically one to three years in length. The majority of recent contracts have been 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. On rare occasions, a cloud-based subscription may include the right for the customer to take possession of the license and as such, the revenue is treated as a 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

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 contracts are each 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. 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 includes both fixed and variable consideration. 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 nine months ended September 30, 2020 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.

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.SaaS subscriptions - Given the highly variable selling price of our SaaS subscriptions, we establish the SSP of our SaaS subscriptions using a residual approach after first determining the SSP of consulting and training services. We have concluded the residual approach to estimating SSP of our SaaS 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 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 SSP of term license subscriptions is an appropriate allocation of the transaction price.

3.Maintenance and support - We establish 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 services and training services - SSP of consulting services 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, 2020 and December 31, 2019, contract assets of $18.4 million and $22.8 million, respectively, are included in the Prepaid expenses and other current assets and Other assets line items in our condensed consolidated balance sheets.

Contract liabilities consists 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, 2020, we recognized $75.3 million of revenue that was included in the deferred revenue balance as of December 31, 2019.

Transaction Price Allocated to the Remaining Performance Obligations

As of September 30, 2020, we had an aggregate transaction price of $185.8 million allocated to unsatisfied performance obligations. We expect to recognize $171.1 million of this balance as revenue over the next 24 months with the remaining amount recognized thereafter.

4. Leases

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease. Operating leases with a term greater than one year are recognized on the balance sheet as right-of-use ("ROU") assets, lease liabilities, and, if applicable, long-term lease liabilities. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. We have elected not to recognize on the balance sheet leases with a term of one year or less. For contracts with lease and non-lease components, we have elected not to allocate the contract consideration and to account for the lease and non-lease components as a single lease component. Finance leases are included in the Property and equipment,

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

net, Finance lease liabilities, current, and Finance lease liabilities, net of current portion line items in our condensed consolidated balance sheets.

Lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The implicit rates within most of our leases are generally not determinable; therefore, we use the incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment and is estimated for each lease based on the rate we would have to pay for a collateralized loan with the same term and payments as the lease. We consider various factors, including our level of collateralization, estimated credit rating, and the currency in which the lease is denominated. Operating lease ROU assets also include any lease prepayments, offset by lease incentives. Certain of our leases include options to extend or terminate the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option while an option to terminate is considered unless it is reasonably certain we will not exercise the option. For certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest 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 based on future obligations, are not included in ROU assets or lease liabilities but rather are expensed as incurred and recorded as variable lease expense.

We have operating and finance leases for corporate offices, office furniture and fixtures, and computer hardware. Our leases have remaining lease terms of 1 to 12 years, some of which include options to extend the leases for up to 5 years.

In April 2018, we entered into a lease agreement with respect to 176,222 square feet of office space in McLean, Virginia for a new corporate headquarters. The initial term of the lease was 150 months. We took initial possession of the first phase of the new headquarters in October 2018 and began to recognize rent expense as of that date. In February 2019, we took possession of a further 28,805 square feet of adjacent office space.

In January 2020, we entered into an amendment which adjusts the original terms of the headquarters lease. Under this amendment, we exercised an option to expand occupancy, adding 34,158 square feet of space. Occupancy of the added space is to commence upon the earlier of the completion of certain improvements or October 14, 2020. Pursuant to the guidance of ASC 842, the amendment is considered a modification to the original lease and is accounted for as a separate contract because it represents a new right-of-use asset and the lease costs charged on the new space are at prevailing market rates. Effective July 1, 2020, we have taken possession of the space, begun to recognize rent expense, and reported a $7.9 million ROU asset and lease liability on our condensed consolidated balance sheets.

The following table sets forth the components of lease expense for the three and nine months ended September 30, 2020 (in thousands):


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Operating lease cost	$	1,695	$	4,971
Finance lease costs:
Amortization of right-of-use assets	373		1,118
Interest on lease liabilities	41		138
Short-term lease cost	85		465
Variable lease cost	1		218
Total	$	2,195	$	6,910

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Supplemental balance sheet information related to leases as of September 30, 2020 was as follows (in thousands, except for lease term and discount rate):


	As of
	September 30, 2020
Operating Leases
Operating right-of-use assets	$	30,855

Operating lease liabilities, current	$	6,592
Operating lease liabilities, net of current portion	51,727
Total operating lease liabilities	$	58,319

Finance Leases
Property and equipment, at cost	$	4,471
Accumulated depreciation	(1,818)
Property and equipment, net	$	2,653

Finance lease liabilities, current	$	1,549
Finance lease liabilities, net of current portion	1,192
Total finance lease liabilities	$	2,741

Weighted Average Remaining Lease Term (in years)
Operating leases	10.8
Finance leases	1.8

Weighted Average Discount Rate
Operating leases	9.6		%
Finance leases	5.5		%

For the three and nine months ended September 30, 2020, amortization of operating right-of-use assets totaled $0.4 million and $1.3 million, respectively. For the three and nine months ended September 30, 2020, interest expense on operating right-of-use liabilities totaled $0.7 million and $2.2 million, respectively.

Supplemental cash flow information related to leases for the nine months ended September 30, 2020 was as follows (in thousands):


	Nine Months Ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows for operating leases	$	1,716
Operating cash outflows for finance leases	138
Financing cash outflows for finance leases	1,080

A summary of our future minimum lease commitments under non-cancellable leases as of September 30, 2020 is as follows (in thousands):

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Operating Leases		Finance Leases
2020 (excluding the nine months ended September 30, 2020)	$	1,687	$	405
2021	7,455		1,620
2022	8,078		859
2023	8,157		—
2024	8,544		—
2025	9,240		—
Thereafter	57,382		—
Total lease payments	100,543		2,884
Less: imputed interest	(42,224)		(143)
Total	$	58,319	$	2,741

5. Acquisitions

Novayre Solutions SL

In January 2020, we acquired 100% of the outstanding common stock of Novayre Solutions SL, a developer of a robotic process automation platform, for approximately $6.9 million. The acquisition was made due to the attractive nature of the product offerings of Novayre and in furtherance of our objective to enhance our automation platform. The transaction was financed through available cash on hand.

The allocation of the purchase price is preliminary pending the finalization of the fair value of the acquired net assets, liabilities assumed, deferred income taxes, and assumed income and non-income based tax liabilities. As of the acquisition date, the purchase price was assigned to the acquired assets and assumed liabilities as follows (in thousands):


Cash acquired	$	731
Other current assets	213
Property and equipment	22
Developed technology	1,537
Customer relationships	406
Goodwill	4,348
Other noncurrent assets	10
Total assets acquired	7,267
Current liabilities	14
Noncurrent liabilities	344
Total liabilities assumed	358
Net assets acquired	$	6,909

There were no changes to our reportable segments as a result of the acquisition, and revenue and expenses from the date of the acquisition through September 30, 2020 were immaterial. Additionally, acquisition costs incurred in relation to the transaction were immaterial.

Acquired property and equipment is depreciated on a straight-line basis over the assets' respective estimated remaining useful lives. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, non-contractual relationships, and expected future synergies. We do not expect the purchase price allocated to goodwill and intangible assets to be deductible for tax purposes.

6. Property and Equipment, net

APPIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Property and equipment, net consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
Leasehold improvements	$	36,220	$	37,130
Office furniture and fixtures	4,865		4,963
Computer hardware	3,903		3,365
Computer software	1,352		1,350
Equipment	48		72
Property and equipment, gross	46,388		46,880
Less: accumulated depreciation	(9,973)		(7,326)
Property and equipment, net	$	36,415	$	39,554

Depreciation expense totaled $1.4 million and $4.2 million for the three and nine months ended September 30, 2020, respectively. There were no disposals recorded during the three months ended September 30, 2020. During the nine months ended September 30, 2020, we retired $1.3 million of leasehold improvements, $0.1 million of computer hardware, and $0.1 million of office furniture and fixtures and equipment. Nominal losses on disposal were recorded for the three and nine months ended September 30, 2020.

Depreciation expense totaled $1.3 million and $3.3 million for the three and nine months ended September 30, 2019, respectively. During the three months ended September 30, 2019, we retired $0.4 million of computer hardware and $0.1 million of equipment. During the nine months ended September 30, 2019, we retired $3.2 million of leasehold improvements, $0.8 million of computer hardware, $0.4 million of office furniture and fixtures, and $0.1 million of equipment. During the three and nine months ended September 30, 2019, we recorded a loss on disposal of $0.1 million.

At September 30, 2020, property and equipment included $4.5 million of assets acquired under finance lease arrangements. Accumulated depreciation related to these finance lease arrangements totaled $1.8 million at September 30, 2020. Amortization of assets acquired under finance leases is included in depreciation and amortization expense.

7. Accrued Expenses

Accrued expenses consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):


	September 30, 2020		December 31, 2019
Accrued hosting costs	$	1,332	$	1,865
Accrued contract labor costs	1,221		1,921
Accrued marketing and tradeshow expenses	687		365
Accrued audit and tax expenses	281		315
Accrued legal costs	377		422
Accrued reimbursable employee expenses	183		1,353
Accrued third party license fees	234		288
Other accrued expenses	1,972		959
Total	$	6,287	$	7,488

Price	50.46	EPS	-1
Shares	66	P/E	-62
MCap	3,306	P/FCF	-1,117
Net Debt	-166	EBIT	-53
TEV	3,140	TEV/EBIT	-59
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-09-30	Filed 2020-11-05
10-Q	2020-06-30	Filed 2020-08-06
10-Q	2020-03-31	Filed 2020-05-07
10-K	2019-12-31	Filed 2020-02-20
10-Q	2019-09-30	Filed 2019-10-31
10-Q	2019-06-30	Filed 2019-08-08
10-Q	2019-03-31	Filed 2019-05-02
10-K	2018-12-31	Filed 2019-02-21
10-Q	2018-09-30	Filed 2018-11-01
10-Q	2018-06-30	Filed 2018-08-02
10-Q	2018-03-31	Filed 2018-05-03
10-K	2017-12-31	Filed 2018-02-23
10-Q	2017-09-30	Filed 2017-11-02
10-Q	2017-06-30	Filed 2017-08-03

8-K	2020-11-05
8-K	2020-08-06
8-K	2020-06-12
8-K	2020-06-01
8-K	2020-05-07
8-K	2020-02-20
8-K	2019-10-31
8-K	2019-09-04
8-K	2019-08-08
8-K	2019-06-06
8-K	2019-05-23
8-K	2019-05-02
8-K	2019-02-21
8-K	2019-01-02
8-K	2018-12-10
8-K	2018-11-01
8-K	2018-08-20
8-K	2018-08-02
8-K	2018-06-07
8-K	2018-05-03
8-K	2018-04-17
8-K	2018-02-22

EX-31.1	appn09302020ex311.htm
EX-31.2	appn09302020ex312.htm
EX-32.1	appn09302020ex321.htm

APPN 10Q Quarterly Report

Appian Earnings 2020-09-30