QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐
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
Tysons, 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 October 28, 2019, there were 34,210,508 shares of the registrant’s Class A common stock and 32,942,636 shares of the registrant’s Class B common stock, each with a par value of $0.0001 per share, outstanding.
Accounts receivable, net of allowance of $600 as of September 30, 2019 and December 31, 2018
70,792
79,383
Deferred commissions, current
18,468
14,020
Prepaid expenses and other current assets
10,200
21,293
Total current assets
265,014
209,626
Property and equipment, net
40,023
7,539
Deferred commissions, net of current portion
13,069
15,088
Deferred tax assets
560
326
Other assets
561
601
Total assets
$
319,227
$
233,180
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable
$
5,316
$
9,249
Accrued expenses
7,916
7,464
Accrued compensation and related benefits
11,458
13,796
Deferred revenue, current
100,497
95,523
Capital leases, current
1,429
—
Other current liabilities
2,067
2,369
Total current liabilities
128,683
128,401
Deferred tax liabilities
136
42
Deferred revenue, net of current portion
13,557
16,145
Deferred rent, net of current portion
21,280
15,400
Capital leases, net of current portion
2,763
—
Total liabilities
166,419
159,988
Stockholders’ equity
Class A common stock—par value $0.0001; 500,000,000 shares authorized and 34,204,362 shares issued and outstanding as of September 30, 2019; 500,000,000 shares authorized and 29,626,054 shares issued and outstanding as of December 31, 2018
3
3
Class B common stock—par value $0.0001; 100,000,000 shares authorized and 32,942,636 shares issued and outstanding as of September 30, 2019; 100,000,000 shares authorized and 34,290,383 shares issued and outstanding as of December 31, 2018
3
3
Additional paid-in capital
336,694
218,284
Accumulated other comprehensive income
1,106
542
Accumulated deficit
(184,998)
(145,640)
Total stockholders’ equity
152,808
73,192
Total liabilities and stockholders’ equity
$
319,227
$
233,180
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
Revenue:
Subscriptions, software and support
$
41,599
$
30,905
$
115,767
$
90,904
Professional services
27,788
24,043
80,110
75,623
Total revenue
69,387
54,948
195,877
166,527
Cost of revenue:
Subscriptions, software and support
4,484
3,261
12,105
8,713
Professional services
19,467
16,831
58,963
54,002
Total cost of revenue
23,951
20,092
71,068
62,715
Gross profit
45,436
34,856
124,809
103,812
Operating expenses:
Sales and marketing
28,858
25,467
89,951
75,815
Research and development
15,697
11,737
42,418
32,392
General and administrative
11,191
12,537
29,468
29,022
Total operating expenses
55,746
49,741
161,837
137,229
Operating loss
(10,310)
(14,885)
(37,028)
(33,417)
Other expense:
Other expense, net
2,016
110
1,700
1,785
Interest expense
96
67
236
134
Total other expense
2,112
177
1,936
1,919
Loss before income taxes
(12,422)
(15,062)
(38,964)
(35,336)
Income tax expense (benefit)
5
(34)
394
212
Net loss
$
(12,427)
$
(15,028)
$
(39,358)
$
(35,548)
Net loss per share attributable to common stockholders:
Basic and diluted
$
(0.19)
$
(0.24)
$
(0.61)
$
(0.58)
Weighted average common shares outstanding:
Basic and diluted
65,508,113
62,480,927
64,860,342
61,583,610
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
2019
2018
2019
2018
Net loss
$
(12,427)
$
(15,028)
$
(39,358)
$
(35,548)
Comprehensive income (loss), net of income taxes:
Foreign currency translation adjustment
954
(400)
564
137
Total other comprehensive loss, net of income taxes
$
(11,473)
$
(15,428)
$
(38,794)
$
(35,411)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
Accumulated Other Comprehensive Income (Loss)
Total Stockholders' Equity
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Shares
Amount
Balance, January 1, 2018
60,599,877
$
6
$
141,268
$
439
$
(96,189)
$
45,524
Net loss
―
―
―
―
(9,553)
(9,553)
Issuance of common stock to directors
2,935
―
―
―
―
—
Exercise of stock options
607,349
―
982
―
―
982
Stock-based compensation expense
―
―
2,240
―
―
2,240
Other comprehensive loss
―
―
―
(565)
―
(565)
Balance, March 31, 2018
61,210,161
6
144,490
(126)
(105,742)
38,628
Net loss
—
—
—
—
(10,967)
(10,967)
Issuance of common stock to directors
3,670
—
—
—
—
—
Exercise of stock options
399,049
—
1,090
—
—
1,090
Stock-based compensation expense
—
—
2,206
—
—
2,206
Other comprehensive income
—
—
—
1,102
—
1,102
Balance, June 30, 2018
61,612,880
6
147,786
976
(116,709)
32,059
Net loss
—
—
—
—
(15,028)
(15,028)
Issuance of common stock from public offering, net of issuance costs
1,675,000
—
57,829
—
—
57,829
Issuance of common stock to directors
2,555
—
—
—
—
—
Vesting of restricted stock units
6,300
—
—
—
—
—
Exercise of stock options
291,581
—
555
—
—
555
Stock-based compensation expense
—
—
6,801
—
—
6,801
Other comprehensive loss
—
—
—
(400)
—
(400)
Balance, September 30, 2018
63,588,316
$
6
$
212,971
$
576
$
(131,737)
$
81,816
7
APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
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
Net loss
—
—
—
—
(17,537)
(17,537)
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
—
—
—
340
—
340
Balance, March 31, 2019
64,681,022
6
226,582
882
(163,177)
64,293
Net loss
—
—
—
—
(9,394)
(9,394)
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
—
—
—
(730)
—
(730)
Balance, June 30, 2019
64,837,568
6
230,185
152
(172,571)
57,772
Net loss
—
—
—
—
(12,427)
(12,427)
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
—
—
—
954
—
954
Balance, September 30, 2019
67,146,998
$
6
$
336,694
$
1,106
$
(184,998)
$
152,808
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
2019
2018
Cash flows from operating activities:
Net loss
$
(39,358)
$
(35,548)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
3,273
1,452
Loss (gain) on disposal of equipment
146
(4)
Bad debt expense
97
2
Deferred income taxes
(191)
69
Stock-based compensation
13,055
11,247
Changes in assets and liabilities:
Accounts receivable
9,051
(6,226)
Prepaid expenses and other assets
11,351
76
Deferred commissions
(2,428)
(5,531)
Accounts payable and accrued expenses
(3,910)
1,255
Accrued compensation and related benefits
(2,159)
1,814
Other current liabilities
(251)
376
Deferred revenue
2,646
7,862
Deferred rent, non-current
5,718
(797)
Net cash used in operating activities
(2,960)
(23,953)
Cash flows from investing activities:
Purchases of property and equipment
(31,430)
(2,187)
Proceeds from sale of equipment
—
4
Net cash used in investing activities
(31,430)
(2,183)
Cash flows from financing activities:
Proceeds from public offering, net of any underwriting discounts
101,653
58,258
Payment of costs related to public offerings
(12)
(353)
Proceeds from exercise of common stock options
4,052
2,627
Principal payments on capital lease obligations
(299)
—
Net cash provided by financing activities
105,394
60,532
Effect of foreign exchange rate changes on cash and cash equivalents
(380)
(888)
Net increase in cash and cash equivalents
70,624
33,508
Cash and cash equivalents, beginning of period
94,930
73,758
Cash and cash equivalents, end of period
$
165,554
$
107,266
Supplemental disclosure of cash flow information:
Cash paid for interest
$
250
$
34
Cash paid for income taxes
$
236
$
178
Supplemental disclosure of non-cash financing information:
Capital lease obligations to acquire new office furniture and fixtures and computer hardware
$
4,491
$
—
Offering costs included in accounts payable and accrued expenses
$
338
$
76
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
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 development platform that accelerates the creation of high-impact business applications. The applications created on our platform help companies 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 Tysons, 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, 2018, filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2019.
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 that 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 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.
Public Offering
In September 2019, we completed an underwritten public offering of 2,329,000 shares of our Class A common stock, of which 1,825,000 shares of Class A common stock were sold by us and 504,000 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 $55.70 per share. Our net proceeds from the offering were $101.3 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
We generate revenue primarily through sales of subscriptions to our platform, as well as professional services. We recognize revenue when all of the following conditions are met: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of related fees is reasonably assured. If collection is not reasonably assured, we defer revenue recognition until collectability becomes reasonably assured. Our arrangements do not contain general rights of return. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.
10
APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Subscriptions, Software and Support Revenue
Subscriptions, software and support revenue is primarily related to (1) software as a service (“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 or, alternatively, non-user based single application licenses. We bill customers and collect payment for subscriptions to our platform in advance on a monthly, quarterly or annual basis. In certain instances, we have had customers pay their entire contract up front.
SaaS Subscriptions
Our SaaS subscription revenue is derived from customers accessing our cloud offering pursuant to contracts that are generally one to three years in length. We perform all required maintenance and support for our cloud offering and we do not separately charge customers for hosting costs. In these arrangements, our customers do not have the right to take the software on-premises and, as a result, such arrangements are not accounted for within the scope of the software revenue guidance. Revenue from SaaS subscriptions is recognized ratably over the term of the subscription, beginning with the date our service is made available to our customer.
Term License Subscriptions
Our term license subscription revenue is derived from customers with on-premises installations of our platform pursuant to contracts that are generally one to three years in length, with more recent contracts trending towards one year in length. Customers with term license subscriptions have the right to use our software and receive maintenance and support. Since we do not sell maintenance and support separately from the subscription, revenue for the term license subscription and maintenance and support is recognized ratably over the term of the subscription, upon delivery of the platform to the customer when sold on a standalone basis.
Professional Services
Our professional services revenue is comprised of fees for consulting services, including application development and deployment assistance and training related to our platform. Our professional services are not essential to the functionality of our platform because the platform is ready for the customer’s use immediately upon delivery and is not modified or customized in any manner.
Consulting services are billed under both time-and-material and fixed-fee arrangements. For standalone time-and-material contracts, we recognize revenue at contractually agreed upon billing rates applied to hours performed. For standalone fixed-fee contracts, we also recognize revenue as the work is performed using the proportional performance method of accounting. Training revenue is recognized when the associated training services are delivered. Training is also sold in the form of a subscription arrangement where a customer agrees to pay an annual fixed fee for a fixed number of users to have access to all our training offerings during the year. Revenue from training subscription agreements is recognized ratably over the subscription period.
We defer recognition of revenue from work performed on pending contract modifications until the period in which the modifications are accepted and funding is approved by the customer. Costs of work performed on pending contract modifications are expensed as incurred.
Multiple Element Arrangements
Our multiple element arrangements are from SaaS subscriptions and term license subscriptions that are generally sold in combination with maintenance and support service and frequently with professional services.
SaaS Subscriptions
For multiple element arrangements involving SaaS subscriptions that include professional services in addition to the subscription to our platform, we evaluate each element to determine whether it represents a separate unit of accounting.
11
APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Because there are third-party vendors who routinely sell and provide the same professional services to our customers, our professional services are deemed to have standalone value apart from the SaaS subscription. Additionally, we offer both SaaS subscriptions and professional services on a standalone basis. Professional services revenue is therefore accounted for separately from subscription fees and recognized as the professional services are performed. We allocate revenue to the elements based on the selling price hierarchy using vendor-specific objective evidence (“VSOE”) of selling price, third-party evidence (“TPE”) of selling price, or if neither exists, best estimated selling price (“BESP”). In cases where we do not have VSOE or TPE of the elements of our arrangements, we use BESP to allocate revenue. We determine BESP for a service by considering multiple factors including, but not limited to, evaluating the weighted average of actual sales prices and other factors such as gross margin objectives, pricing practices and growth strategy. Pricing practices taken into consideration include historic contractually stated prices, volume discounts where applicable and our price lists. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Once the revenue is allocated to these elements, revenue is recognized as such services are provided.
Term License Subscriptions
For multiple element arrangements involving term license subscriptions, maintenance and support and professional services, we do not have VSOE of fair value for the maintenance and support. Our term license subscriptions are generally not sold on a standalone basis, and therefore, we have not established VSOE of fair value for the subscriptions. Consequently, for our bundled arrangements that include certain professional services, there are two undelivered elements for which VSOE of fair value has not been established and, therefore, we utilize the combined services approach and defer all revenue until the software has been delivered and the provision of all services has commenced. We then recognize the entire fee from the arrangement ratably over the remaining period of the arrangement, assuming all other software revenue recognition criteria have been met.
Deferred Revenue
Deferred revenue primarily consists of amounts billed or billable in advance of revenue recognition from our subscriptions, software, and support and professional services described above. Deferred revenue is recognized as the revenue recognition criteria are met.
Cost of Revenue
Cost of Subscriptions, Software and Support Revenue
Cost of subscriptions, software and support revenue consists primarily of fees paid to our third-party managed hosting providers and other third-party service providers, personnel costs, including payroll and benefits for our technology operations and customer support teams, and allocated facility costs and overhead.
Cost of Professional Services Revenue
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 that are 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 that the financial institutions that hold 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 that no additional credit risk beyond amounts provided for collection loss are inherent in accounts receivable. Revenue generated from government agencies represented 15.9% and 17.0% of our revenue for the three and nine months ended September 30, 2019, respectively, of which the top three federal government agencies generated 7.0% of our revenue for each of the three and nine months ended September 30, 2019. Additionally, 32.5% and 31.1% of our revenue during the three and nine months ended September 30, 2019, respectively, was generated from foreign customers. Revenue generated from
12
APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
government agencies represented 14.1% and 16.1% of our revenue for the three and nine months ended September 30, 2018, respectively, of which the top three federal government agencies generated 7.2% and 8.7% of our revenue for the three and nine months ended September 30, 2018, respectively. Additionally, 29.1% and 30.0% of our revenue during the three and nine months ended September 30, 2018, respectively, was generated from foreign customers.
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. 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. To date, our allowance and related bad debt write-offs have been nominal. There was no change in the allowance for doubtful accounts from December 31, 2018 to September 30, 2019.
Non-Trade Receivables
We record non-trade receivables to reflect amounts due for activities other than sales of subscriptions to our platform and professional services. Our non-trade receivables relate entirely to a receivable from our tenant improvement allowance. The tenant improvement allowance receivable was $14.4 million as of December 31, 2018 and is classified within prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets. We recognized our initial tenant improvement allowance receivable of $15.8 million related to our new headquarters once we took initial possession of the space in October 2018. We recognized additional tenant improvement allowance receivable of $2.6 million when we took possession of adjacent office space in February 2019. We had received the entire tenant improvement allowance as of September 30, 2019, and therefore, there was no receivable balance remaining as of such date.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with subscription agreements with customers and consist of sales commissions paid to our direct sales force. Commissions are considered direct and incremental and as such are deferred and amortized over the terms of the related customer contracts consistent with the related revenue. Amortization of deferred commissions is included in sales and marketing expense in the accompanying condensed consolidated statements of operations. Commission expense was $4.9 million and $14.0 million for the three and nine months ended September 30, 2019, respectively. Commission expense was $4.0 million and $10.2 million for the three and nine months ended September 30, 2018, 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.
Asset Category
Useful Life (in years)
Computer software
3
Computer hardware
3
Equipment
5
Office furniture and fixtures
10
Leasehold improvements
Shorter of useful life of assets or lease term
13
APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2019 and December 31, 2018 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 during the three and nine months ended September 30, 2019 and September 30, 2018.
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 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, 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. For restricted stock units, stock-based compensation expense is recognized on a straight-line basis over the requisite service period. We account for forfeitures as they occur, rather than estimating expected forfeitures.
Emerging Growth Company Status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). We will remain an emerging growth company until December 31, 2019. After that date, we will no longer be an "emerging growth company" but will then be a "large accelerated filer," because over $700 million of our outstanding equity securities were held by non-affiliates as of June 30, 2019. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
Recent Accounting Pronouncements
Adopted
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which aims to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
prospectively as of the earliest date practicable. ASU 2016-15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The adoption of ASU 2016-15 did not have an impact on our condensed consolidated financial statements for the three and nine months ended September 30, 2019.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"), which provides entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income ("OCI") that the FASB refers to as having been stranded in accumulated OCI as a result of tax reform. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. The adoption of ASU 2018-02 did not have an impact on our condensed consolidated financial statements for the three and nine months ended September 30, 2019.
Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which provides new guidance for revenue recognition. ASC 606 provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. In March 2016, the FASB issued ASU No. 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) (“ASU 2016-08”), which clarifies implementation guidance on principal versus agent considerations in ASC 606. In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing (“ASU 2016-10”), which clarifies the identification of performance obligations and the licensing implementation guidance in ASC 606. In addition, in May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"), which clarifies the guidance on assessing collectibility, presentation of sales taxes, noncash consideration and completed contracts and contract modifications at transition. For public entities, the new standard is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. For all other entities, the new standard is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods beginning after December 15, 2019. We have elected to avail ourselves of the JOBS Act extended transition period that permits us to defer adoption until January 1, 2019. In accordance with guidance, the new standard will be adopted in our Annual Report on Form 10-K for the fiscal year ending December 31, 2019 but has not been adopted in our Quarterly Reports on Form 10-Q during 2019.
The ASC 606 guidance allows two methods of adoption: retrospectively to each prior reporting period (full retrospective method) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We intend to adopt the new standard using the modified retrospective method.
We do not expect the new standard to have a material impact on the timing of revenue recognition related to our cloud-based subscriptions and standalone professional services. However, we expect the new standard to have a significant impact on the timing of revenue recognition related to our on-premise term license contracts. Under current industry-specific software revenue recognition guidance, we have historically concluded that we did not have VSOE of fair value of the undelivered services related to on-premise term license contracts, and accordingly, have recognized on-premise term license contracts and related services ratably over the contract term. Under this new standard, the requirement to have VSOE for undelivered services is eliminated. Therefore, we will be required to recognize a portion of revenue from the on-premise term license contracts upon delivery of the software.
In addition, we expect the new standard to impact our accounting for contract acquisition costs, both with respect to the amounts that will be capitalized as well as the period of amortization. Currently, we defer the direct and incremental commission costs to obtain a contract with a customer and amortize those costs over the term of the related customer contract consistent with the related revenue. Under the new standard, we will defer the incremental costs to obtain a contract with a customer. Therefore, the new standard will result in additional costs being capitalized, including fringe benefits. Under the new standard, initial incremental costs to obtain a contract will be amortized over the customer's estimated economic life of five years, which was calculated based on both qualitative and quantitative factors, such as product life cycles, contractual terms and customer attrition. Incremental contract costs paid relating to contract renewals will be deferred and amortized on a straight-
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
line basis over the related renewal period. As a result, we expect the deferred commissions asset to increase and the related amortization expense in each reporting period to decrease under the new standard.
We are still in the process of quantifying the effects of the adoption of ASC 606 as well as continuing to evaluate the impact of the adoption of the standard on our consolidated financial statements, including our footnotes.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which was further clarified by ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, both issued in July 2018. ASU 2016-02 requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by lease assets. The new standard also requires additional disclosure of qualitative and quantitative information about the amounts recorded in the financial statements related to lease agreements. Because we will lose "emerging growth company" status effective December 31, 2019, the new standard will be adopted in our Annual Report on Form 10-K for the year ending December 31, 2019. ASU 2016-02 requires a transition adoption election of either (1) a modified retrospective approach with periods prior to the adoption date being restated or (2) a prospective adoption approach with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not restated.
We are currently evaluating the impact the adoption of ASU 2016-02 will have on our condensed consolidated financial statements. We plan to adopt this standard using the prospective adoption approach and electing the package of practical expedients allowed under the standard. The package of practical expedients will allow us not to reassess: (i) whether or not any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any existing leases qualify for capitalization under ASU 2016-02. Additionally, we plan to elect the practical expedient to not separate lease components from non-lease components for leases related to office space. We do not plan on using the hindsight practical expedient when determining the lease term and assessing impairment of right-of-use assets.
Although we are still evaluating the impact of the adoption of the standard on our condensed consolidated financial statements, we expect there will be a material increase to assets and liabilities related to the recognition of new right-of-use assets and lease liabilities on our balance sheet for leases currently classified as operating leases. We do not expect the adoption of ASU 2016-02 to have a material impact on our consolidated statements of operations.
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. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
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. Early application will be permitted. We do not expect ASU 2018-13 to have a material impact on our consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Property and Equipment, net
Property and equipment, net consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019
December 31, 2018
Leasehold improvements
$
36,698
$
9,958
Office furniture and fixtures
4,183
649
Computer hardware
3,690
2,535
Computer software
1,727
1,727
Equipment
80
138
46,378
15,007
Less: accumulated depreciation
(6,355)
(7,468)
Property and equipment, net
$
40,023
$
7,539
Depreciation and amortization totaled $1.3 million and $3.3 million for the three and nine months ended September 30, 2019, respectively. Depreciation and amortization totaled $0.5 million and $1.5 million for the three and nine months ended September 30, 2018, respectively. During the three months ended September 30, 2019, we retired $0.4 million of fully depreciated computer hardware and $0.1 million of fully depreciated equipment associated with the relocation of our corporate headquarters. 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 associated with the relocation of our corporate headquarters. During the nine months ended September 30, 2019, we recorded a loss on disposal of $0.1 million. During the nine months ended September 30, 2018, we disposed of $0.1 million of fully depreciated computer hardware. There were no disposals in the three months ended September 30, 2018.
At September 30, 2019, office furniture and fixtures included $