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APPIAN CORP - Quarter Report: 2019 September (Form 10-Q)



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, 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 classTrading symbolName of each exchange on which registered
Class A Common StockAPPNThe 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.





Table of Contents
Page
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

3


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 ofAs of
September 30, 2019December 31, 2018
(unaudited)
Assets
Current assets
Cash and cash equivalents$165,554  $94,930  
Accounts receivable, net of allowance of $600 as of September 30, 2019 and December 31, 2018
70,792  79,383  
Deferred commissions, current18,468  14,020  
Prepaid expenses and other current assets10,200  21,293  
Total current assets265,014  209,626  
Property and equipment, net40,023  7,539  
Deferred commissions, net of current portion13,069  15,088  
Deferred tax assets560  326  
Other assets561  601  
Total assets$319,227  $233,180  
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$5,316  $9,249  
Accrued expenses7,916  7,464  
Accrued compensation and related benefits11,458  13,796  
Deferred revenue, current100,497  95,523  
Capital leases, current1,429  —  
Other current liabilities2,067  2,369  
Total current liabilities128,683  128,401  
Deferred tax liabilities136  42  
Deferred revenue, net of current portion13,557  16,145  
Deferred rent, net of current portion21,280  15,400  
Capital leases, net of current portion2,763  —  
Total liabilities166,419  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
  
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
  
Additional paid-in capital336,694  218,284  
Accumulated other comprehensive income1,106  542  
Accumulated deficit(184,998) (145,640) 
Total stockholders’ equity152,808  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,
2019201820192018
Revenue:
Subscriptions, software and support$41,599  $30,905  $115,767  $90,904  
Professional services27,788  24,043  80,110  75,623  
Total revenue69,387  54,948  195,877  166,527  
Cost of revenue:
Subscriptions, software and support4,484  3,261  12,105  8,713  
Professional services19,467  16,831  58,963  54,002  
Total cost of revenue23,951  20,092  71,068  62,715  
Gross profit45,436  34,856  124,809  103,812  
Operating expenses:
Sales and marketing28,858  25,467  89,951  75,815  
Research and development15,697  11,737  42,418  32,392  
General and administrative11,191  12,537  29,468  29,022  
Total operating expenses55,746  49,741  161,837  137,229  
Operating loss(10,310) (14,885) (37,028) (33,417) 
Other expense:
Other expense, net2,016  110  1,700  1,785  
Interest expense96  67  236  134  
Total other expense2,112  177  1,936  1,919  
Loss before income taxes(12,422) (15,062) (38,964) (35,336) 
Income tax expense (benefit) (34) 394  212  
Net loss$(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 diluted65,508,113  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,
2019201820192018
Net loss$(12,427) $(15,028) $(39,358) $(35,548) 
Comprehensive income (loss), net of income taxes:
Foreign currency translation adjustment954  (400) 564  137  
Total other comprehensive loss, net of income taxes$(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 StockAdditional Paid-In CapitalAccumulated Deficit
SharesAmount
Balance, January 1, 201860,599,877  $ $141,268  $439  $(96,189) $45,524  
Net loss―  ―  ―  ―  (9,553) (9,553) 
Issuance of common stock to directors2,935  ―  ―  ―  ―  —  
Exercise of stock options607,349  ―  982  ―  ―  982  
Stock-based compensation expense―  ―  2,240  ―  ―  2,240  
Other comprehensive loss―  ―  ―  (565) ―  (565) 
Balance, March 31, 201861,210,161   144,490  (126) (105,742) 38,628  
Net loss—  —  —  —  (10,967) (10,967) 
Issuance of common stock to directors3,670  —  —  —  —  —  
Exercise of stock options399,049  —  1,090  —  —  1,090  
Stock-based compensation expense—  —  2,206  —  —  2,206  
Other comprehensive income—  —  —  1,102  —  1,102  
Balance, June 30, 201861,612,880   147,786  976  (116,709) 32,059  
Net loss—  —  —  —  (15,028) (15,028) 
Issuance of common stock from public offering, net of issuance costs1,675,000  —  57,829  —  —  57,829  
Issuance of common stock to directors2,555  —  —  —  —  —  
Vesting of restricted stock units6,300  —  —  —  —  —  
Exercise of stock options291,581  —  555  —  —  555  
Stock-based compensation expense—  —  6,801  —  —  6,801  
Other comprehensive loss—  —  —  (400) —  (400) 
Balance, September 30, 201863,588,316  $ $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 StockAdditional Paid-In CapitalAccumulated Deficit
SharesAmount
Balance, January 1, 201963,916,437  $ $218,284  $542  $(145,640) $73,192  
Net loss—  —  —  —  (17,537) (17,537) 
Issuance of common stock to directors3,461  —  —  —  —  —  
Vesting of restricted stock units278,680  —  —  —  —  —  
Exercise of stock options482,444  —  1,073  —  —  1,073  
Stock-based compensation expense—  —  7,225  —  —  7,225  
Other comprehensive income—  —  —  340  —  340  
Balance, March 31, 201964,681,022   226,582  882  (163,177) 64,293  
Net loss—  —  —  —  (9,394) (9,394) 
Issuance of common stock to directors2,684  —  —  —  —  —  
Vesting of restricted stock units6,010  —  —  —  —  —  
Exercise of stock options147,852  —  914  —  —  914  
Stock-based compensation expense—  —  2,689  —  —  2,689  
Other comprehensive loss—  —  —  (730) —  (730) 
Balance, June 30, 201964,837,568   230,185  152  (172,571) 57,772  
Net loss—  —  —  —  (12,427) (12,427) 
Issuance of common stock from public offering, net of issuance costs1,825,000  —  101,303  —  —  101,303  
Issuance of common stock to directors2,563  —  —  —  —  —  
Vesting of restricted stock units94,772  —  —  —  —  —  
Exercise of stock options387,095  —  2,065  —  —  2,065  
Stock-based compensation expense—  —  3,141  —  —  3,141  
Other comprehensive income—  —  —  954  —  954  
Balance, September 30, 201967,146,998  $ $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,
20192018
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 amortization3,273  1,452  
Loss (gain) on disposal of equipment146  (4) 
Bad debt expense97   
Deferred income taxes(191) 69  
Stock-based compensation13,055  11,247  
Changes in assets and liabilities:
Accounts receivable9,051  (6,226) 
Prepaid expenses and other assets11,351  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 revenue2,646  7,862  
Deferred rent, non-current5,718  (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—   
Net cash used in investing activities(31,430) (2,183) 
Cash flows from financing activities:
Proceeds from public offering, net of any underwriting discounts101,653  58,258  
Payment of costs related to public offerings(12) (353) 
Proceeds from exercise of common stock options4,052  2,627  
Principal payments on capital lease obligations(299) —  
Net cash provided by financing activities105,394  60,532  
Effect of foreign exchange rate changes on cash and cash equivalents(380) (888) 
Net increase in cash and cash equivalents70,624  33,508  
Cash and cash equivalents, beginning of period94,930  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 CategoryUseful Life (in years)
Computer software3
Computer hardware3
Equipment5
Office furniture and fixtures10
Leasehold improvementsShorter 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
14

APPIAN CORPORATION AND SUBSIDIARIES
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-
15

APPIAN CORPORATION AND SUBSIDIARIES
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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APPIAN CORPORATION AND SUBSIDIARIES
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, 2019December 31, 2018
Leasehold improvements$36,698  $9,958  
Office furniture and fixtures4,183  649  
Computer hardware3,690  2,535  
Computer software1,727  1,727  
Equipment80  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 $3.7 million acquired under capital lease agreements and computer hardware included $0.8 million acquired under capital lease agreements. There were no assets acquired under capital lease agreements as of December 31, 2018. Accumulated depreciation related to office furniture and fixtures and computer hardware acquired under capital leases totaled $0.3 million at September 30, 2019. Amortization of assets acquired under capital leases is included in depreciation and amortization expense.

4.  Accrued Expenses

Accrued expenses consisted of the following as of September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019December 31, 2018
Accrued contract labor costs$2,558  $3,128  
Accrued reimbursable employee expenses1,318  459  
Accrued hosting costs931  579  
Accrued audit and tax expenses797  375  
Accrued leasehold improvement costs426  —  
Accrued third party license fees301  729  
Accrued marketing and tradeshow expenses287  229  
Accrued legal costs276  —  
Other accrued expenses1,022  1,965  
Total$7,916  $7,464  


5.  Debt
Line of Credit
In November 2017, we entered into a $20.0 million revolving line of credit with a lender. The facility matures in November 2022. We may elect whether amounts drawn on the revolving line of credit bear interest at a floating rate per annum equal to either the LIBOR or the prime rate plus an additional interest rate margin that is determined by the availability of the
17

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
borrowings under the revolving line of credit. The additional interest rate margin will range from 2.00% to 2.50% in the case of LIBOR advances and from 1.00% to 1.50% in the case of prime rate advances. The revolving line of credit contains an unused facility fee in an amount between 0.15% and 0.25% of the average unused portion of the revolving line of credit, which is payable quarterly. The agreement contains certain customary affirmative and negative covenants and requires us to maintain (1) an adjusted quick ratio of at least 1.35 to 1.0 and (ii) minimum adjusted EBITDA, in the amounts and for the periods set forth in the agreement. Any amounts borrowed under the credit facility are collateralized by substantially all of our assets. We were in compliance with all covenants as of September 30, 2019. As of September 30, 2019, we had no outstanding borrowings under the revolving line of credit.


6.  Income Taxes
The provision for income taxes is based upon the estimated annual effective tax rates for the year applied to the current period income before tax plus the tax effect of any significant unusual items, discrete events or changes in tax law. Our operating subsidiaries are exposed to statutory effective tax rates ranging from zero to approximately 32%. Fluctuations in the distribution of pre-tax income among our operating subsidiaries can lead to fluctuations of the effective tax rate in the condensed consolidated financial statements. For the three and nine months ended September 30, 2019, the actual effective tax rates were (0.04)% and (1.0)%, respectively. For the three and nine months ended September 30, 2018, the actual effective tax rates were 0.2% and (0.6)%, respectively.
We assess uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Income Taxes. As of September 30, 2019, our net unrecognized tax benefits totaled $1.0 million, of which the entire portion would favorably impact our effective tax rate in the period if recognized. We anticipate that the amount of reasonably possible unrecognized tax benefits that could decrease over the next 12 months due to the expiration of certain statutes of limitations and settlement of tax audits is not material to our consolidated financial statements.
We file income tax returns in the United States federal jurisdiction and in many states and foreign jurisdictions. The tax years 2015 through 2018 remain open to examination by the major taxing jurisdictions to which we are subject. We are not currently under examination by the Internal Revenue Service for any open tax years.

7.  Stock-Based Compensation
In May 2017, our board of directors adopted, and our stockholders approved, the 2017 Equity Incentive Plan (the “2017 Plan”), which became effective as of the date of the final prospectus for our initial public offering. The 2017 Plan provides for the grant of incentive stock options to employees, and for the grant of nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards and other forms of equity compensation to employees, including officers, and to non-employee directors and consultants. We initially reserved 6,421,442 shares of Class A common stock for issuance under the 2017 Plan, which included 421,442 shares that remained available for issuance under our 2007 Stock Option Plan (the “2007 Plan”) at the time that the 2017 Plan became effective. The number of shares reserved under the 2017 Plan increases for any shares subject to outstanding awards originally granted under the 2007 Plan that expire or are forfeited prior to exercise. As a result of the adoption of the 2017 Plan, no further grants may be made under the 2007 Plan. As of September 30, 2019, there were 7,099,083 shares of Class A common stock reserved for issuance under the 2017 Plan, of which 4,859,478 were available to be issued.
We estimate the fair value of stock options containing only a service condition using the Black-Scholes Option Pricing Model, which requires the use of subjective assumptions, including the expected term of the option, the current price of the underlying stock, the expected stock price volatility, expected dividend yield and the risk-free interest rate for the expected term of the option. The expected term represents the period of time the stock options are expected to be outstanding. Due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the stock options, we use the simplified method to estimate the expected term for our stock options. Under the simplified method, the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected term of the stock options. We assume no dividend yield because dividends are not expected to be paid in the near future, which is consistent with our history of not paying dividends.
In May 2019, our board of directors granted a stock option to purchase 700,000 shares of our Class A common stock to our Chief Executive Officer (the "2019 CEO Grant") under the 2017 Plan with an exercise price of $33.98 per share. The
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APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2019 CEO Grant is eligible to vest based on the achievement of a stock price appreciation target of our Class A common stock. Specifically, the 2019 CEO Grant will vest when shares of our Class A common stock closes at or above $84.63 per share for a period equal to or greater than 90 calendar days or upon the occurrence of a change in control in which the value of our Class A common stock is equal to or greater than $84.63 per share within five years of the grant date. The fair value of the 2019 CEO Grant was determined using a Monte Carlo simulation. The fair value of the award at the grant date was $9.5 million and will be amortized over the derived service period of 2.6 years.
There were no stock options granted during the three months ended September 30, 2019 and 2018. The following table summarizes the assumptions used to estimate the fair value of stock options granted during the nine months ended September 30, 2019 and 2018:
Nine Months Ended September 30,
20192018
Risk-free interest rate2.1%*
Expected term (in years)2.6*
Expected volatility55.0%  *
Expected dividend yield—%  *
* Not applicable because no stock options were granted during the period
Stock Options
The following table summarizes the stock option activity for the nine months ended September 30, 2019:
Number of SharesWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value (in thousands)
January 1, 20195,021,068  $7.30  6.4$97,440  
Granted700,000  33.98  
Exercised(1,017,391) 3.98  37,562  
Canceled(58,620) 10.19  
Outstanding at September 30, 20194,645,057  12.02  6.0164,826  
Exercisable at September 30, 20192,894,857  7.39  5.9116,112  
The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2019 was $13.57 per share. No stock options were granted during the nine months ended September 30, 2018. The total fair value of stock options that vested during the nine months ended September 30, 2019 and 2018 was $1.7 million and $10.2 million, respectively. As of September 30, 2019, the total compensation cost related to unvested stock options not yet recognized was $9.6 million, which will be recognized over a weighted average period of 2.2 years.
Restricted Stock Units
The following table summarizes the restricted stock unit activity for the nine months ended September 30, 2019:
Number of SharesWeighted Average Grant Date Fair Value
Non-vested outstanding at January 1, 20191,175,049  $26.04  
Granted199,845  36.50  
Vested(379,462) 29.83  
Canceled(28,556) 29.11  
Non-vested outstanding at September 30, 2019966,876  26.63  
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APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of September 30, 2019, total unrecognized compensation cost related to unvested restricted stock units was approximately $21.3 million, which will be recognized over a weighted average period of 2.2 years.
In November 2018, our co-founders were granted 255,930 restricted stock units under the 2017 Plan at a fair value of $30.06 per share. The awards were approved by the board of directors. The value of these awards at the grant date was $7.7 million and was amortized over the vesting periods. The restricted stock units vested during the three months ended March 31, 2019.
The following table summarizes the components of our stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2019201820192018
Stock-based compensation expense related to restricted stock units$1,873  $1,477  $10,544  $3,388  
Stock-based compensation expense related to stock options1,176  5,232  2,235  7,559  
Stock-based compensation expense related to the issuance of common stock to directors92  92  276  300  
Total stock-based compensation expense$3,141  $6,801  $13,055  $11,247  
Stock-based compensation expense for restricted stock units, stock options and issuances of common stock is included in the following line items in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2019201820192018
Cost of revenue
Subscriptions, software and support$147  $138  $462  $355  
Professional services243  222  2,461  645  
Operating expenses
Sales and marketing776  736  3,971  1,781  
Research and development433  373  2,983  1,106  
General and administrative1,542  5,332  3,178  7,360  
Total stock-based compensation expense$3,141  $6,801  $13,055  $11,247  


8.  Stockholders’ Equity
As of September 30, 2019, we had authorized 500,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each with a par value of $0.0001 per share, of which 34,204,362 shares of Class A common stock and 32,942,636 shares of Class B common stock were issued and outstanding. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. The holders of Class A common stock are entitled to one vote per share, and the holders of Class B common stock are entitled to ten votes per share, on all matters that are subject to stockholder vote. The holders of Class B common stock also have approval rights for certain corporate actions. Each share of Class B common stock may be converted into one share of Class A common stock at the option of its holder and will be automatically converted into one share of Class A common stock upon transfer thereof, subject to certain exceptions. In addition, upon the date on which the outstanding shares of Class B common stock represent less than 10% of the aggregate voting power of our capital stock, all outstanding shares of Class B common stock shall convert automatically into Class A common stock.


20

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9.  Basic and Diluted Loss per Common Share
The following potentially dilutive securities outstanding, prior to the use of the treasury stock method or the if-converted method, have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been anti-dilutive:
Three and Nine Months Ended September 30,
20192018
Stock options4,645,057  5,642,484  
Non-vested restricted stock units966,876  1,021,970  


10.  Commitments and Contingencies
Operating Leases
We lease office space and equipment under non-cancellable operating lease agreements which have various expiration dates through 2031 for our office space and various expiration dates through 2020 for our equipment.
In April 2018, we entered into a new lease agreement for a new headquarters in Tysons, Virginia. We took initial possession of the first phase of the new headquarters in October 2018 and began to recognize rent expense. We expect to start making recurring rental payments under the lease in the third quarter of 2020. Total payments committed under the lease amount to $87.2 million. In connection with the lease agreement, we also entered into a letter of credit of $9.4 million to fund the security deposit required by the lease.
The lease for the new headquarters contains a tenant improvement allowance of up to $18.4 million from the landlord. The tenant improvement allowance is accounted for as a lease incentive obligation and is amortized as a reduction to rent expense over the lease term. We recorded a lease incentive obligation when we took initial possession of the first phase of the new headquarters. We took initial possession of the second phase in February 2019 and recorded an additional lease incentive obligation. As of September 30, 2019, $1.4 million was included in other current liabilities and $15.7 million was included in deferred rent, net of current portion on the accompanying consolidated balance sheets. As of December 31, 2018, $1.2 million was included in other current liabilities and $14.4 million was included in deferred rent, net of current portion on the accompanying consolidated balance sheets.
Capital Leases
We lease certain office furniture and fixtures and computer hardware under non-cancellable capital lease agreements that have expiration dates in 2022. As of September 30, 2019, office furniture and fixtures and computer hardware acquired under capital lease agreements totaled $3.7 million and $0.8 million, respectively. There were no assets acquired under capital lease agreements as of December 31, 2018.
A summary of our future minimum payments under non-cancellable operating and capital lease agreements by year as of September 30, 2019 is as follows (in thousands):
Operating LeasesCapital Leases
Remainder of 2019$1,073  $405  
20203,312  1,620  
20216,840  1,620  
20226,983  884  
20237,035  —  
Thereafter  65,217  —  
Total minimum lease payments90,460  4,529  
Less: amounts representing interest —  (337) 
Present value of lease obligations$90,460  $4,192  

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APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We record rent expense using the total minimum rent commitment, amortized using the straight-line method over the term of the lease. The difference between monthly rental payments and recorded rent expense is charged to deferred rent. As of September 30, 2019 and December 31, 2018, deferred rent totaled $22.6 million and $17.4 million, respectively, and is included within other current liabilities and deferred rent, net of current portion on the accompanying condensed consolidated balance sheets. In addition to rental payments, certain leases require additional payments for real estate taxes, common area maintenance and insurance, which are expensed when incurred and not included in future minimum payments.
Total rent and lease expense was $2.5 million and $8.0 million for the three and nine months ended September 30, 2019, respectively. Total rent and lease expense was $1.9 million and $5.8 million for the three and nine months ended September 30, 2018, respectively.
Other Commitments
We also have entered into a non-cancellable agreement for the use of technology that is integral in the development of our software and pay annual royalty fees of $0.3 million.
Letters of Credit
As of each of September 30, 2019 and December 31, 2018, we had outstanding letters of credit totaling $10.5 million in connection with securing our leased office space. All letters of credit are secured by our borrowing arrangement as described in Note 5.
Legal
From time to time, we are subject to legal, regulatory and other proceedings and claims that arise in the ordinary course of business. There are no issues or resolution of any matters that are expected to have a material adverse impact on our consolidated financial statements.


11.  Segment and Geographic Information
The following table summarizes revenue by geography for the three and nine months ended September 30, 2019 and 2018 (in thousands): 
Three Months Ended September 30,Nine Months Ended September 30,
2019201820192018
Domestic$46,859  $38,982  $135,037  $116,498  
International22,528  15,966  60,840  50,029  
Total$69,387  $54,948  $195,877  $166,527  
With respect to geographic information, revenue is attributed to respective geographies based on the contracting address of the customer. Revenues from external customers attributed to the United Kingdom were 12.1% and 10.8% of our total revenue for the three and nine months ended September 30, 2019, respectively. There were no individual foreign countries from which more than 10% of our total revenue was attributable for the three and nine months ended September 30, 2018. Substantially all of our long-lived assets were held in the United States as of September 30, 2019 and December 31, 2018.

12.  Subsequent Events
In preparing our condensed consolidated financial statements, we evaluated subsequent events through October 31, 2019, which is the date that the condensed consolidated financial statements were available to be issued.
On October 29, 2019, our board of directors approved the grant of 224,770 restricted stock units under the 2017 Plan at a fair value of $44.34 per share to members of management and other employees. The value of these awards at the grant date was $10.0 million and will be amortized over the vesting periods. The restricted stock units vest over five years through November 5, 2024.
22


Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2018 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on February 21, 2019.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations, including statements regarding our future financial and operating performance, anticipated expansion of the usage of partners to perform professional services and our future capital requirements. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC on February 21, 2019 and in our other filings with the SEC. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We provide 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.
With our platform, organizations can rapidly and easily design, build and implement powerful, enterprise-grade custom applications through our intuitive, visual interface with little or no coding required. Our customers have used applications built on our low-code platform to launch new business lines, automate vital employee workflows, manage complex trading platforms, accelerate drug development and build global procurement systems. With our platform, decision makers can reimagine their products, services, processes and customer interactions by removing much of the complexity and many of the challenges associated with traditional approaches to software development.
We have generated the majority of our revenue from sales of subscriptions, software and support, which include (1) SaaS subscriptions bundled with maintenance and support and hosting services, and (2) term license subscriptions bundled with maintenance and support.
Our subscription fees are based primarily on the number of users who access and utilize the applications built on our platform or, alternatively, non-user based single application licenses. Our customer contract terms generally vary from one to three years with most providing for payment in advance on an annual, quarterly or monthly basis. Due to the variability of our billing terms and the episodic nature of our customers purchasing additional subscriptions, we do not believe that changes in our deferred revenue in a given period are directly correlated with our revenue growth.
Since inception, we have invested in our professional services organization to help ensure that customers are able to build and deploy applications on our platform. We have several strategic partnerships, including with KPMG, PricewaterhouseCoopers and Deloitte, for them to refer customers to us and then to provide professional services directly to the customers using our platform. We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities.  In addition, over time we expect professional services revenue as a percentage of total revenue to decline as we increasingly rely on strategic partners to help our customers deploy our software.  We believe our investment in professional services, including strategic partners building their practices around Appian, will drive increased adoption of our platform.
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Our customers include financial services, life sciences, government, telecommunications, media, energy, manufacturing and transportation organizations. Generally, our sales force targets its efforts on organizations with over 2,000 employees and $2 billion in annual revenue. Revenue from government agencies represented 15.9% and 17.0% of our total revenue in the three and nine months ended September 30, 2019, respectively. Revenue from government agencies represented 14.1% and 16.1% of our total revenue in the three and nine months ended September 30, 2018, respectively. No single end-customer accounted for more than 10% of our total revenue in the three and nine months ended September 30, 2019 or September 30, 2018.
Our platform supports multiple languages to facilitate collaboration and address challenges in multi-national organizations. We offer our platform globally. In the three and nine months ended September 30, 2019, 32.5% and 31.1%, respectively, of our total revenue was generated from customers outside of the United States. In the three and nine months ended September 30, 2018, 29.1% and 30.0%, respectively, of our total revenue was generated from customers outside of the United States. As of September 30, 2019, we operated in 12 countries. We believe that we have a significant opportunity to grow our international footprint. We are investing in new geographies, including through investment in direct and indirect sales channels, professional services and customer support and implementation partners.
Recent Developments
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.
Our Business Model
Our business model focuses on maximizing the lifetime value of customer relationships, which is a function of the duration of a customer’s deployment of Appian as well as the price and number of subscriptions of Appian that a customer purchases. The costs we incur with respect to any customer may exceed revenue from that customer in earlier periods because we generally recognize costs associated with customer acquisition faster than we generate and recognize the associated revenue. We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who generally take more than one year to become productive given the length of our sales cycle, and marketing costs, all of which, with the exception of sales commissions, are expensed as incurred.
The following are several key factors that affect our performance:
Market Adoption of Our Platform. Our ability to grow our customer base and drive market adoption of our platform is affected by the pace at which organizations digitally transform. We expect that our revenue growth will be primarily driven by the pace of adoption and penetration of our platform. We offer a leading custom software development platform and intend to continue to invest to expand our customer base. The degree to which prospective customers recognize the need for low-code software that enables organizations to digitally transform, and subsequently allocate budget dollars to purchase our software, will drive our ability to acquire new customers and increase sales to existing customers, which, in turn, will affect our future financial performance.
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Growth of Our Customer Base. We believe we have a substantial opportunity to grow our customer base. We define a customer as an entity with an active subscription or active maintenance and support contract related to a perpetual software license as of the specified measurement date. To the extent we contract with one or more entities under common control, we count those entities as separate customers. We have aggressively invested, and intend to continue to invest, in our sales force in order to drive sales to new customers. In particular, we have recently made, and plan to continue to make, investments to enhance the expertise of our sales and marketing organization within our key industry verticals of financial services, life sciences and government. In addition, we have established relationships with strategic partners who work with organizations undergoing digital transformations. Our ability to continue to grow our customer base is dependent, in part, upon our ability to compete within the increasingly competitive markets in which we participate.
Further Penetration of Existing Customers. Our sales force seeks to generate additional revenue from existing customers by adding new users to our platform. Many of our customers begin by building a single application and then grow to build dozens of applications on our platform. Generally, the development of new applications on our platform results in the expansion of our user base within an organization and a corresponding increase in revenue to us because we charge subscription fees on a per-user basis for the significant majority of our customer contracts. As a result of this "land and expand" strategy, we have generated significant additional revenue from our customer base. Our ability to increase sales to existing customers will depend on a number of factors, including the size of our sales force and professional services teams, customers’ level of satisfaction with our platform and professional services, pricing, economic conditions and our customers’ overall spending levels. We have also re-focused some of our professional services personnel to become customer success managers. Their role is to ensure the customer realizes value from our platform and support the "land and expand" strategy versus delivering billable hours.
Mix of Subscription and Professional Services Revenue. We believe our professional services have driven customer success and facilitated the adoption of our platform by customers. During the initial period of deployment by a customer, we generally provide a greater amount of support in building applications and training than later in the deployment, with a typical engagement extending from two to six months. At the same time, many of our customers have historically purchased subscriptions only for a limited set of their total potential end users. As a result of these factors, the proportion of total revenue for a customer associated with professional services is relatively high during the initial deployment period. Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect the mix of total revenue to shift more toward subscription revenue in the long term. In addition, we intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities. These partners perform professional services with respect to any new service contracts they sign with our customers. As the usage of partners expands, we expect the proportion of our total revenue from subscriptions to increase over time relative to professional services. For the three months ended September 30, 2019 and 2018, 60.0% and 56.2% of our revenue, respectively, was derived from sales of subscriptions, software and support, while the remaining 40.0% and 43.8%, respectively, was derived from the sale of professional services. For the nine months ended September 30, 2019 and 2018, 59.1% and 54.6% of our revenue, respectively, was derived from sales of subscriptions, software and support, while the remaining 40.9% and 45.4%, respectively, was derived from the sale of professional services.
Investments in Growth. We have made and plan to continue to make investments for long-term growth, including investment in our platform and infrastructure to continuously maximize the power and simplicity of the platform to meet the evolving needs of our customers and to take advantage of our market opportunity.  We intend to continue to invest in sales and marketing, as we further expand our sales teams, increase our marketing activities and grow our international operations.
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Key Metrics
We monitor the following metrics to help us measure and evaluate the effectiveness of our operations (dollars in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2019201820192018
Subscription Revenue$40,435  $29,384  $112,045  $81,908  
As of September 30,
20192018
Subscription Revenue Retention Rate119 %117 %
Subscription Revenue
Subscription revenue is a portion of our revenue contained in the subscriptions, software and support revenue line of our consolidated statements of operations, and includes (1) software as a service, or SaaS, subscriptions bundled with maintenance and support and hosting services, and (2) term license subscriptions bundled with maintenance and support. As we generally sell our software on a per-user basis, our subscription revenue for any customer is primarily determined by the number of users who access and utilize the applications built on our platform, as well as the price paid. We believe that increasing our subscription revenue is an indicator of the demand for our platform, the pace at which the market for our solutions is growing, the productivity of our sales force and strategic relationships in growing our customer base, and our ability to further penetrate our existing customer base.
Subscription Revenue Retention Rate
A key factor to our success is the renewal and expansion of subscription agreements with our existing customers. We calculate this metric over a set of customers who have been with us for at least one full year. To calculate our subscription revenue retention rate for a particular trailing 12-month period, we first establish the recurring subscription revenue for the previous trailing 12-month period. This effectively represents recurring dollars that we should expect in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period without any expansion or contraction. We subsequently measure the recurring subscription revenue in the current trailing 12-month period from the cohort of customers from the previous trailing 12-month period. Subscription revenue retention rate is then calculated by dividing the aggregate recurring subscription revenue in the current trailing 12-month period by the previous trailing 12-month period. This calculation includes the impact on our revenue from customer non-renewals, pricing changes and growth in the number of users on our platform. Our subscription revenue retention rate can fluctuate from period to period due to large customer contracts in any given period.

Key Components of Results of Operations
Revenue
We generate revenue primarily through sales of subscriptions to our platform, as well as professional services. We generally sell our software on a per-user basis. We generally bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly or monthly basis. In certain instances, we have had customers pay their entire contract value up front.
Our revenue is comprised of the following:
Subscriptions, Software and Support
Subscriptions, software and support revenue is primarily derived from:
SaaS subscriptions bundled with maintenance and support and hosting services; and
on-premises term license subscriptions bundled with maintenance and support.
Our maintenance and support agreements provide customers with the right to unspecified software upgrades, maintenance releases and patches released during the term of the maintenance and support agreement on a when-and-if-
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available basis, and rights to technical support. When our platform is deployed within a customer’s own data center or private cloud, it is installed on the customer’s infrastructure and generally offered as a term license. When our platform is delivered as a SaaS subscription, we handle its operational needs in third-party hosted data centers.
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. Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect the mix of total revenue to shift more toward subscription revenue. We have several strategic partnerships, including with KPMG, PricewaterhouseCoopers and Deloitte. Our agreements with our strategic partners have indefinite terms and may be terminated for convenience by either party. We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities. These partners refer software subscription customers to us and, generally, perform professional services with respect to any new service contracts they originate, increasing our software subscription revenue without any change to our professional services revenue. As we expand the usage of partners, we expect professional services revenue to decline as a percentage of total revenue over time since our partners may perform professional services associated with software subscriptions that we sell.
Cost of Revenue
Subscriptions, Software and Support
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. We expect cost of revenue to continue to increase in absolute dollars for the foreseeable future as our customer base grows.
Professional Services
Cost of professional services revenue includes all direct and indirect costs to deliver our professional services and training, including employee compensation for our global professional services and training personnel, third-party contractor costs, allocated facility costs and overhead, as well as the costs of billable expenses, such as travel and lodging. The unpredictability of the timing of entering into significant professional services agreements sold on a standalone basis may cause significant fluctuations in our quarterly financial results.
Gross Margin
Gross profit and gross margin, or gross profit as a percentage of total revenue, has been, and will continue to be, affected by various factors, including the mix of subscription, software and support revenue and professional services revenue. Subscription pricing, the costs associated with third-party hosting facilities, and the extent to which we expand our professional services to support future growth will impact our gross margins. Our gross margin may fluctuate from period to period based on the above factors.
Subscriptions, Software and Support Gross Margin. Subscriptions, software and support gross margin is primarily affected by the growth in our subscriptions, software and support revenue as compared to the growth in, and timing of, costs to support such revenue. We expect to continue to invest in the customer support and SaaS operations to support the growth in the business and the timing of those investments is expected to cause gross margins to fluctuate.
Professional Services Gross Margin. Professional services gross margin is affected by the growth in our professional services revenue as compared to the growth in, and timing of, the cost of our professional services organization as we continue to invest in the growth of our business. Professional services gross margin is also impacted by the ratable recognition of some of our professional services revenue as compared to the recognition of related costs of services in the period incurred, as well as the amount of services performed by subcontractors as opposed to internal resources. Our professional services gross margin is also impacted by the amount of services performed by partners as opposed to internal resources.
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Operating Expenses
Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries, bonuses and other personnel-related costs are the most significant components of each of these expense categories.
Sales and Marketing Expense
Sales and marketing expense primarily includes personnel costs, including salaries, bonuses, commissions, stock-based compensation and other personnel costs related to sales teams. Additional expenses in this category include travel and entertainment, marketing and promotional events, marketing activities, subcontracting fees and allocated facility costs and overhead.
In order to continue to grow our business, geographical footprint and brand awareness, we expect to continue investing resources in sales and marketing by increasing the number of sales and account management teams. As a result, we expect sales and marketing expense to increase in absolute dollars as we continue to invest to acquire new customers and further expand usage of our platform within our existing customer base.
Research and Development Expense
Research and development expense consists primarily of personnel costs for our employees who develop and enhance our platform, including salaries, bonuses, stock-based compensation and other personnel costs. Also included are non-personnel costs such as subcontracting, consulting and professional fees to third party development resources, allocated facility costs, overhead and depreciation and amortization costs.
Our research and development efforts are focused on enhancing the speed and power of our software platform.  We expect research and development expenses to continue to increase as they are critical to maintain and improve our quality of applications and our competitive position.
General and Administrative Expense
General and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation and other personnel costs for our administrative, legal, information technology, human resources, finance and accounting employees and executives. Additional expenses included in this category are non-personnel costs, such as travel-related expenses, contracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses, along with allocated facility costs and overhead. We expect our general and administrative expense to increase in absolute dollars as we continue to support our growth and as a result of our becoming a public company. 
Other Expense
Other Expense, Net
Other expense, net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates and interest income on our cash and cash equivalents.
Interest Expense
Interest expense consists primarily of interest on our capital leases and debt, unused fees on our credit facility and commitment fees on our letters of credit.
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Results of Operations
The following table sets forth our consolidated statement of operations data:
Three Months Ended September 30,Nine Months Ended September 30,
2019201820192018
(in thousands)
Consolidated Statement of Operations Data:
Revenue:
Subscriptions, software and support$41,599  $30,905  $115,767  $90,904  
Professional services27,788  24,043  80,110  75,623  
Total revenue69,387  54,948  195,877  166,527  
Cost of revenue:
Subscriptions, software and support4,484  3,261  12,105  8,713  
Professional services19,467  16,831  58,963  54,002  
Total cost of revenue23,951  20,092  71,068  62,715  
Gross profit45,436  34,856  124,809  103,812  
Operating expenses:
Sales and marketing28,858  25,467  89,951  75,815  
Research and development15,697  11,737  42,418  32,392  
General and administrative11,191  12,537  29,468  29,022  
Total operating expenses55,746  49,741  161,837  137,229  
Operating loss(10,310) (14,885) (37,028) (33,417) 
Other expense:
Other expense, net2,016  110  1,700  1,785  
Interest expense96  67  236  134  
Total other expense2,112  177  1,936  1,919  
Loss before income taxes(12,422) (15,062) (38,964) (35,336) 
Income tax expense (benefit) (34) 394  212  
Net loss$(12,427) $(15,028) $(39,358) $(35,548) 
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The following table sets forth our consolidated statement of operations data expressed as a percentage of total revenue:

Three Months Ended September 30,Nine Months Ended September 30,
2019201820192018
Consolidated Statement of Operations Data:
Revenue:
Subscriptions, software and support60.0 %56.2 %59.1 %54.6 %
Professional services40.0  43.8  40.9  45.4  
Total revenue100.0  100.0  100.0  100.0  
Cost of revenue:
Subscriptions, software and support6.5  5.9  6.2  5.2  
Professional services28.1  30.6  30.1  32.4  
Total cost of revenue34.6  36.5  36.3  37.6  
Gross margin65.4  63.5  63.7  62.4  
Operating expenses:
Sales and marketing41.6  46.3  45.9  45.5  
Research and development22.6  21.4  21.7  19.5  
General and administrative16.1  22.8  15.0  17.4  
Total operating expenses80.3  90.5  82.6  82.4  
Operating loss(14.9) (27.0) (18.9) (20.0) 
Other expense:
Other expense, net2.9  0.2  0.9  1.1  
Interest expense0.1  0.1  0.1  0.1  
Total other expense3.0  0.3  1.0  1.2  
Loss before income taxes(17.9) (27.3) (19.9) (21.2) 
Income tax expense (benefit)—  (0.1) 0.2  0.1  
Net loss(17.9)%(27.3)%(20.1)%(21.3)%
Comparison of the Three Months Ended September 30, 2019 and 2018
Revenue
Three Months Ended September 30,% Change
20192018
(dollars in thousands)
Revenue
Subscriptions, software and support$41,599  $30,905  34.6 %
Professional services27,788  24,043  15.6  
Total revenue$69,387  $54,948  26.3  

Total revenue increased $14.4 million, or 26.3%, in the three months ended September 30, 2019 compared to the same period in 2018, due to an increase in our subscriptions, software and support revenue of $10.7 million and an increase in our professional services revenue of $3.7 million. The increase in subscriptions, software and support revenue was attributable to $6.9 million of revenue from expanded deployments and corresponding sales of additional subscriptions to existing customers and $3.8 million in sales of subscriptions to new customers. The increase in professional services revenue was due to $8.3 million in sales to new customers, offset by a $4.6 million decrease in revenue from existing customers.
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Cost of Revenue
Three Months Ended September 30,% Change
20192018
(dollars in thousands)
Cost of revenue:
Subscriptions, software and support$4,484  $3,261  37.5 %
Professional services19,467  16,831  15.7  
Total cost of revenue$23,951  $20,092  19.2  
Subscriptions, software and support gross margin89.2 %89.4 %
Professional services gross margin29.9 %30.0 %
Total gross margin65.4 %63.5 %
 
Cost of revenue increased $3.9 million, or 19.2%, in the three months ended September 30, 2019 compared to the same period in 2018, primarily due to a $1.6 million increase in professional services and product support personnel costs, a $1.1 million increase in contractor costs, a $0.7 million increase in other cost of revenue and a $0.7 million increase in facility and overhead costs, offset by a $0.2 million decrease in billable expenses. Personnel costs increased due to an increase in professional services and product support staff personnel headcount of 15.3% from September 30, 2018 to September 30, 2019. Contractor costs increased in the three months ended September 30, 2019 compared to the same period in 2018 because of an increase in the usage of subcontractors for professional service engagements. The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in the three months ended September 30, 2019. Facility and overhead costs increased to support our personnel growth. Billable expenses decreased in the three months ended September 30, 2019 compared to the same period in 2018 because of an increase in the percentage of professional services engagements being staffed remotely.
Subscriptions, software and support gross margin decreased to 89.2% in the three months ended September 30, 2019 compared to 89.4% in the same period in 2018 due to increased hosting costs during the three months ended September 30, 2019 as sales of our cloud offering increased and became a larger proportion of our overall subscription, software and support revenue. Professional services gross margin decreased slightly to 29.9% in the three months ended September 30, 2019 compared to 30.0% in the same period in 2018 due to an increase in the usage of subcontractors for professional services engagements as compared to the three months ended September 30, 2018. Due to the higher percentage of subscriptions, software and support revenue for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018, gross margin increased to 65.4% in the three months ended September 30, 2019 compared to 63.5% in the same period in 2018.
Sales and Marketing Expense
Three Months Ended September 30,% Change
20192018
(dollars in thousands)
Sales and marketing$28,858  $25,467  13.3 %
% of revenue41.6 %46.3 %
 
Sales and marketing expense increased $3.4 million, or 13.3%, in the three months ended September 30, 2019 compared to the same period in 2018, primarily due to a $2.2 million increase in sales and marketing personnel costs, a $0.9 million increase in facility and overhead costs, a $0.2 million increase in professional fees and a $0.1 million increase in marketing costs. Personnel costs increased due to an increase in sales and marketing personnel headcount by 9.4% from September 30, 2018 to September 30, 2019 and increased sales commissions driven by our revenue growth. Facility and overhead costs increased to support our personnel growth. Professional fees increased due to an increase in consulting fees to
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support our ongoing marketing events and activities. Marketing costs increased due to a rise in marketing event sponsorship and attendance.
Research and Development Expense
Three Months Ended September 30,% Change
20192018
(dollars in thousands)
Research and development$15,697  $11,737  33.7 %
% of revenue22.6 %21.4 %

Research and development expense increased $4.0 million, or 33.7%, in the three months ended September 30, 2019 compared to the same period in 2018, primarily due to a $2.8 million increase in research and development personnel costs and a $1.1 million increase in facility and overhead costs and a $0.1 million increase in professional fees. Personnel costs increased due to an increase in research and development personnel headcount by 33.2% from September 30, 2018 to September 30, 2019. Facility and overhead costs increased to support our personnel growth. Professional fees increased due to an increase in consulting fees to support the development and enhancement of our platform.
General and Administrative Expense
Three Months Ended September 30,% Change
20192018
(dollars in thousands)
General and administrative expense$11,191  $12,537  (10.7)%
% of revenue16.1 %22.8 %
 
General and administrative expense decreased $1.3 million, or 10.7%, in the three months ended September 30, 2019 compared to the same period in 2018, due to a $2.7 million decrease in general and administrative personnel costs, offset by a $0.8 million increase in professional fees and a $0.6 million increase in facility and overhead costs. Personnel costs decreased due to a $3.8 million decrease in stock-based compensation expense during the three months ended September 30, 2019. Stock-based compensation expense decreased during the three months ended September 30, 2019 due to the vesting of an option to purchase 1,828,080 shares of our Class A common stock in August 2018, resulting in $4.5 million of stock-based compensation expense. The decrease in stock-based compensation expense during the three months ended September 30, 2019 was offset by an increase in general and administrative personnel headcount by 25.0% from September 30, 2018 to September 30, 2019. Professional fees increased due to the use of consulting services to support our back-office initiatives. Facility and overhead costs increased to support our personnel growth.
Other Expense, Net
Three Months Ended September 30,% Change
20192018
(dollars in thousands)
Other expense, net$2,016  $110  1,732.7 %
% of revenue2.9 %0.2 %
 
Other expense, net increased by $1.9 million in the three months ended September 30, 2019 compared to the same period in 2018, primarily due to $2.2 million in foreign exchange loss in the three months ended September 30, 2019 compared to $0.2 million in foreign exchange loss in the three months ended September 30, 2018. The increase in foreign exchange loss was primarily due to currency fluctuations of the British Pound Sterling, Euro, Australian dollar and Swiss Franc versus the
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U.S. dollar during the three months ended September 30, 2019 compared to the same period in 2018. There was also a $0.1 million increase in interest income in the three months ended September 30, 2019 compared to the same period in 2018.
Interest Expense
Three Months Ended September 30,% Change
20192018
(dollars in thousands)
Interest expense$96  $67  43.3 %
% of revenue0.1 %0.1 %
 
Interest expense remained consistent in the three months ended September 30, 2019 compared to the same period in 2018.
Comparison of the Nine Months Ended September 30, 2019 and 2018
Revenue
Nine Months Ended September 30,% Change
20192018
(dollars in thousands)
Revenue
Subscriptions, software and support$115,767  $90,904  27.4 %
Professional services80,110  75,623  5.9  
Total revenue$195,877  $166,527  17.6  

Total revenue increased $29.4 million, or 17.6%, in the nine months ended September 30, 2019 compared to the same period in 2018, due to an increase in our subscriptions, software and support revenue of $24.9 million and an increase in our professional services revenue of $4.5 million. The increase in subscriptions, software and support revenue was attributable to $21.3 million of revenue from expanded deployments and corresponding sales of additional subscriptions to existing customers and $8.0 million in sales of subscriptions to new customers, offset by a $4.4 million perpetual software license sold to a federal agency in the nine months ended September 30, 2018. The increase in professional services revenue was due to $17.3 million in sales to new customers, offset by $12.8 million less revenue from existing customers.
Cost of Revenue
Nine Months Ended September 30,% Change
20192018
(dollars in thousands)
Cost of revenue:
Subscriptions, software and support$12,105  $8,713  38.9 %
Professional services58,963  54,002  9.2  
Total cost of revenue$71,068  $62,715  13.3  
Subscriptions, software and support gross margin89.5 %90.4 %
Professional services gross margin26.4  28.6  
Total gross margin63.7  62.4  
 
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Cost of revenue increased $8.4 million, or 13.3%, in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a $5.8 million increase in professional services and product support personnel costs, a $1.9 million increase in other cost of revenue and a $1.8 million increase in facility and overhead costs, offset by a $0.8 million decrease in contractor costs and a $0.3 million decrease in billable expenses. Personnel costs increased due to an increase in professional services and product support staff personnel headcount of 15.3% from September 30, 2018 to September 30, 2019 and a $1.9 million increase in stock-based compensation expense during the nine months ended September 30, 2019 due to the vesting of restricted stock units granted to our co-founders. These restricted stock units vested in the three months ended March 31, 2019. The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in the nine months ended September 30, 2019. Facility and overhead costs increased to support our personnel growth. Contractor costs decreased in the nine months ended September 30, 2019 compared to the same period in 2018 because of a decrease in the average hourly rate for subcontractors. Billable expenses decreased in the nine months ended September 30, 2019 compared to the same period in 2018 because of an increase in the percentage of professional services engagements being staffed remotely.
Subscriptions, software and support gross margin decreased to 89.5% in the nine months ended September 30, 2019 compared to 90.4% in the same period in 2018 due to the sale of a $4.4 million perpetual software license in the nine months ended September 30, 2018 and increased hosting costs as sales of our cloud offering increased and became a larger proportion of our overall subscription, software and support revenue. There is minimal cost of revenue for our perpetual software revenue, and therefore, our subscriptions, software and support gross margin was higher during the nine months ended September 30, 2018. Professional services gross margin decreased to 26.4% in the nine months ended September 30, 2019 compared to 28.6% in the same period in 2018 due to a $1.8 million increase in stock-based compensation expense during the nine months ended September 30, 2019 due to the vesting of restricted stock units granted to our co-founders. There was also an increase in the use of customer success managers during the nine months ended September 30, 2019 compared to the same period in 2018. To a lesser degree, the gross margin of our professional services revenue for the nine months ended September 30, 2019 was also negatively impacted by a slight decrease in the utilization rate of professional services resources as compared to the nine months ended September 30, 2018. Due to the higher percentage of subscriptions, software and support revenue for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, gross margin increased to 63.7% in the nine months ended September 30, 2019 compared to 62.4% in the same period in 2018.
Sales and Marketing Expense
Nine Months Ended September 30,% Change
20192018
(dollars in thousands)
Sales and marketing89,951  75,815  18.6 %
% of revenue45.9 %45.5 %
 
Sales and marketing expense increased $14.1 million, or 18.6%, in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a $9.8 million increase in sales and marketing personnel costs, a $2.5 million increase in facility and overhead costs, a $0.9 million increase in marketing costs and a $0.9 million increase in professional fees. Personnel costs increased due to an increase in sales and marketing personnel headcount by 9.4% from September 30, 2018 to September 30, 2019, increased sales commissions driven by our revenue growth and a $2.2 million increase in stock-based compensation expense during the nine months ended September 30, 2019 due to the vesting of restricted stock units granted to our co-founders. These restricted stock units vested in the three months ended March 31, 2019. Facility and overhead costs increased to support our personnel growth. Marketing costs increased due to increased costs for our annual user conference, Appian World, as well as a rise in marketing event sponsorship and attendance. Professional fees increased due to an increase in consulting fees to support our ongoing marketing events and activities.
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Research and Development Expense
Nine Months Ended September 30,% Change
20192018
(dollars in thousands)
Research and development$42,418  $32,392  31.0 %
% of revenue21.7 %19.5 %

Research and development expense increased $10.0 million, or 31.0%, in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a $7.5 million increase in research and development personnel costs, a $2.3 million increase in facility and overhead costs and a $0.2 million increase in professional fees. Personnel costs increased due to an increase in research and development personnel headcount by 33.2% from September 30, 2018 to September 30, 2019, and a $1.9 million increase in stock-based compensation expense during the nine months ended September 30, 2019 due to the vesting of restricted stock units granted to our co-founders. These restricted stock units vested in the three months ended March 31, 2019. Facility and overhead costs increased to support our personnel growth. Professional fees increased due to an increase in consulting fees to support the development and enhancement of our platform.
General and Administrative Expense
Nine Months Ended September 30,% Change
20192018
(dollars in thousands)
General and administrative expense$29,468  $29,022  1.5 %
% of revenue15.0 %17.4 %
 
General and administrative expense increased $0.4 million, or 1.5%, in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a $1.4 million increase in facility and overhead costs and a $0.9 million increase in professional fees, offset by a $1.9 million decrease in general and administrative personnel costs. Facility and overhead costs increased to support our personnel growth. Professional fees increased due to the use of consulting services to support our back-office initiatives. Personnel costs decreased due to a $4.2 million decrease in stock-based compensation expense during the nine months ended September 30, 2019. Stock-based compensation expense decreased during the nine months ended September 30, 2019 due to the vesting of an option to purchase 1,828,080 shares of our Class A common stock in August 2018, resulting in $4.5 million of stock-based compensation expense. The decrease in stock-based compensation expense during the nine months ended September 30, 2019 was offset by an increase in general and administrative personnel headcount by 25.0% from September 30, 2018 to September 30, 2019.
Other Expense, Net
Nine Months Ended September 30,% Change
20192018
(dollars in thousands)
Other expense, net$1,700  $1,785  (4.8)%
% of revenue0.9 %1.1 %
 
Other expense, net decreased by $0.1 million in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a $0.5 million increase in interest income in the nine months ended September 30, 2019 compared to the same period in 2018. The increase in interest income was offset by a $0.3 million increase in foreign exchange loss in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The increase in foreign exchange loss was primarily due to currency fluctuations of the British Pound Sterling, Euro, Australian dollar and Swiss Franc versus the U.S. dollar during the nine months ended September 30, 2019 compared to the same period in 2018.
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Additionally, there was a $0.1 million in loss on the disposal of property and equipment during the nine months ended September 30, 2019.
Interest Expense
Nine Months Ended September 30,% Change
20192018
(dollars in thousands)
Interest expense$236  $134  76.1 %
% of revenue0.1 %0.1 %
 
Interest expense increased by $0.1 million in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to commitment fees on the letter of credit to fund the security deposit required by the lease for our new headquarters.
Liquidity and Capital Resources
As of September 30, 2019, we had $165.6 million of cash and cash equivalents.
We believe that our existing cash and cash equivalents, together with any positive cash flows from operations and available borrowings under our line of credit, will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, and the introduction of new and enhanced products and functions, platform enhancements and professional services offerings, the level of market acceptance of our applications and spending on our new headquarters.  In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. To the extent existing cash and cash equivalents and investments and cash from operations are not sufficient to fund future activities, we may need to raise additional funds. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our equity securities and could contain covenants that restrict operations. Any additional equity financing may be dilutive to our existing stockholders. We may enter into investments in, or acquisitions of, complementary businesses, products or technologies in the future, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. We have no present binding agreements or commitments to enter into any such acquisitions. If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.  
The following table shows a summary of our cash flows for the nine months ended September 30, 2019 and 2018:
Nine Months Ended September 30,
20192018
(in thousands)
Cash used in operating activities$(2,960) $(23,953) 
Cash used in investing activities(31,430) (2,183) 
Cash provided by financing activities105,394  60,532  
Sources of Funds
We have financed our operations in large part with equity and debt financing arrangements, including net proceeds of $77.8 million from our initial public offering in May 2017, net proceeds of $57.8 million from our underwritten public offering in August 2018 and net proceeds of $101.3 million from our underwritten public offering in September 2019, as well as through sales of software and professional services and borrowings under our credit facilities. We also financed $3.7 million of office furniture and fixtures and $0.8 million of computer hardware, both associated with the build out of our new headquarters.
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As of September 30, 2019, we had no outstanding borrowings. In November 2017, we entered into a $20.0 million revolving line of credit with a lender. The facility matures in November 2022. We may elect whether amounts drawn on the revolving line of credit bear interest at a floating rate per annum equal to either the LIBOR or the prime rate plus an additional interest rate margin that is determined by the availability of borrowings under the revolving line of credit. The additional interest rate margin will range from 2.00% to 2.50% in the case of LIBOR advances and from 1.00% to 1.50% in the case of prime rate advances. The revolving line of credit contains an unused facility fee in an amount between 0.15% and 0.25% of the average unused portion of the revolving line of credit, which is payable quarterly. The agreement contains certain customary affirmative and negative covenants and requires us to maintain (1) an adjusted quick ratio of at least 1.35 to 1.0 and (ii) minimum adjusted EBITDA in the amounts and for the periods set forth in the agreement. Any amounts borrowed under the credit facility are collateralized by substantially all of our assets. We were in compliance with all covenants as of September 30, 2019.
Use of Funds
Our principal uses of cash are funding operations and other working capital requirements. Over the past several years, revenue has increased significantly from year to year and, as a result, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. During 2018 and 2019, our uses of cash included the build out of our new headquarters, which we completed during the three months ended September 30, 2019. We spent approximately $21 million above the $18.4 million tenant improvement allowance provided by the landlord for the build out. This spend included $4.5 million of office furniture and fixtures and computer hardware that has been financed. For the nine months ended September 30, 2019, substantially all of the $31.4 million of cash used in investing activities was related to the build out.
Historical Cash Flows
Operating Activities
For the nine months ended September 30, 2019, net cash used in operating activities of $3.0 million consisted of a net loss of $39.4 million, offset by $16.4 million in adjustments for non-cash items and $20.0 million of cash provided by changes in working capital. Adjustments for non-cash items consisted of stock-based compensation of $13.1 million, depreciation and amortization expense of $3.3 million, a loss on disposal of equipment of $0.1 million and bad debt expense of $0.1 million, offset by a provision for deferred income taxes of $0.2 million. The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $11.4 million decrease in prepaid expenses and other assets, primarily due to the receipt of the non-trade receivable resulting from our tenant improvement allowance. In accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, the $17.0 million of tenant improvement allowance reimbursements received during the nine months ended September 30, 2019 are a source of cash in operating activities, whereas the capital expenditures are recorded as cash used in investing activities. There was also a $9.1 million decrease in accounts receivable, due to increased cash collections during the nine months ended September 30, 2019, and a $5.7 million increase in deferred rent, non-current, as a result of taking initial possessio