Document


 
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, 2017
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.)
 
 
 
11955 Democracy Drive, Suite 1700
Reston, VA
 
20190
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (703) 442-8844
 
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
 
☒   (Do not check if a small reporting company)
 
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 31, 2017, there were 7,206,517 shares of the registrant’s Class A common stock and 53,096,759 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.

ii



PART I—FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS
APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) 
 
As of
September 30,
2017
 
As of
December 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
72,289

 
$
31,143

Accounts receivable, net of allowance of $400
41,399

 
46,814

Deferred commissions, current
7,719

 
7,146

Prepaid expenses and other current assets
6,318

 
3,281

Total current assets
127,725

 
88,384

Property and equipment, net
2,737

 
3,101

Deferred commissions, net of current portion
11,343

 
10,860

Deferred tax assets
107

 
12

Other assets
414

 
381

Total assets
$
142,326

 
$
102,738

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)
 
 
 
Current liabilities
 
 
 
Accounts payable
$
2,712

 
$
5,057

Accrued expenses
5,977

 
2,860

Accrued compensation and related benefits
9,742

 
9,554

Deferred revenue, current
57,181

 
52,000

Current portion of long-term debt

 
6,111

Other current liabilities
574

 
437

Total current liabilities
76,186

 
76,019

Long-term debt, net of current portion

 
13,889

Deferred tax liabilities
35

 
32

Deferred revenue, net of current portion
14,577

 
18,108

Preferred stock warrant liability

 
850

Other long-term liabilities
1,624

 
1,917

Total liabilities
92,422

 
110,815

Convertible preferred stock
 
 
 
Series A convertible preferred stock—par value $0.0001; no shares authorized, issued or outstanding as of September 30, 2017; 12,127,468 shares authorized and 12,043,108 shares issued and outstanding as of December 31, 2016

 
17,915

Series B convertible preferred stock—par value $0.0001; no shares authorized, issued or outstanding as of September 30, 2017; 6,120,050 shares authorized, issued and outstanding as of December 31, 2016

 
37,500

Stockholders’ equity (deficit)
 
 
 
Common stock—par value $0.0001; no shares authorized, issued or outstanding as of September 30, 2017; 61,462,320 shares authorized and 34,274,718 shares issued and outstanding as of December 31, 2016

 
3

Class A common stock—par value $0.0001; 500,000,000 shares authorized and 7,203,271 shares issued and outstanding as of September 30, 2017; no shares authorized, issued or outstanding as of December 31, 2016
1

 

Class B common stock—par value $0.0001; 100,000,000 shares authorized and 53,073,459 shares issued and outstanding as of September 30, 2017; no shares authorized, issued or outstanding as of December 31, 2016
5

 

Additional paid-in capital
138,767

 

Accumulated other comprehensive income
451

 
1,330

Accumulated deficit
(89,320
)
 
(64,825
)
Total stockholders’ equity (deficit)
49,904

 
(63,492
)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
$
142,326

 
$
102,738

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

1



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,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Subscriptions, software and support
$
22,660

 
$
17,668

 
$
66,116

 
$
50,607

Professional services
21,988

 
13,077

 
60,059

 
48,569

Total revenue
44,648

 
30,745

 
126,175

 
99,176

Cost of revenue:
 
 
 
 
 

 
 

Subscriptions, software and support
2,341

 
1,890

 
6,891

 
5,508

Professional services
14,272

 
9,315

 
39,049

 
34,016

Total cost of revenue
16,613

 
11,205

 
45,940

 
39,524

Gross profit
28,035

 
19,540

 
80,235

 
59,652

Operating expenses:
 
 
 
 
 

 
 

Sales and marketing
19,725

 
14,480

 
59,503

 
39,477

Research and development
8,596

 
6,702

 
25,867

 
16,925

General and administrative
6,237

 
4,531

 
19,721

 
12,779

Total operating expenses
34,558

 
25,713

 
105,091

 
69,181

Operating loss
(6,523
)
 
(6,173
)
 
(24,856
)
 
(9,529
)
Other (income) expense:
 
 
 
 
 

 
 

Other (income) expense, net
(425
)
 
(67
)
 
(1,658
)
 
129

Interest (income) expense
(2
)
 
243

 
451

 
726

Total other (income) expense
(427
)
 
176

 
(1,207
)
 
855

Net loss before income taxes
(6,096
)
 
(6,349
)
 
(23,649
)
 
(10,384
)
Income tax expense (benefit)
188

 
(1,610
)
 
489

 
(2,106
)
Net loss
(6,284
)
 
(4,739
)
 
(24,138
)
 
(8,278
)
Accretion of dividends on convertible preferred stock

 
214

 
357

 
642

Net loss attributable to common stockholders
$
(6,284
)
 
$
(4,953
)
 
$
(24,495
)
 
$
(8,920
)
Net loss per share attributable to common stockholders:
 

 
 

 
 

 
 

Basic and diluted
$
(0.10
)
 
$
(0.14
)
 
$
(0.53
)
 
$
(0.26
)
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic and diluted
60,204,596

 
34,274,718

 
45,855,044

 
34,274,718

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




2



APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(6,284
)
 
$
(4,739
)
 
$
(24,138
)
 
$
(8,278
)
Comprehensive loss, net of income taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustment
517

 
(177
)
 
(879
)
 
(537
)
Total other comprehensive loss, net of income taxes
$
(5,767
)
 
$
(4,916
)
 
$
(25,017
)
 
$
(8,815
)
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3



APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
(unaudited)
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Total Stockholders' Equity (Deficit)
 
Common Stock
 
Additional
Paid-In Capital
 
 
Accumulated Deficit
 
 
Shares
 
Amount
 
 
 
 
Balance, January 1, 2017
34,274,718

 
$
3

 
$

 
$
1,330

 
$
(64,825
)
 
$
(63,492
)
Net loss

 

 

 

 
(24,138
)
 
(24,138
)
Accretion of dividends on convertible preferred stock

 

 

 

 
(357
)
 
(357
)
Conversion of convertible preferred stock to common stock
18,163,158

 
2

 
48,205

 

 

 
48,207

Conversion of convertible preferred stock warrant to common stock warrant

 

 
1,191

 

 

 
1,191

Issuance of common stock from initial public offering, net of issuance costs
7,187,500

 
1

 
77,788

 

 

 
77,789

Exercise of common stock warrant
79,363

 

 

 

 

 

Issuance of common stock to directors
10,841

 

 

 

 

 

Vesting of restricted stock units
4,930

 

 

 

 

 

Exercise of stock options
556,220

 

 
664

 

 

 
664

Stock-based compensation expense

 

 
10,919

 

 

 
10,919

Other comprehensive loss

 

 

 
(879
)
 

 
(879
)
Balance, September 30, 2017
60,276,730

 
$
6

 
$
138,767

 
$
451

 
$
(89,320
)
 
$
49,904

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


4



APPIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(24,138
)
 
$
(8,278
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
673

 
567

Bad debt expense

 
4

Deferred income taxes
(91
)
 
(883
)
Stock-based compensation
10,919

 

Fair value adjustment for warrant liability
341

 
200

Loss on extinguishment of debt
384

 

Changes in assets and liabilities:
 
 
 
Accounts receivable
4,329

 
6,208

Prepaid expenses and other assets
(3,184
)
 
(2,360
)
Deferred commissions
(1,056
)
 
(1,389
)
Accounts payable and accrued expenses
1,202

 
(2,931
)
Accrued compensation and related benefits
(339
)
 
1,617

Other current liabilities
(75
)
 
(1,377
)
Deferred revenue
1,043

 
374

Other long-term liabilities
(143
)
 
433

Net cash used in operating activities
(10,135
)
 
(7,815
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(295
)
 
(935
)
Net cash used in investing activities
(295
)
 
(935
)
Cash flows from financing activities:
 
 
 
Proceeds from initial public offering, net of underwriting discounts
80,213

 

Payment of deferred initial public offering costs
(2,424
)
 

Payment of dividend to Series A preferred stockholders
(7,565
)
 

Proceeds from exercise of common stock options
664

 

Proceeds from issuance of long-term debt, net of debt issuance costs
19,616

 
20,000

Repayment of long-term debt
(40,000
)
 
(10,000
)
Net cash provided by financing activities
50,504

 
10,000

Effect of foreign exchange rate changes on cash and cash equivalents
1,072

 
(907
)
Net increase in cash and cash equivalents
41,146

 
343

Cash and cash equivalents, beginning of period
31,143

 
31,393

Cash and cash equivalents, end of period
$
72,289

 
$
31,736

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$

 
$
643

Cash paid for income taxes
$
484

 
$
580

Supplemental disclosure of non-cash financing activities:
 
 
 
Conversion of convertible preferred stock to common stock
$
48,207

 
$

Conversion of convertible preferred stock warrant to common stock warrant
$
1,191

 
$

Accretion of dividends on convertible preferred stock
$
357

 
$
642

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


5

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 leading low-code software development platform that enables organizations to rapidly develop powerful and unique applications. The applications created on our platform help companies drive digital transformation and competitive differentiation. We were incorporated in the state of Delaware in August 1999. We are headquartered in Reston, Virginia and have offices in Canada, Switzerland, the United Kingdom, France, Germany, the Netherlands, Italy, and Australia.

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 of America (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “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 (deficit) 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 final prospectus for our initial public offering (“IPO”) dated as of May 24, 2017 and filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.
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, stock-based compensation and fair value measurements for our common stock and preferred stock warrant.
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.
Initial Public Offering
In May 2017, we completed an IPO in which we sold 7,187,500 shares of our newly-authorized Class A common stock at an initial price to the public of $12.00 per share.  We received net proceeds of $77.8 million, after deducting underwriting discounts and commissions and offering expenses paid and payable by us, from sales of our shares in the IPO.  Immediately prior to the completion of the IPO, (1) all shares of common stock then outstanding were converted into Class B common stock on a one-for-one basis, (2) a warrant to purchase shares of convertible preferred stock was converted into a warrant to purchase shares of Class B common stock and (3) all shares of convertible preferred stock then outstanding were converted into shares of our common stock on a one-for-one basis, and then reclassified as shares of Class B common stock.  See Note 7 for further discussion of the convertible preferred stock and Note 8 for further discussion of the warrant.
Deferred offering costs of $2.4 million, consisting of legal, accounting and other fees and costs related to our IPO, were recorded to additional paid-in capital as a reduction of the proceeds upon the closing of our IPO.

6

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


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.

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. To a lesser extent, we also generate revenue from the sale of perpetual software licenses and associated maintenance and support.
Historically, we licensed our software primarily under perpetual licenses, but over time we transitioned from perpetual licenses to subscriptions. As a result, revenue from our perpetual software licenses was less than 1.0% of our total revenue for the three and nine months ended September 30, 2017 and September 30, 2016.
We generally charge subscription fees on a per-user basis. 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 five 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 five years 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.
Perpetual Licenses
Our perpetual license revenue is derived from customers with perpetual licenses to our platform and associated maintenance and support contracts. We recognize revenue from perpetual licenses on the date of delivery to our customer. We sell maintenance and support to perpetual license customers separately from the perpetual licenses pursuant to agreements that generally renew annually. Maintenance and support revenue is deferred and recognized ratably over the term of the support period.
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.

7

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


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, plus the cost of any materials delivered. 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 of 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, term license subscriptions, and perpetual licenses 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. 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.
Perpetual Licenses
For multiple element arrangements involving our perpetual software licenses, we allocate revenue to the software license arrangement by determining if VSOE of fair value exists for the undelivered elements, which are usually maintenance and support and professional services. In situations where VSOE of fair value exists for the undelivered elements, we apply the residual method whereby the fees allocated to license revenue are recognized upon delivery, the fees allocated to maintenance and support revenue are recognized over the service period and the fees allocated to professional services and training are recognized as performed. In instances where we lack VSOE of fair value for the undelivered elements, revenue is either deferred until the final element is delivered or recognized ratably over the service period when the only undelivered elements are either professional services or maintenance and support. We have VSOE for maintenance and support elements and professional services elements performed on a time and materials basis. VSOE of fair value is based upon the price charged

8

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


when the same element is sold separately. In determining VSOE of fair value, we require that a substantial majority of the selling prices fall within a reasonably narrow pricing range. We reassess VSOE annually or more frequently if required.
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 Risk
Our financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Cash deposits may be in excess of insured limits. 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 14.2% and 15.4% of our revenue for the three and nine months ended September 30, 2017, respectively, of which the top three federal government agencies generated 7.7% and 9.1% of our revenue for the three and nine months ended September 30, 2017, respectively. Additionally, 28.6% and 25.6% of our revenue during the three and nine months ended September 30, 2017, respectively, was generated from foreign customers.  Revenue generated from government agencies represented 19.4% and 28.5% of our revenue for the three and nine months ended September 30, 2016, respectively, of which the top three federal government agencies generated 13.1% and 19.5% of our revenue for the three and nine months ended September 30, 2016, respectively. Additionally, 23.1% and 18.6% of our revenue during the three and nine months ended September 30, 2016, respectively, was generated from foreign customers.
Federal government agencies accounted for 9.1% and 17.2% of accounts receivable at September 30, 2017 and December 31, 2016, respectively.
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, 2016 to September 30, 2017.

9

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


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 $3.2 million and $8.5 million for the three and nine months ended September 30, 2017, respectively. Commission expense was $1.8 million and $5.4 million for the three and nine months ended September 30, 2016, respectively.
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, 2017 and December 31, 2016 because of the relatively short duration of these instruments. The carrying value of our long-term debt as of December 31, 2016 approximated fair value given interest rates for similar debt instruments available to the Company.
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
We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. After the reclassification of the convertible preferred stock warrant in May 2017, we did not have any assets or liabilities subject to fair value measurements as of September 30, 2017. See Note 8 for further discussion of the warrant reclassification. The following table summarizes the conclusions reached as of December 31, 2016 (in thousands):
 
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Series A convertible preferred stock warrant(1)
$
850

 
$

 
$

 
$
850

 
$
850

 
$

 
$

 
$
850

 _______________________________________________
(1)
In order to determine the fair value of the convertible preferred stock warrant, we used the Black-Scholes option pricing model (“OPM”). Significant inputs for the OPM included an estimate of the fair value of the Series A convertible preferred stock, the remaining contractual life of the warrant, an estimate of the timing of a liquidity event, a risk-free rate of interest and an estimate of our stock volatility using the volatilities of guideline peer companies.
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs
There were no changes in our Level 3 instruments measured at fair value on a recurring basis during the three months ended September 30, 2017 and 2016.
    

10

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


The following table presents the changes in our Level 3 instruments measured at fair value on a recurring basis during the nine months ended September 30, 2017 and 2016 (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Balance as of January 1
$
850

 
$
650

Change in fair value of warrant liability
341

 
200

Reclassification of warrant liability to equity
(1,191
)
 

Balance as of September 30
$

 
$
850

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 using the Black-Scholes OPM. 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 model 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.
As discussed in “—Recent Accounting Pronouncements,” we have elected to early adopt Accounting Standards Update (“ASU”) No. 2016-9, which, among other things, permits an entity to make an entity-wide policy election to either (1) estimate the number of awards that are expected to vest or (2) account for forfeitures when they occur. We have elected to account for forfeitures as they occur, rather than estimate expected forfeitures.
Emerging Growth Company Status
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). 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 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which amends ASC Subtopic 205-40 to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation of every reporting period, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated and (6) require an assessment for a period of one year after the date that financial statements are issued. ASU 2014-15 was effective for our year ended December 31, 2016, and its adoption did not have a material impact on our financial condition, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-3”), which simplifies the presentation of debt issuance costs by requiring that such costs be presented in the condensed consolidated balance sheets as a direct deduction from the carrying value of the associated debt instrument, consistent with debt discounts. Subsequent to the issuance of ASU 2015-3, the SEC staff announced that the presentation of debt issuance costs associated with line-of-credit arrangements may be presented as an asset. This announcement was codified

11

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


by the FASB in ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-3 and ASU 2015-15 were both effective for our year ended December 31, 2016, and their adoption did not have a material impact on our financial condition, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-5, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-5”), which provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting for other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. ASU 2015-5 was effective for our year ended December 31, 2016, and its adoption did not have a material impact on our financial condition, results of operations or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (“ASU 2015-17”), which requires that all deferred tax assets and liabilities, including any related valuation allowance, be classified as noncurrent on the balance sheet. We elected to early adopt ASU 2015-17 beginning with our year ended December 31, 2015. The adoption of ASU 2015-17 did not have a material impact on our financial condition, results of operations or cash flows.
In March 2016, the FASB issued ASU No. 2016-9, Improvements to Employee Share-Based Payment Accounting (Topic 718) (“ASU 2016-9”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We elected to early adopt ASU 2016-9 beginning with our year ended December 31, 2016, and have applied the guidance retrospectively. The adoption of ASU 2016-9 did not have a material impact on our financial condition, results of operations or cash flows.
Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606)(“ASU 2014-9”), which provides new guidance for revenue recognition. ASU 2014-9 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. ASU 2014-9 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. 2016-8, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) (“ASU 2016-8”), which clarifies implementation guidance on principal versus agent considerations in ASU 2014-9. 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 ASU 2014-9. 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 intend to avail ourselves of the JOBS Act extended transition period that permits us to defer adoption until January 1, 2019. We are currently evaluating the impact the adoption of these standards will have on our consolidated financial statements.
We currently plan to adopt the new standard using the full retrospective approach; however, the decision regarding the adoption method has not been finalized. Our final determination will depend on a number of factors such as the significance of the impact of the new standard on our financial results, system readiness, including that of software procured from third-party providers, and our ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.

12

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


We are in the initial stages of our evaluation of the impact of the new standard on our accounting policies, processes, and system requirements. We have assigned internal resources in addition to the engagement of third-party service providers to assist in the evaluation. Furthermore, we have made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While we continue to assess all potential impacts under the new standard there is the potential for significant impacts to the timing of recognition of revenue, particularly term license subscriptions and professional services revenue. We also expect an impact to our accounting for contract acquisition costs, both with respect to the amounts that will be capitalized as well as the period of amortization.
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 term license subscriptions, and accordingly, have recognized term license subscriptions and related services ratably over the subscription term. Professional services included in an arrangement with subscription revenue has also been recognized ratably over the subscription term. The new standard, which does not retain the concept of VSOE, requires an evaluation of whether term license subscriptions and related services, including professional services, are distinct performance obligations and therefore should be separately recognized at a point in time or over time. Depending on the outcome of our evaluation, the timing of when revenue is recognized could change significantly for term license subscriptions and professional services under the new standard.
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842) (“ASU 2016-2”), which requires that lessees recognize assets and liabilities for leases with lease terms greater than 12 months in the statement of financial position. ASU 2016-2 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact the adoption of ASU 2016-2 will have on our consolidated financial statements.
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 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. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of this standard on our consolidated financial statements.

3.
Accrued Expenses

Accrued expenses consist of the following:
 
September 30, 2017
 
December 31, 2016
Accrued contract labor costs
$
3,122

 
$
743

Accrued audit and tax expenses
364

 
358

Accrued reimbursable employee expenses
285

 
134

Accrued marketing and tradeshow expenses
251

 
111

Other accrued expenses
1,955

 
1,514

Total
$
5,977

 
$
2,860


4.
Debt
2015 Line of Credit
At December 31, 2015, we had a $10.0 million revolving line of credit with a lender, expiring in June 2016, which was subsequently amended in June 2016 to extend the maturity date through June 2017. This line of credit was terminated in April 2017.
2015 Term Loan
In March 2015, we entered into a collateralized $10.0 million term loan facility with a lender, maturing in March 2019, and borrowed the full amount under the term loan facility in June 2015. In January 2016, we paid off the outstanding balance of

13

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


the term loan and simultaneously entered into a collateralized $20.0 million term loan facility, maturing in January 2020. We borrowed the full amount under the term loan facility in January 2016, which we repaid in full in April 2017.
2017 Financing Facility
In April 2017, we entered into a new financing facility consisting of a $5.0 million senior revolving credit facility, a $20.0 million senior term loan, and a $10.0 million subordinated term loan. In connection with the execution of this financing facility, the prior line of credit was terminated, and we borrowed the full $20.0 million available under the senior term loan and repaid the outstanding balance under our prior term loan. Additionally, in connection with the execution of our new financing facility, the lender waived the prepayment fee associated with our prior line of credit.  In June 2017, we used proceeds from our IPO to pay all remaining outstanding principal and interest under the senior term loan and subsequently terminated the senior term loan and subordinated term loan. In connection with the repayment of the senior term loan, we recognized a loss on extinguishment of debt of $0.4 million related to unamortized debt issuance costs, which is included within other (income) expense, net in the accompanying condensed consolidated statements of operations. As of September 30, 2017, we had no outstanding borrowings. This financing facility was terminated in November 2017 in connection with our entry into a new $20.0 million revolving line of credit. See Note 11 for additional information regarding our new revolving line of credit.

5.
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 (loss) 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 40%. Fluctuations in the distribution of pre-tax income (loss) among our operating subsidiaries can lead to fluctuations of the effective tax rate in the consolidated financial statements. For the three and nine months ended September 30, 2017, the actual effective tax rates were (3.1)% and (2.1)%, respectively.  For the three and nine months ended September 30, 2016, the actual effective tax rates were 25.4% and 20.3%, respectively.
We assess uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Tax. As of September 30, 2017, our net unrecognized tax benefits totaled $0.5 million of which the entire portion would impact our effective tax rate 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 state and foreign jurisdictions. The tax years 2013 through 2016 remain open to examination by the major taxing jurisdictions to which we are subject. No material examinations are currently open.

6.
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 IPO. 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, 2017, there were 6,481,622 shares of Class A common stock reserved for issuance under the 2017 Plan, of which 6,425,767 were available to be issued.
The 2007 Plan provided for the grant of stock options to employees, directors, and officers. Options under the 2007 Plan are exercisable into shares of Class B common stock and generally expire ten years from the date of grant. Under the 2007 Plan, the exercise price of each award was established by the board of directors, but could not be less than the fair market value of a share of our common stock on the grant date. Options generally vest upon the satisfaction of both a service condition and a performance condition. The service condition is satisfied at various rates as determined by us, typically on an annual basis over

14

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


five years. The performance condition required the occurrence of a qualifying event, defined as a change of control transaction or upon the completion of an IPO. The performance condition was satisfied upon the effectiveness of our IPO in May 2017, on which date we recognized $6.2 million of cumulative stock-based compensation expense using the accelerated attribution method from the service start date.
We estimate the fair value of stock options using the Black-Scholes OPM, 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.
The following table summarizes the assumptions used to estimate the fair value of stock options granted during the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Risk-free interest rate
1.9% - 2.1%
 
1.3%
 
1.9% - 2.2%
 
1.3% - 1.5%
Expected term (in years)
6.5
 
6.5
 
6.5
 
6.5
Expected volatility
38.6%
 
41.6%
 
38.6% - 40.6%
 
41.2% - 42.0%
Expected dividend yield
—%
 
—%
 
—%
 
—%

Stock Options
The following table summarizes the stock option activity for the nine months ended September 30, 2017:
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at January 1, 2017
6,784,448

 
$
4.65

 
6.5
 
$
44,259

Granted
1,252,200

 
11.89

 
 
 
 
Exercised
(556,220
)
 
1.19

 
 
 
8,386

Canceled
(96,500
)
 
6.30

 
 
 
 
Outstanding at September 30, 2017
7,383,928

 
6.16

 
6.7
 
164,688

Exercisable at September 30, 2017
2,992,648

 
1.85

 
3.8
 
79,636

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2017 and 2016 was $5.04 and $4.38 per share, respectively. The total fair value of stock options that vested during the nine months ended September 30, 2017 was $5.3 million. No stock options vested during the nine months ended September 30, 2016 because a qualifying event had not yet occurred. As of September 30, 2017, the total compensation cost related to unvested stock options not yet recognized was $12.6 million, which will be recognized over a weighted average period of 3.0 years.
On April 25, 2017, our board of directors modified certain outstanding stock options nearing their expiration date to remove the performance condition. Stock options to purchase an aggregate of 216,160 shares of common stock were modified, and we recognized stock-based compensation expense of $2.4 million related to this modification.

15

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)



Restricted Stock Units
The following table summarizes the restricted stock unit activity for the nine months ended September 30, 2017:
 
Number of Shares
 
Weighted Average Grant Date Fair Value
Non-vested outstanding at December 31, 2016

 
$

Granted
47,855

 
20.38

Vested
(4,930
)
 
20.24

Canceled

 

Non-vested outstanding at September 30, 2017
42,925

 
20.40

As of September 30, 2017, total unrecognized compensation cost related to unvested restricted stock units was approximately $0.8 million and the weighted average remaining vesting period was 2.7 years.
The following table summarizes the components of our stock-based compensation expense for the three and nine months ended September 30, 2017 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2017
Stock-based compensation expense related to stock option modifications
$

 
$
2,394

Cumulative stock-based compensation expense related to stock options recorded upon effectiveness of our IPO

 
6,236

Post-IPO stock-based compensation expense related to stock options
1,440

 
2,025

Stock-based compensation expense related to the issuance of common stock to directors

 
130

Stock-based compensation expense related to restricted stock units
134

 
134

Total stock-based compensation expense
$
1,574

 
$
10,919

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, 2017 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2017
Cost of revenue
 
 
 

Subscriptions, software and support
$
80

 
$
484

Professional services
142

 
1,126

Operating expenses
 
 
 
Sales and marketing
359

 
2,782

Research and development
256

 
2,458

General and administrative
737

 
4,069

Total stock-based compensation expense
$
1,574

 
$
10,919

For the three and nine months ended September 30, 2016, no stock-based compensation expense was recognized for our stock option awards because a qualifying event had not yet occurred.


16

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


7.
Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Convertible Preferred Stock
Immediately prior to the completion of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into 18,163,158 shares of common stock on a one-for-one basis, and then reclassified as shares of Class B common stock.
Summary of Activity
The following tables present a summary of activity for our convertible preferred stock issued and outstanding for the nine months ended September 30, 2017 (dollar amounts in thousands):
 
Series A Convertible
Preferred Stock
 
Series B Convertible
Preferred Stock
 
Amount
 
Shares
 
Amount
 
Shares
Balance as of January 1, 2017
$
17,915

 
12,043,108

 
$
37,500

 
6,120,050

Accretion of dividends on convertible preferred stock
357

 

 

 

Payment of accrued dividend to Series A convertible preferred stockholders
(7,565
)
 

 

 

Conversion of convertible preferred stock to common stock
(10,707
)
 
(12,043,108
)
 
(37,500
)
 
(6,120,050
)
Balance as of September 30, 2017
$

 

 
$

 

Common Stock
Immediately prior to the completion of the IPO, all shares of common stock then outstanding were converted into Class B common stock on a one-for-one basis.  We offered and sold newly authorized shares of Class A common stock in the IPO.
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.

8.
Warrants
We previously issued a warrant to purchase 84,360 shares of Series A convertible preferred stock in conjunction with a credit facility with a lender at an exercise price of $0.88905 per share.  Immediately prior to the completion of the IPO, this warrant was converted into a warrant to purchase 84,360 shares of Class B common stock.  The fair value at the time of the conversion was $1.2 million and was recorded as additional paid-in capital and a reduction of the preferred stock warrant liability.  In May 2017, the warrant holder exercised the warrant and we issued 79,363 shares of Class B common stock through a cashless exercise of the warrant, in accordance with its terms.  

9.
Basic and Diluted Loss per Common Share
We use the two-class method to compute net loss per common share because we have issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings. These participating securities include our convertible preferred stock which have non-forfeitable rights to participate in any dividends declared on our common stock. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings.
Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding

17

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current period earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the period’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses.
Diluted net income (loss) per common share is computed under the two-class method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants. In addition, we analyze the potential dilutive effect of the outstanding participating securities under the “if-converted” method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period or date of issuance, if later. We report the more dilutive of the approaches (two-class or “if-converted”) as our diluted net income per share during the period.
The following securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive or performance or market conditions had not been met at the end of the period:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Convertible preferred stock:
 
 
 
 
 
 
 
Series A convertible preferred stock

 
12,043,108

 

 
12,043,108

Series B convertible preferred stock

 
6,120,050

 

 
6,120,050

Warrant to purchase Series A convertible preferred stock

 
84,360

 

 
84,360

Stock options
7,383,928

 
6,699,048

 
7,383,928

 
6,699,048

Restricted stock units
42,925

 

 
42,925

 


10.
Segment and Geographic Information
The following table summarizes revenue by geography for the three and nine months ended September 30, 2017 and 2016 (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Domestic
$
31,878

 
$
23,650

 
$
93,860

 
$
80,715

International
12,770

 
7,095

 
32,315

 
18,461

Total
$
44,648

 
$
30,745

 
$
126,175

 
$
99,176

With respect to geographic information, revenue is attributed to respective geographies based on the contracting address of the customer. 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, 2017 and 2016. Substantially all of our long-lived assets were held in the United States as of September 30, 2017 and December 31, 2016.


18

APPIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)


11.
Subsequent Events
In preparing our condensed consolidated financial statements, we evaluated subsequent events through November 2, 2017, which is the date that the condensed consolidated financial statements were available to be issued.
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 (i) 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.
On October 25, 2017, our board of directors approved the grant of 689,200 restricted stock units under the 2017 Plan at a fair value of $22.27 per share to members of management and other employees. The value of these awards at the grant date was $15.3 million and will be amortized over the vesting periods. In addition, our board of directors also approved stock option grants under the 2017 Plan to purchase an aggregate of 4,000 shares of common stock at an exercise price of $22.27 per share. The restricted stock units and options vest over five years through October 25, 2022.

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 fiscal year ended December 31, 2016 included in the final prospectus for our initial public offering, or IPO, dated as of May 24, 2017 and filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b)(4) (File No. 333-217510).
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. 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 II, Item 1A of this Quarterly Report on Form 10-Q 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 leading low-code software development platform as a service that enables organizations to rapidly develop powerful and unique applications. The applications created on our platform help companies drive digital transformation and competitive differentiation.
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.

19



In 2016 and 2017, 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. To a lesser extent, we also generate revenue from the sale of perpetual software license agreements and associated maintenance and support agreements.
Our subscription fees are based primarily on the number of users who access and utilize the applications built on our platform. Our customer contract terms vary from one to five years, with an average length of 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 Deloitte, KPMG and PricewaterhouseCoopers 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.
Our customers include financial services, healthcare, government, telecommunications, media, energy, manufacturing and transportation organizations. Generally, our sales force targets its efforts to organizations with over 1,000 employees and $1 billion in annual revenue. Revenue from government agencies represented 14.2% and 15.4% of our total revenue in the three and nine months ended September 30, 2017, respectively. No single end-customer accounted for more than 10% of our total revenue in the three and nine months ended September 30, 2017.  Revenue from government agencies represented 19.4% and 28.5% of our total revenue in the three and nine months ended September 30, 2016, respectively.  No single end-customer accounted for more than 10% of our total revenue in the three months ended September 30, 2016, although we had one customer that accounted for 10.5% of our total revenue in the nine months ended September 30, 2016.
Our platform is designed to be natively multi-lingual to facilitate collaboration and address challenges in multi-national organizations. We offer our platform globally. In the three and nine months ended September 30, 2017, 28.6% and 25.6%, respectively, of our total revenue was generated from customers outside of the United States.  In the three and nine months ended September 30, 2016, 23.1% and 18.6%, respectively, of our total revenue was generated from customers outside of the United States. As of September 30, 2017, we operated in 11 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 May 2017, we closed our IPO of 7,187,500 shares of our Class A common stock at an offering price of $12.00 per share, including 937,500 shares pursuant to the underwriters’ option to purchase additional Class A shares, resulting in net proceeds to us of $77.8 million, after deducting underwriting discounts and commissions of $6.0 million and offering expenses of $2.4 million.
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 are expensed as incurred.

20



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.
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 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, healthcare 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.
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 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. As we expand the network of strategic partners, 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, 2017 and 2016, 50.8% and 57.5% of our revenue, respectively, was derived from sales of subscriptions, software and support, while the remaining 49.2% and 42.5%, respectively, was derived from the sale of professional services. For the nine months ended September 30, 2017 and 2016, 52.4% and 51.0% of our revenue, respectively, was derived from sales of subscriptions, software and support, while the remaining 47.6% and 49.0%, 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 increase our investment in sales and marketing, as we further expand our sales teams, increase our marketing activities and grow our international operations. We expect to use a portion of the proceeds from our IPO to fund these growth strategies.

21



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,
 
 
2017
 
2016
 
2017
 
2016
Subscription Revenue
 
$
20,665

 
$
15,282

 
$
59,284

 
$
43,397

 
 
 
 
 
 
 
 
 
 
 
September 30,
 
 
 
 
 
 
2017
 
2016
 
 
 
 
Subscription Revenue Retention Rate
 
122
%
 
118
%
 
 
 
 
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 include (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.

22



To a lesser extent, we also generate revenue from the sale of perpetual software license agreements and associated 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-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 offered as a term or perpetual license. When our platform is delivered as a SaaS subscription, we handle its operational needs in a third-party hosted data center.
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 Deloitte, KPMG and PricewaterhouseCoopers. 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 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 network of strategic partners, we expect professional services revenue to decline as a percentage of total revenue over time since our strategic 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, travel costs, third-party contractor costs and allocated facility costs and overhead. 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 in the short term but improve over time.
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

23



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.
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.  We also anticipate that we will incur additional costs for personnel and consulting and professional fees as a result of operating as a newly public company.

24



Results of Operations
The following table sets forth our consolidated statements of operations data:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Subscriptions, software and support
$
22,660

 
$
17,668

 
$
66,116

 
$
50,607

Professional services
21,988

 
13,077

 
60,059

 
48,569

Total revenue
44,648

 
30,745

 
126,175

 
99,176

Cost of revenue:
 
 
 
 
 
 
 
Subscriptions, software and support
2,341

 
1,890

 
6,891

 
5,508

Professional services
14,272

 
9,315

 
39,049

 
34,016

Total cost of revenue
16,613

 
11,205

 
45,940

 
39,524

Gross profit
28,035

 
19,540

 
80,235

 
59,652

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
19,725

 
14,480

 
59,503

 
39,477

Research and development
8,596

 
6,702

 
25,867

 
16,925

General and administrative
6,237

 
4,531

 
19,721

 
12,779

Total operating expenses
34,558

 
25,713

 
105,091

 
69,181

Operating loss
(6,523
)
 
(6,173
)
 
(24,856
)
 
(9,529
)
Other (income) expense:
 
 
 
 
 
 
 
Other (income) expense, net
(425
)
 
(67
)
 
(1,658
)
 
129

Interest (income) expense
(2
)
 
243

 
451

 
726

Total other (income) expense
(427
)
 
176

 
(1,207
)
 
855

Net loss before income taxes
(6,096
)
 
(6,349
)
 
(23,649
)
 
(10,384
)
Income tax expense (benefit)
188

 
(1,610
)
 
489

 
(2,106
)
Net loss
$
(6,284
)
 
$
(4,739
)
 
$
(24,138
)
 
$
(8,278
)

25



The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
Subscriptions, software and support
50.8
 %
 
57.5
 %
 
52.4
 %
 
51.0
 %
Professional services
49.2

 
42.5

 
47.6

 
49.0

Total revenue
100.0

 
100.0

 
100.0

 
100.0

Cost of revenue:
 
 
 
 
 
 
 
Subscriptions, software and support
5.2

 
6.1

 
5.5

 
5.6

Professional services
32.0

 
30.3

 
30.9

 
34.3

Total cost of revenue
37.2

 
36.4

 
36.4

 
39.9

Gross margin
62.8

 
63.6

 
63.6

 
60.1

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
44.2

 
47.1

 
47.2

 
39.8

Research and development
19.3

 
21.8

 
20.5

 
17.1

General and administrative
14.0

 
14.7

 
15.6

 
12.9

Total operating expenses
77.5

 
83.6

 
83.3

 
69.8

Operating loss
(14.7
)
 
(20.0
)
 
(19.7
)
 
(9.7
)
Other (income) expense:
 
 
 
 
 
 
 
Other (income) expense, net
(1.0
)
 
(0.2
)
 
(1.3
)
 
0.1

Interest (income) expense

 
0.8

 
0.4

 
0.7

Total other (income) expense
(1.0
)
 
0.6

 
(0.9
)
 
0.8

Net loss before income taxes
(13.7
)
 
(20.6
)
 
(18.8
)
 
(10.5
)
Income tax expense (benefit)
0.4

 
(5.2
)
 
0.4

 
(2.1
)
Net loss
(14.1
)%
 
(15.4
)%
 
(19.2
)%
 
(8.4
)%

Comparison of the Three Months Ended September 30, 2017 and 2016
Revenue
 
Three Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
Subscriptions, software and support
$
22,660

 
$
17,668

 
28.3
%
Professional services
21,988

 
13,077

 
68.1

Total revenue
$
44,648

 
$
30,745

 
45.2


Total revenue increased $13.9 million, or 45.2%, in the three months ended September 30, 2017 compared to the same period in 2016, due to an increase in our professional services revenue of $8.9 million and an increase in our subscriptions, software and support revenue of $5.0 million. The increase in professional services revenue was due to $3.7 million of additional revenue from existing customers and $5.2 million in sales to new customers.  The increase in subscription revenue was attributable to $3.2 million of revenue from expanded deployments and corresponding sales of additional subscriptions to existing customers and $1.8 million in sales of subscriptions to new customers.

26



Cost of Revenue
 
Three Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
Cost of revenue:
 
 
 
 
 
Subscriptions, software and support
$
2,341

 
$
1,890

 
23.9
%
Professional services
14,272

 
9,315

 
53.2

Total cost of revenue
$
16,613

 
$
11,205

 
48.3

Subscriptions, software and support gross margin
89.7
%
 
89.3
%
 
 
Professional services gross margin
35.1

 
28.8

 
 
Total gross margin
62.8

 
63.6

 
 
 
Cost of revenue increased $5.4 million, or 48.3%, in the three months ended September 30, 2017 compared to the same period in 2016, primarily due to a $3.8 million increase in contractor costs, a $0.9 million increase in professional services and product support staff personnel costs, a $0.5 million increase in facility and overhead costs and a $0.2 million increase in other cost of revenue. Contractor costs increased in the three months ended September 30, 2017 compared to the same period in 2016 because of an increase in the usage of contractor resources for professional service engagements. Personnel costs increased due to $0.2 million in stock-based compensation expense and an increase in the number of experienced professional services employees in the three months ended September 30, 2017. Facility and overhead costs increased due to an increase in billable expenses.  The increase in other cost of revenue is due to increased hosting costs as sales of our cloud offering increased in the three months ended September 30, 2017.
Gross margin decreased to 62.8% in the three months ended September 30, 2017 compared to 63.6% in the same period in 2016 due to a higher relative proportion of professional services revenue, which has a lower gross margin than our subscriptions, software and support revenue. The gross margin of our professional services revenue for the three months ended September 30, 2016 was negatively impacted by temporarily low utilization of professional services resources as they were being redeployed after the completion of a large engagement in the prior quarter.
Sales and Marketing Expense
 
Three Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
Sales and marketing
$
19,725

 
$
14,480

 
36.2
%
% of revenue
44.2
%
 
47.1
%
 
 
 
Sales and marketing expense increased $5.2 million, or 36.2%, in the three months ended September 30, 2017 compared to the same period in 2016, primarily due to a $4.5 million increase in sales and marketing personnel costs, a $0.6 million increase in facility and overhead costs and a $0.1 million increase in marketing cost. Personnel costs increased due to $0.4 million in stock-based compensation expense during the three months ended September 30, 2017, an increase in sales and marketing personnel headcount by 27.6% from September 30, 2016 to September 30, 2017, and increased sales commissions driven by our revenue growth. Marketing costs increased due to a rise in marketing event sponsorship and attendance.  Facility and overhead costs as well as contractor costs increased to support our personnel growth.

27



Research and Development Expense
 
Three Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
Research and development
$
8,596

 
$
6,702

 
28.3
%
% of revenue
19.3
%
 
21.8
%
 
 

Research and development expense increased $1.9 million, or 28.3%, in the three months ended September 30, 2017 compared to the same period in 2016, primarily due to a $1.9 million increase in research and development personnel costs. Personnel costs increased due to $0.3 million in stock-based compensation expense during the three months ended September 30, 2017 and an increase in research and development personnel headcount by 32.4% from September 30, 2016 to September 30, 2017.
General and Administrative Expense
 
Three Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
General and administrative expense
$
6,237

 
$
4,531

 
37.7
%
% of revenue
14.0
%
 
14.7
%
 
 
 
General and administrative expense increased $1.7 million, or 37.7%, in the three months ended September 30, 2017 compared to the same period in 2016, primarily due to a $1.1 million increase in general and administrative personnel costs, a $0.5 million increase in professional fees and a $0.1 million increase in facility and overhead costs. Personnel costs increased due to $0.7 million in stock-based compensation expense during the three months ended September 30, 2017 and an increase in general and administrative personnel headcount by 13.4% from September 30, 2016 to September 30, 2017. Facility and overhead costs as well as contractor costs increased to support our personnel growth.
Comparison of the Nine Months Ended September 30, 2017 and 2016
Revenue
 
Nine Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
Revenue
 
 
 
 
 
Subscriptions, software and support
$
66,116

 
$
50,607

 
30.6
%
Professional services
60,059

 
48,569

 
23.7

Total revenue
$
126,175

 
$
99,176

 
27.2

 
Total revenue increased $27.0 million, or 27.2%, in the nine months ended September 30, 2017 compared to the same period in 2016, due to an increase in our subscriptions, software and support revenue of $15.5 million and an increase in our professional services revenue of $11.5 million. The increase in subscription revenue was attributable to $11.6 million of revenue from expanded deployments and corresponding sales of additional subscriptions to existing customers and $3.9 million in sales of subscriptions to new customers. The increase in professional services revenue was due to $11.7 million of revenue from new customers, offset by the completion of a substantial portion of a government contract during the nine months ended September 30, 2016.

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Cost of Revenue
 
Nine Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
Cost of revenue:
 
 
 
 
 
Subscriptions, software and support
$
6,891

 
$
5,508

 
25.1
%
Professional services
39,049

 
34,016

 
14.8

Total cost of revenue
$
45,940

 
$
39,524

 
16.2

Subscriptions, software and support gross margin
89.6
%
 
89.1
%
 
 
Professional services gross margin
35.0

 
30.0

 
 
Total gross margin
63.6

 
60.1

 
 
 
Cost of revenue increased $6.4 million, or 16.2%, in the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to a $3.7 million increase in professional services and product support staff personnel costs, a $1.5 million increase in facility and overhead costs, a $0.7 million increase in contractor costs and a $0.5 million increase in other cost of revenue.  Personnel costs increased due to $1.6 million in stock-based compensation expense and an increase in the number of experienced professional services employees in the nine months ended September 30, 2017.  Facility and overhead costs increased due to an increase in billable expenses.  Contractor costs increased in the nine months ended September 30, 2017 compared to the same period in 2016 because of an increase in the usage of contractor resources for professional service engagements. The increase in other cost of revenue is due to increased hosting costs as sales of our cloud offering increased in the nine months ended September 30, 2017.
Gross margin increased to 63.6% in the nine months ended September 30, 2017 compared to 60.1% in the same period in 2016, due to an increase in the gross margin of our subscriptions, software and support revenue as well as our professional services revenue. Our revenue mix remained relatively constant in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The gross margin of our professional services revenue for the nine months ended September 30, 2016 was negatively impacted by temporarily low utilization of professional services resources as they were being redeployed after the completion of a large engagement in the second quarter of 2016.
Sales and Marketing Expense
 
Nine Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
Sales and marketing
$
59,503

 
$
39,477

 
50.7
%
% of revenue
47.2
%
 
39.8
%
 
 
 
Sales and marketing expense increased $20.0 million, or 50.7%, in the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to a $15.0 million increase in sales and marketing personnel costs, a $2.9 million increase in facility and overhead costs, a $1.8 million increase in marketing costs and a $0.3 million increase in professional fees. Personnel costs increased due to $2.8 million in stock-based compensation expense during the nine months ended September 30, 2017, an increase in sales and marketing personnel headcount by 27.6% from September 30, 2016 to September 30, 2017 and increased sales commissions driven by our revenue growth.  Facility and overhead costs increased to support our personnel growth. Marketing costs increased due to a rise in marketing event sponsorship and attendance. Professional fees increased due to an increase in consulting fees.

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Research and Development Expense
 
Nine Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
Research and development
$
25,867

 
$
16,925

 
52.8
%
% of revenue
20.5
%
 
17.1
%
 
 


Research and development expense increased $8.9 million, or 52.8%, in the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to a $8.4 million increase in research and development personnel costs and a $0.6 million increase in facility and overhead costs, offset by $0.1 million decrease in consulting fees. Personnel costs increased due to $2.5 million in stock-based compensation expense during the nine months ended September 30, 2017 and an increase in research and development personnel headcount by 32.4% from September 30, 2016 to September 30, 2017.  Facility and overhead costs increased to support our personnel growth. Consulting fees decreased as we continued to hire additional internal research and development personnel.
General and Administrative Expense
 
Nine Months Ended
September 30,
 
% Change
 
2017
 
2016
 
 
 
(dollars in thousands)
 
 
General and administrative expense
$
19,721

 
$
12,779

 
54.3
%
% of revenue
15.6
%
 
12.9
%
 
 
 
General and administrative expense increased $6.9 million, or 54.3%, in the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to a $5.5 million increase in general and administrative personnel costs, a $0.6 million increase in professional fees, a $0.5 million increase in facility and overhead costs and a $0.3 million increase in legal costs. Personnel costs increased due to $4.1 million in stock-based compensation expense during the nine months ended September 30, 2017 and an increase in general and administrative personnel headcount by 13.4% from September 30, 2016 to September 30, 2017.   Facility and overhead costs as well as contractor costs increased to support our personnel growth.  Legal costs increased due to the settlement of certain legal matters during the nine months ended September 30, 2017.
Liquidity and Capital Resources
As of September 30, 2017, we had $72.3 million of cash and cash equivalents. On May 31, 2017, we closed our IPO of 7,187,500 shares of our Class A common stock at an offering price of $12.00 per share, including 937,500 shares pursuant to the underwriters’ option to purchase additional Class A shares, resulting in net proceeds to us of $77.8 million, after deducting underwriting discounts and commissions of $6.0 million and offering expenses of $2.4 million.
We believe that our existing cash and cash equivalents, together with any positive cash flows from operations, 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 professional services offerings.  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.  If we are unable to raise additional capital when desired, our business, operating results and financial condition could be adversely affected.  

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The following table shows a summary of our cash flows for the nine months ended September 30, 2017 and 2016:
 
Nine Months Ended
September 30,
 
2017
 
2016
 
(in thousands)
Cash used in operating activities
$
(10,135
)
 
$
(7,815
)
Cash used in investing activities
(295
)
 
(935
)
Cash provided by financing activities
50,504

 
10,000

Sources of Funds
We have financed our operations in large part with equity and debt financing arrangements, including net proceeds of $10.0 million from the sale of shares of preferred stock over a period of several years prior to our IPO and the net proceeds from our IPO.  
As of September 30, 2017, we had no outstanding borrowings. In April 2017, we terminated our previously existing line of credit and repaid in full the $20.0 million outstanding balance of our term loan. In April 2017, we also entered into a new financing facility consisting of a $5.0 million senior revolving credit facility, a $20.0 million senior term loan and $10.0 million subordinated term loan. We borrowed the full $20.0 million available under the senior term loan and, in June 2017, we used proceeds from our IPO to pay all remaining outstanding principal and interest under the senior term loan and subsequently terminated the senior term loan and subordinated term loan. In November 2017, we entered into a $20.0 million revolving line of credit and terminated our prior line of credit. We have not made any borrowings under this new revolving line of credit.
  
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. Our operating cash requirements may increase in the future as we continue to invest in the strategic growth of our company.
Historical Cash Flows
Operating Activities
For the nine months ended September 30, 2017, net cash used in operating activities of $10.1 million consisted of a net loss of $24.1 million, offset by $12.2 million in adjustments for non-cash items and $1.8 million of cash provided by changes in working capital. Adjustments for non-cash items consisted of stock-based compensation of $10.9 million, depreciation and amortization expense of $0.7 million, loss on extinguishment of debt of $0.4 million and fair value adjustment for the warrant liability of $0.3 million, offset by a provision for deferred income taxes of $0.1 million. The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a $4.3 million decrease in accounts receivable, primarily due to the timing of billings, an increase in accounts payable and accrued expenses of $1.2 million and an increase in deferred revenue of $1.0 million, as a result of increased subscription sales. This increase was partially offset by a $3.2 million increase in prepaid expenses and other assets, a $1.0 million increase in deferred commissions due to increased sales, a $0.3 million decrease in accrued compensation and related benefits, primarily due to the timing of year-end bonus payments and a $0.2 million decrease in other liabilities.
For the nine months ended September 30, 2016, net cash used in operating activities of $7.8 million consisted of a net loss of $8.3 million and $0.1 million in adjustments for non-cash items, offset by $0.6 million of cash provided by changes in working capital. Adjustments for non-cash items consisted of a provision for deferred income taxes of $0.9 million, offset by depreciation and amortization expense of $0.6 million and fair value adjustment for the warrant liability of $0.2 million. The increase in cash and cash equivalents resulting from changes in working capital primarily consisted of a decrease in accounts receivable of $6.2 million, primarily due to the timing of billings, a $1.6 million increase in accrued compensation and related benefits as a result of our increasing headcount and a $0.4 million increase in deferred revenue as a result of increased subscription sales. This increase was partially offset by a $2.9 million decrease in accounts payable and accrued expenses, an

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increase in prepaid expenses and other assets of $2.4 million, an increase in deferred commissions of $1.4 million due to increased sales and a $0.9 million decrease in other liabilities.
Investing Activities
For the nine months ended September 30, 2017 and 2016, net cash used in investing activities was $0.3 million and $0.9 million, respectively, for the purchase of property and equipment.
Financing Activities
For the nine months ended September 30, 2017, net cash provided by financing activities was $50.5 million, consisting of $80.2 million in proceeds from our IPO, net of underwriting discounts, $19.6 million in proceeds from the issuance of long-term debt, net of issuance costs, and $0.7 million in proceeds received from stock option exercises.  These increases were offset by the repayment of $40.0 million of long-term debt, a $7.6 million dividend payment to the Series A preferred stockholders and the payment of deferred IPO costs of $2.4 million.   For the nine months ended September 30, 2016, net cash provided by financing activities was $10.0 million, consisting of $20.0 million in net borrowings under our term loan, partially offset by $10.0 million in repayments of debt.
Contractual Obligations and Commitments
As of September 30, 2017, the only material change in our contractual obligations and commitments from those disclosed in the final prospectus for our IPO dated as of May 24, 2017 and filed with the SEC pursuant to Rule 424(b)(4) was the termination of our line of credit and full repayment of $20.0 million in net borrowings under our term loan in April 2017, as described further above under “Liquidity and Capital Resources – Sources of Funds.”
Off-Balance Sheet Arrangements
As of September 30, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates. Significant estimates embedded in the consolidated financial statements for the period presented include revenue recognition, income taxes, stock-based compensation, and fair value measurements for our preferred stock warrant.
There have been no material changes in our critical accounting policies from those disclosed in the final prospectus for our IPO dated as of May 24, 2017 and filed with the SEC pursuant to Rule 424(b)(4).  
Recent Accounting Pronouncements
See Note 2 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
JOBS Act
In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with

32



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 take advantage of the extended transition period to comply with new or revised accounting standards and to adopt certain of the reduced disclosure requirements available to emerging growth companies. As a result of the accounting standards election, we will not be subject to the same implementation timing for new or revised accounting standards as other public companies that are not emerging growth companies which may make comparison of our financials to those of other public companies more difficult.


ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
We had cash and cash equivalents of $72.3 million as of September 30, 2017, which consisted of cash in readily available checking accounts and overnight repurchase investments. These securities are not dependent on interest rate fluctuations that may cause the principal amount of these assets to fluctuate.
At September 30, 2017, we had no outstanding borrowings.
Foreign Currency Exchange Risk
Our reporting currency is the U.S. dollar. Due to our international operations, we have foreign currency risks related to revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound Sterling, Euro, Australian Dollar and Swiss Franc. Our sales contracts are primarily denominated in the local currency of the customer making the purchase. In addition, a portion of operating expenses are incurred outside the United States and are denominated in foreign currencies. Decreases in the relative value of the U.S. dollar to other currencies may negatively affect revenue and other operating results as expressed in U.S. dollars. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on operating results.
We have experienced and will continue to experience fluctuations in net loss as a result of transaction gains or losses related to remeasuring certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future.

ITEM 4.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting

33



There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



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PART II—OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS.
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

ITEM 1A.
RISK FACTORS.
Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our Class A common stock could decline.
Risks Related to Our Business and Industry
Our recent growth may not be indicative of our future growth and, if we continue to grow, we may not be able to manage our growth effectively.
We have recently experienced a period of rapid growth in our headcount and operations.  We have also significantly increased the size of our customer base over the last several years. We anticipate that we will continue to significantly expand our operations and headcount in the near term. Our growth has placed, and future growth will place, a significant strain on our management, administrative, operational and financial infrastructure. Our success will depend in part on our ability to manage this growth effectively. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure to effectively manage our growth could result in difficulty or delays in deploying our platform to customers, declines in quality or customer satisfaction, increases in costs, difficulties in introducing new features or other operational difficulties. Any of these difficulties could adversely impact our business performance and results of operations.
Our rapid growth also makes it difficult to evaluate our future prospects. Our ability to forecast our future operating results is subject to a number of uncertainties, including our ability to plan for and model future growth. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, our business could suffer and the trading price of our stock may decline.
If we are unable to sustain our revenue growth rate, we may not achieve or maintain profitability in the future.
We have experienced revenue growth with revenue of $89.0 million, $111.2 million and $132.9 million in 2014, 2015 and 2016, respectively. Although we have experienced rapid revenue growth historically, we may not continue to grow as rapidly in the future and our revenue growth rates may decline. Any success that we may experience in the future will depend in large part on our ability to, among other things:
maintain and expand our customer base;
increase revenue from existing customers through increased or broader use of our platform within their organizations;
further penetrate the existing industry verticals that we serve and expand into other industry verticals;
improve the performance and capabilities of our platform through research and development;
continue to successfully expand our business domestically and internationally; and
successfully compete with other companies.

35



If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability. You should not rely on our revenue for any prior quarterly or annual periods as any indication of our future revenue or revenue growth.
We may not be able to scale our business quickly enough to meet our customers’ growing needs, and if we are not able to grow efficiently, our operating results could be harmed.
As usage of our platform grows and as customers use our platform for more advanced and more frequent projects, we may need to devote additional resources to improving our software architecture, integrating with third-party systems, and maintaining infrastructure performance. In addition, we will need to appropriately scale our internal business as well as grow our partner services systems, including our professional services organization and operations, to serve our growing customer base, particularly as our customer base expands over time. Any failure of or delay in these efforts could cause impaired system performance and reduced customer satisfaction. These issues could reduce the attractiveness of our platform to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers, the issuance of service credits, or requested refunds, which could hurt our revenue growth and our reputation. Even if we are able to upgrade our systems and expand our staff, any such expansion will be expensive and complex, requiring management time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely impact our financial results.
We are dependent on a single solution, and the lack of continued market acceptance of our platform could cause our operating results to suffer.
Sales of our Appian software platform account for substantially all of our subscription revenue and are the source of substantially all of our professional services revenue. We expect that we will be substantially dependent on our platform to generate revenue for the foreseeable future. As a result, our operating results could suffer due to:
any decline in demand for our platform;
the failure of our platform to achieve continued market acceptance;
the market for low-code solutions not continuing to grow, or growing more slowly than we expect;
the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our platform;
technological innovations or new standards that our platform does not address;
sensitivity to current or future prices offered by us or competing solutions; and
our inability to release enhanced versions of our platform on a timely basis.
If the market for our platform grows more slowly than anticipated or if demand for our platform does not grow as quickly as anticipated, whether as a result of competition, pricing sensitivities, product obsolescence, technological change, unfavorable economic conditions, uncertain geopolitical environment, budgetary constraints of our customers or other factors, we may not be able to grow our revenue.
If we are unable to further penetrate our existing industry verticals or expand our customer base, our revenue may not grow and our operating results may be harmed.
Currently, a significant majority of our revenue is derived from companies in the financial services, pharmaceuticals, insurance and healthcare industries, and from the U.S. federal government. We are investing substantial resources to expand and train our sales force to enable it to better understand these industry verticals and drive sales to customers in these industry verticals, but there can be no assurance that these investments will be successful. Further, an important part of our strategy is to expand our customer base in a wide variety of industries. We have less experience in some industries and our expansion may require us to grow our expertise in certain areas and add sales and support personnel possessing familiarity with the relevant industries. There may be competitors in these verticals that may be entrenched and difficult to dislodge. As a result of these and other factors, our efforts to expand our customer base may be expensive and may not succeed, and we therefore may be unable to grow our revenue. If we fail to further penetrate our existing industry verticals or expand our customer base, we may be unable to grow our revenue and our operating results may be harmed.

36



Market adoption of low-code solutions to drive digital transformation is new and unproven and may not grow as we expect, which may harm our business and prospects.
We believe our future success will depend in large part on growth in the demand for low-code solutions to drive software-enabled digital transformation. We have customers in a wide variety of industries, including financial services, healthcare, government, telecommunications, media, energy, manufacturing and transportation. It is difficult to predict customer demand for our platform, renewal rates, the rate at which existing customers expand their subscriptions, the size and growth rate of the market for our platform, the entry of competitive products or the success of existing competitive products. The utilization of low-code software to drive digital transformation is still relatively new. Any expansion in our addressable market depends on a number of factors, including businesses continuing to desire to differentiate themselves through software-enabled digital transformation, increasing their reliance on low-code solutions, changes in the competitive landscape, technological changes, budgetary constraints of our customers and changes in economic conditions. If our platform does not achieve widespread adoption or there is a reduction in demand for low-code solutions caused by a lack of customer acceptance, technological challenges, competing technologies and products, decreases in corporate or IT infrastructure spending, weakening economic conditions, or other factors, it could result in reduced customer purchases, reduced renewal rates and decreased revenue, any of which will adversely affect our business, operating results and financial condition.
Our sales cycle is long and unpredictable, particularly with respect to large customers, and our sales efforts require considerable time and expense, all of which may cause our operating results to fluctuate.
Our operating results may fluctuate, in part, because of the resource-intensive nature of our sales efforts, the length and variability of the sales cycle of our platform and the difficulty that we face in adjusting our short-term operating expenses. Our operating results depend in part on sales to large customers and promotion of increasing usage within those large customers. The length of our sales cycle, from initial evaluation to delivery of, and payment for, the software, varies substantially from customer to customer. Our sales cycle can extend to more than a year for certain large customers. It is difficult to predict if or when we will make a sale to a potential customer. Prospective customers, especially larger organizations, often undertake a prolonged evaluation process, which typically involves not only our platform, but also those of our competitors and can last from four to nine months or longer. We may spend substantial time, effort and money on our sales and marketing efforts without any assurance that our efforts will produce any sales. In addition, events affecting our customers’ businesses may occur during the sales cycle that could affect the size or timing of a purchase, contributing to more unpredictability in our business and operating results. As a result of these factors, we may face greater costs, longer sales cycles and less predictability in the future. In the past, certain individual sales have occurred in periods later than we expected or have not occurred at all. The loss or delay of one or more large transactions in a quarter could impact our operating results for that quarter and any future quarters in which such revenue would otherwise have been recognized. As a result of these factors, it is difficult for us to forecast our revenue accurately in any quarter, and our quarterly results may fluctuate substantially. Further, because a substantial portion of our expenses are relatively fixed in the short-term, our operating results will suffer if revenue falls below our expectations in a particular quarter.
We currently face significant competition.
The markets for low-code development platforms, business process management, case management software and custom software are highly competitive, rapidly evolving and have relatively low barriers to entry. The principal competitive factors in our market include: platform features, reliability, performance and effectiveness; ease of use and speed; platform extensibility and ability to integrate with other technology infrastructures; deployment flexibility; robustness of professional services and customer support; price and total cost of ownership; strength of platform security and adherence to industry standards and certifications; strength of sales and marketing efforts; and brand awareness and reputation. If we fail to compete effectively with respect to any of these competitive factors, we may fail to attract new customers or lose or fail to renew existing customers, which would cause our operating results to suffer.
We primarily compete with low-code development platforms sold by companies such as salesforce.com, inc. and ServiceNow, Inc. We also compete with companies that provide business process management and case management software, including IBM, OpenText Corporation, Oracle Corporation, Pegasystems Inc. and SAP SE. Further, because our platform is used by our customers to create custom applications, there are software companies that offer commercial, off-the-shelf applications as well as custom software solutions that compete with us. For example, our platform is used by the Defense Information Systems Agency of the U.S. federal government, or DISA, to manage procurement processes and contract writing. Competing vendors offer software that specifically performs contract writing functionality, and we have on occasion lost

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competitive bids to those point solution vendors for contracts with DISA. In addition, large software and internet companies may seek to enter our primary markets.
Some of our actual and potential competitors have advantages over us, such as longer operating histories, more established relationships with current or potential customers and commercial partners, significantly greater financial, technical, marketing or other resources, stronger brand recognition, larger intellectual property portfolios and broader global distribution and presence. Such competitors may make their solutions available at a low cost or no cost basis in order to enhance their overall relationships with current or potential customers. Our competitors may also be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. With the introduction of new technologies and new market entrants, we expect competition to intensify in the future. In addition, some of our larger competitors have substantially broader offerings and can bundle competing products with other software offerings. As a result, customers may choose a bundled offering from our competitors, even if individual products have more limited functionality than our platform. These larger competitors are also often in a better position to withstand any significant reduction in capital spending, and will therefore not be as susceptible to economic downturns.
Furthermore, our actual and potential competitors may establish cooperative relationships among themselves or with third parties that may further enhance their resources and offerings in the markets we address. In addition, current or potential competitors may be acquired by third parties with greater available resources. As a result of such relationships and acquisitions, our actual or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their offerings more quickly than we do. For all of these reasons, we may not be able to compete successfully against our current or future competitors.
If our security measures are breached or unauthorized access to our platform or customer data is otherwise obtained, our platform may be perceived as not being secure, customers may reduce the use of or stop using our platform and we may incur significant liabilities.
Our platform, which can be deployed in the cloud, on-premises or using a hybrid approach, allows for the storage and transmission of our customers’ proprietary or confidential information, which may include trade secrets, personally identifiable information, personal health information and payment card information. Any actual or perceived unauthorized access to, or security breaches affecting, our platform or the information stored on or transmitted by our platform could result in the loss of information, litigation, regulatory investigations, penalties, indemnity obligations and other costs, expenses and liability, which could exceed our existing insurance coverage and could result in a substantial financial loss. While we have security measures in place designed to protect customer information and prevent data loss and other security breaches, there can be no assurance that these measures will be effective in protecting against unauthorized access to our platform or our customers’ information. Similarly, if cyber incidents, such as phishing attacks, viruses, denial of service attacks, malware installation, server malfunction, software or hardware failures, loss of data or other computer assets, adware, or other similar issues, impair the integrity or availability of our systems by affecting our data, or reducing access to or shutting down one or more of our computing systems or our IT network, we may be subject to negative treatment by our customers, our business partners, the press, and the public at large. Further, because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Additionally, we may be subject to attacks on our networks or systems or attempts to gain unauthorized access to our proprietary or confidential information or other data we or our vendors maintain, such as data about our employees. Such attacks and other breaches of security may occur as a result of malicious attacks, human error, social engineering, or other causes. Any actual or perceived breach of our security measures or failure to adequately protect our customers’ or our confidential or proprietary information could negatively affect our ability to attract new customers, cause existing customers to elect to not renew their subscriptions to our software or result in reputational damage, any of which could adversely affect our operating results.
Further, security compromises experienced by our customers with respect to data hosted on our platform, even if caused by the customer’s own misuse or negligence, may lead to public disclosures, which could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, or cause existing customers to elect not to renew their subscriptions with us. We may be subjected to indemnity demands, regulatory proceedings, audits, penalties or litigation based on our customers’ misuse of our platform with respect to such

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sensitive information, and defending against such litigation and otherwise addressing such matters may be expensive, cause distraction, and may result in us incurring liability, all of which may affect our operating results.
While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage will be adequate or otherwise protect us from liabilities or damages with respect to claims alleging compromises of personal data or that such coverage will continue to be available on acceptable terms or at all.
We previously identified a material weakness in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control over financial reporting, this could have a material adverse effect on our business.
We produce our consolidated financial statements in accordance with the requirements of U.S. GAAP. Effective internal controls are necessary for us to provide reliable financial reports to help mitigate the risk of fraud and to operate as a publicly traded company. Prior to our initial public offering, or IPO, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm identified a material weakness and a significant deficiency in our internal controls over financial reporting in connection with the audit of our financial statements for the year ended December 31, 2015. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A “significant deficiency” is a deficiency or a combination of deficiencies in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting.
The material weakness that our independent registered public accounting firm identified related to our revenue recognition related to certain multiple element arrangements in which the controls over the review of transactions that included fixed fee professional services sold with term or perpetual license agreements failed to ensure the resulting revenue recognition was consistent with applicable guidance. This material weakness resulted in the restatement of our 2013 and 2014 financial statements, with approximately $2.4 million in revenue previously recognized in 2013 being deferred until 2014 and beyond and $1.9 million in revenue previously recognized in 2014 being deferred until 2015 and beyond. In addition, the significant deficiency involved lack of oversight to system administrative rights granted to non-IT personnel to our financial reporting systems. We have taken steps to remediate the material weakness and significant deficiency, including hiring additional accounting staff members that are proficient in revenue recognition accounting, including a manager of revenue recognition and an assistant controller, consulting with outside professional accountants on revenue recognition issues, adding internal controls related to revenue recognition and limiting administrative access rights to our financial reporting systems. We believe that as of December 31, 2016, this previous material weakness and significant deficiency were fully remediated. In connection with the audit of our 2016 financial statements, no material weaknesses were identified in our internal control over financial reporting, although one significant deficiency was identified relating to personnel access rights to key accounting spreadsheets.
As a public company, we are required to design, document and test our internal controls over financial reporting to comply with Sarbanes-Oxley Act Section 404. We cannot be certain that additional material weaknesses and control deficiencies will not be discovered in the future. If material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis or help prevent fraud, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the market price of our Class A common stock to decline. If we have material weaknesses in the future, it could affect the financial results that we report or create a perception that those financial results do not fairly state our financial position or results of operations. Either of those events could have an adverse effect on the value of our Class A common stock.
Further, even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our future reporting obligations.

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We derive a material portion of our revenue from a limited number of customers, and the loss of one or more of these customers could adversely impact our business, results of operations and financial condition.
Our customer base is concentrated. For example, during the years ended December 31, 2014, 2015 and 2016, revenue from U.S. federal government agencies represented 34%, 33% and 26% of our total revenue, respectively, and the top three U.S. federal government customers generated 23%, 21% and 18% of our total revenue for the years ended December 31, 2014, 2015 and 2016, respectively. Further, nearly 10% of our subscription customers spent more than $1 million on our software in 2016. If we were to lose one or more of our significant customers, our revenue may significantly decline. In addition, revenue from significant customers may vary from period to period depending on the timing of renewing existing agreements or entering into new agreements. The loss of one or more of our significant customers could adversely affect our business, results of operations and financial condition.
In addition, due to our dependence on a limited number of customers, we face a concentration of credit risk. As of December 31, 2016, one customer accounted for 17.2% of our accounts receivable. In the case of insolvency by one of our significant customers, accounts receivable with respect to that customer might not be collectible, might not be fully collectible, or might be collectible over longer than normal terms, each of which could adversely affect our financial condition.
A portion of our revenue is generated from subscriptions sold to governmental entities and heavily regulated organizations, which are subject to a number of challenges and risks.
A significant portion of our revenue is generated from subscriptions sold to governmental entities, both in the United States and internationally. Additionally, many of our current and prospective customers, such as those in the financial services, pharmaceuticals, insurance and healthcare industries, are highly regulated and may be required to comply with more stringent regulations in connection with subscribing to and implementing our platform. Selling subscriptions to these entities can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that we will successfully complete a sale. Governmental demand and payment for our platform may also be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our platform.
Further, governmental and highly regulated entities often require contract terms that differ from our standard arrangements, including terms that can lead to those customers obtaining broader rights in our products than would be standard. Governmental and highly regulated entities, including the General Services Administration, whose schedule accounts for many of our U.S. federal government contracts, impose compliance requirements that are complicated, require preferential pricing or “most favored nation” terms and conditions or are otherwise time-consuming and expensive to satisfy. In the United States, applicable federal contracting regulations change frequently, and the President may issue executive orders requiring federal contractors to adhere to new compliance requirements after a contract is signed. If we undertake to meet special standards or requirements and do not meet them, we could be subject to significant liability from our customers or regulators. Even if we do meet these special standards or requirements, the additional costs associated with providing our platform to government and highly regulated customers could harm our operating results. Moreover, changes in the underlying statutory and regulatory conditions that affect these types of customers could harm our ability to efficiently provide them access to our platform and to grow or maintain our customer base. In addition, engaging in sales activities to foreign governments introduces additional compliance risks specific to the Foreign Corrupt Practices Act, the U.K. Bribery Act and other similar statutory requirements prohibiting bribery and corruption in the jurisdictions in which we operate.
We have experienced losses in the past, and we may not achieve or sustain profitability in the future.
We generated net losses of $17.1 million, $7.0 million and $12.5 million in 2014, 2015 and 2016, respectively, and a net loss of $24.1 million in the nine months ended September 30, 2017. As of September 30, 2017, we had an accumulated deficit of $89.3 million. We will need to generate and sustain increased revenue levels in future periods in order to achieve or sustain profitability in the future. We also expect our costs to increase in future periods, which could negatively affect our future operating results if our revenue does not increase commensurately. For example, we intend to continue to expend significant funds to expand our sales and marketing operations, develop and enhance our platform, meet the increased compliance requirements associated with our operation as a public company, and expand into new markets. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this

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Quarterly Report on Form 10-Q, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, our stock price may significantly decrease.
Our future quarterly results of operations may fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.
Our revenue and results of operations have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including:
the level of demand for our platform and our professional services;
the rate of renewal of subscriptions with, and extent of sales of additional subscriptions to, existing customers;
large customers failing to renew their subscriptions;
the size, timing and terms of our subscription agreements with existing and new customers;
the timing and growth of our business, in particular through our hiring of new employees and international expansion;
the timing of our adoption of new or revised accounting pronouncements applicable to public companies and the impact on our results of operations;
the introduction of new products and product enhancements by existing competitors or new entrants into our market, and changes in pricing for solutions offered by us or our competitors;
network outages, security breaches, technical difficulties or interruptions with our platform;
changes in the growth rate of the markets in which we compete;
the mix of subscriptions to our platform and professional services sold during a period;
customers delaying purchasing decisions in anticipation of new developments or enhancements by us or our competitors or otherwise;
changes in customers’ budgets;
seasonal variations related to sales and marketing and other activities, such as expenses related to our customers;
our ability to increase, retain and incentivize the strategic partners that market and sell our platform;
our ability to control costs, including our operating expenses;
our ability to hire, train and maintain our direct sales force;
unforeseen litigation and intellectual property infringement;
fluctuations in our effective tax rate; and
general economic and political conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers operate.
Any one of these or other factors discussed elsewhere in this Quarterly Report on Form 10-Q or the cumulative effect of some of these factors may result in fluctuations in our revenue and operating results, meaning that quarter-to-quarter comparisons of our revenue, results of operations and cash flows may not necessarily be indicative of our future performance and may cause us to miss our guidance and analyst expectations and may cause our stock price to decline.
In addition, we have historically experienced seasonality in terms of when we enter into agreements with customers. We typically enter into a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the fourth quarter and, to a lesser extent, the second quarter. The increase in customer agreements for the fourth quarter is attributable to large enterprise account buying patterns typical in the software industry. Furthermore, we usually enter into a significant portion of agreements with customers during the last month, and often the last two weeks, of each quarter. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in revenue, due to the fact that we recognize subscription revenue over the term of the subscription agreement, which is generally one to five years. We expect that seasonality will continue to affect our operating results in the future and may reduce our ability to predict cash flow and optimize the timing of our operating expenses.
We may not be able to continue to shift our revenue towards subscriptions and away from professional services.
Currently, our revenue is nearly evenly divided between subscriptions and professional services revenue. Since 2014, the proportion of our revenue attributable to subscriptions has increased as a proportion of our total revenue. That shift in revenue towards subscriptions has resulted in an increase of our overall gross profit, because our marginal costs in delivering

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our subscriptions are lower than the marginal costs of delivering professional services. Our strategic focus has been to grow subscriptions revenue faster than professional services revenue to perpetuate this trend.
There can be no guarantee that our revenue will continue to shift towards subscriptions and away from professional services. Our customers may demand more professional services from us, or demand for our subscriptions may grow slower than demand for our professional services. Should we fail to continue to shift our revenue towards subscriptions our earnings may suffer and our stock price may decline.
If we do not continue to innovate and provide a platform that is useful to our customers, we may not remain competitive, and our revenue and operating results could suffer.
Our success depends on continued innovation to provide features that make our platform useful for our customers. We must continue to invest significant resources in research and development in order to continually improve the simplicity and power of our platform. We may introduce significant changes to our platform or develop and introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience. If we are unable to continue offering innovative solutions or if new or enhanced solutions fail to engage our customers, we may be unable to attract additional customers or retain our current customers, which may adversely affect our business, operating results and financial condition.
We may need to reduce or change our pricing model to remain competitive.
We generally sell our software on a per-user basis. We expect that we may need to change our pricing from time to time. As competitors introduce new products that compete with ours or reduce their prices, we may be unable to attract new customers or retain existing customers based on our historical pricing. We also must determine the appropriate price to enable us to compete effectively internationally. Moreover, mid- to large-size enterprises may demand substantial price discounts as part of the negotiation of sales contracts. As a result, we may be required or choose to reduce our prices or change our pricing model, which could adversely affect our business, operating results and financial condition.
Defects or disruptions in the rollout of our platform updates or enhancements could diminish demand for our platform, adversely affect our reputation and subject us to substantial liability.
Like many software companies, we provide frequent incremental releases of software updates and functional enhancements to our platform. Despite extensive pre-release testing, such new versions occasionally contain undetected errors when first introduced or released. We have, from time to time, found errors in our software, and new errors in our existing software may be detected in the future. Since our customers use our software for important aspects of their business, any errors, defects, disruptions in our platform or other performance problems with our solution could hurt our reputation and may damage our customers’ businesses. If that occurs, our customers may delay or withhold payment to us, elect not to renew, make service credit claims, warranty claims or other claims against us, and we could lose future sales. The occurrence of any of these events could result in an increase in our bad debt expense, an increase in collection cycles for accounts receivable, decreased future revenue and earnings, require us to increase our warranty provisions or incur the risk or expense of litigation.
If the estimates and assumptions we have used to calculate the size of our target market are inaccurate, our future growth rate may be limited.
We have estimated the size and potential growth of our target market based on data published by third parties and on internally generated data and assumptions. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe our market size and growth information is generally reliable, such information is inherently imprecise. In addition, our projections, assumptions and estimates of future opportunities within our target market are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in this Quarterly Report on Form 10-Q. If third-party or internally generated data prove to be inaccurate or we make errors in our assumptions based on that data, our future growth rate may be limited. In addition, these inaccuracies or errors may cause us to misallocate capital and other business resources, which could harm our business.
Even if our target market meets our size estimates and experiences the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business

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strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this Quarterly Report on Form 10-Q should not be taken as indicative of our future growth.
If governments or their agencies reduce their demand for our platform, our business may suffer. Moreover, if we fail to comply with government contracting regulations, we could suffer a loss of revenue or incur price adjustments or other penalties.
Changes in governmental budget priorities could adversely affect our business. U.S. and foreign government agencies have purchased our platform directly from us and products from our customers. When the government changes budget priorities, such as in times of war or financial crisis or as a result of election cycles, our subscription sales to government agencies and government-funded customers are at risk. Demand and payment for our subscriptions and our customers’ products may be affected by public sector budgetary cycles or funding authorizations. Funding reductions or delays could negatively impact demand for our platform. If government funding is discontinued or significantly reduced, our business could be materially adversely affected. For example, one of our largest customers is a government agency responsible for implementing a portion of the Affordable Care Act, or ACA. If funding for ACA implementation is curtailed or terminated, the agency may not renew its annual subscription with us, which could adversely affect our operating results.
Some of our revenue is derived from contracts with agencies of the U.S. government and subcontracts with its prime contractors. As a result, we are subject to federal contracting regulations, including the Federal Acquisition Regulation, or the FAR, system. The FAR system governs, among other things, U.S. government contract pricing, including determination of the costs incurred by us in the performance of our U.S. government contracts. Under the FAR system, certain contract pricing is based on estimated direct and indirect costs, which are subject to change. Additionally, under the FAR system, the U.S. government is entitled, for years after final payment on certain negotiated contracts, to examine all of our cost records with respect to such contracts and to seek a downward adjustment to the price of the contract if it determines that we failed to furnish complete, accurate and current cost or pricing data in connection with the negotiation of the price of the contract.
In connection with our U.S. government contracts, we are also subject to government audits and review and approval of our policies, procedures and internal controls for compliance with contract terms, procurement regulations and applicable laws. In certain circumstances, if we do not comply with the terms of a contract or with regulations or statutes, we could be subject to contract termination or downward contract price adjustments or refund obligations, could be assessed civil or criminal penalties or could be debarred or suspended from obtaining future contracts for a specified period of time. Any such termination, adjustment, sanction, debarment or suspension could have an adverse effect on our business.
Our business could be adversely affected if our customers are not satisfied with the deployment services provided by us or our partners.
The success of our business depends on our customers’ satisfaction with our platform, the support that we provide for our platform and the professional services that we provide to help our customers deploy our platform. Professional services may be performed by our own staff, by a third party or by a combination of the two. Our strategy is to work with third parties to increase the breadth, capability and depth of capacity for delivery of these services to our customers, and third parties provide a significant portion of our deployment services. If a customer is not satisfied with the quality of work performed by us or a third party or with the type of applications delivered, we could incur additional costs to address the deficiency, which would diminish the profitability of the customer relationship. Further, a customer’s dissatisfaction with our services could impair our ability to expand the number of licenses to our software purchased by that customer or adversely affect the customer’s renewal of existing licenses. In addition, negative publicity related to our customer relationships, regardless of accuracy, may further damage our business by affecting our ability to compete for new business with actual and prospective customers.
If customers do not expand their use of our platform beyond initial use cases and applications, our ability to grow our business and our operating results may be adversely affected.
Our ability to grow our business depends, in part, on our ability to persuade existing customers to expand their use of our platform to additional use cases and additional applications, and to purchase additional software licenses to our platform. Our goal is for customer satisfaction with initial applications developed on our platform to drive increased sales of licenses to our platform. However, if customers are not satisfied with their initial experience using our platform, they may choose not to renew licenses upon expiration or purchase additional software licenses, which would adversely affect our operating results.

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We are substantially dependent upon customer renewals, the addition of new customers and the continued growth of our subscription revenue.
We derive, and expect to increasingly derive in the future, a substantial portion of our revenue from the sale of software subscriptions. For 2014, 2015, 2016 and the nine months ended September 30, 2017, approximately 42%, 48%, 53% and 52%, respectively, of our total revenue was subscriptions, software and support revenue. The market for our platform is still evolving, and competitive dynamics may cause pricing levels to change as the market matures and as existing and new market participants introduce new types of solutions and different approaches to enable customers to address their needs. As a result, we may be forced to reduce the prices we charge for software and may be required to offer terms less favorable to us for new and renewing agreements.
In order for us to improve our operating results, it is important that our customers renew their subscriptions with us when their initial term expires, as well as purchase additional subscriptions from us. In general, our customers have no renewal obligation after their initial term expires, and we cannot assure you that we will be able to renew subscriptions with any of our customers at the same or higher contract value.
Further, while we offer access to our platform primarily through multi-year subscription agreements, some agreements may have shorter durations. Additionally, some of our contracts limit the amount we can increase prices from period to period, or include pricing guarantees. If our customers do not renew their agreements, terminate their agreements, renew their agreements on terms less favorable to us or fail to purchase additional software subscriptions, our revenue may decline and our operating results would likely be harmed as a result.
We rely on the performance of highly skilled personnel, including senior management and our engineering, professional services, sales and technology professionals; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed.
We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, particularly Matthew Calkins, our founder and Chief Executive Officer, and our highly skilled team members, including our sales personnel, professional services personnel and software engineers. We do not maintain key man insurance on