Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Significant Accounting Policies

Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”).

Use of Estimates

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the amounts reported in these 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 consolidated financial statements include revenue recognition, income taxes and the related valuation allowance and stock-based compensation.

Principles of Consolidation

The accompanying 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 initial public offering ("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 the IPO.

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.

Secondary Offering 

In November 2017, we completed a secondary offering in which stockholders sold an aggregate of 4,370,000 shares of our Class A common stock at a price of $20.25 per share. We did not receive any proceeds from the sale of the shares of our Class A common stock sold in the secondary offering.

Public Offerings

In August 2018, we completed an underwritten public offering of 2,000,000 shares of our Class A common stock, of which 1,675,000 shares of Class A common stock were sold by us and 325,000 shares of Class A common stock were sold by existing stockholders, at an offering price to the public of $35.15 per share.  Our net proceeds from the offering were $57.8 million, after deducting underwriting discounts and commissions and offering expenses. We did not receive any of the proceeds from the sale of shares by the selling stockholders.

In September 2019, we completed an underwritten public offering of 2,329,000 shares of our Class A common stock, of which 1,825,000 shares of Class A common stock were sold by us and 504,000 shares of Class A common stock were sold by existing stockholders. The underwriter purchased the shares from us and the selling stockholders at a price of $55.70 per share.  Our net proceeds from the offering were $101.3 million, after deducting underwriting discounts and commissions and offering expenses. We did not receive any of the proceeds from the sale of shares by the selling stockholders.

Revenue Recognition

We generate subscriptions revenue primarily through the sale of SaaS subscriptions bundled with maintenance and support and hosting services and term license subscriptions bundled with maintenance and support. We generate professional services revenue from fees for our consulting services, including application development and deployment assistance and training related to our platform. Because we were an “emerging growth company” until December 31, 2019, the Jumpstart Our Business Startups Act (the “JOBS Act”) allowed us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We elected to use this extended transition period that allowed us not to adopt Financial Accounting Standards Board, or FASB, Accounting Standards Updated, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606") in our Quarterly Reports on Form 10-Q during 2019. The 2019 selected quarterly information in Note 14 have been recast in accordance with ASC 606.

We adopted ASC 606 on January 1, 2019 using the modified retrospective method. Under this method of adoption, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. Comparative periods were not adjusted.

The following table summarizes revenue from contracts with customers for the year ended December 31, 2019 (in thousands):

	Year Ended December 31, 2019
SaaS subscriptions	$	95,028
Term license subscriptions	40,428
Maintenance and support	15,843
Professional services	109,053
Total revenue	$	260,352

Performance Obligations and Timing of Revenue Recognition

We primarily sell products and services that fall into the categories discussed below. Each category contains one or more performance obligations that are either (1) capable of being distinct (i.e. the customer can benefit from the product or service on its own or together with readily available resources, including those purchased separately from us) and distinct within the context of the contract (i.e. separately identified from other promises in the contract) or (2) a series of distinct products or services that are substantially the same and have the same pattern of transfer to the customer. Our term license subscriptions are delivered at a point in time. Our SaaS subscriptions, maintenance and support and professional services are delivered over time.

Subscriptions Revenue

Subscriptions revenue is primarily related to (1) SaaS subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support.

We generally charge subscription fees on a per-user basis and, to a lesser degree, non-user based single application licenses. We bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly or monthly basis. In certain instances, our customers have paid their entire contract up front.

SaaS Subscriptions

We generate cloud-based subscription revenue primarily from the sales of subscriptions to access our cloud offering, together with related support services to our customers. We perform all required maintenance and support for our cloud

offering and we do not separately charge customers for hosting costs. Revenue is recognized on a ratable basis over the contract term beginning on the date the service is made available to the customer. Our cloud-based subscription contracts generally have a term of one to three years in length. We bill customers and collect payment for subscriptions to our platform in advance and they are non-cancellable.

Term License Subscriptions

Our term license subscription revenue is derived from customers with on-premises installations of our platform pursuant to contracts that were historically one to three years in length. The majority of recent contracts are one year in length. Although term license subscriptions are sold with maintenance and support, the software is fully functional at the beginning of the subscription and is considered a distinct performance obligation. On rare occasions, a cloud-based subscription may include the right for the customer to take possession of the license and as such, the revenue is treated as a license. Revenue from term license subscriptions is recognized when control of the software license has transferred to the customer, which is the later of delivery or commencement of the contract term.

Maintenance and Support

Maintenance and support subscriptions include both technical support and when-and-if-available software upgrades, which are treated as a single performance obligation as they are considered a series of distinct services that are substantially the same and have the same duration and measure of progress. Revenue from maintenance and support is recognized ratably over the contract period, which is the period over which the customer has continuous access to maintenance and support.

Professional Services

Our professional services revenue is comprised of fees for consulting services, including application development and deployment assistance and training services related to our platform. Our professional services are considered distinct performance obligations when sold stand alone or with other products.

Consulting Services

We sell consulting services to assist customers plan and execute deployment of our software. Customers are not required to use consulting services to fully benefit from the software. Consulting services are regularly sold on a standalone basis and either (1) a fixed-fee arrangement or (2) a time and materials basis. Consulting contracts are each considered separate performance obligations because they do not integrate with each other or with other products and services to deliver a combined output to the customer, do not modify or customize (or are not modified or customized by) each other or other products and services, and do not affect the customer's ability to use the other consulting offerings or other products and services. Revenue under consulting contracts is recognized over time as services are delivered. For time and materials-based consulting contracts, we have elected the practical expedient of recognizing revenue upon invoicing since the invoiced amount corresponds directly to the value of our service to-date.

Training Services

We sell various training services to our customers. Training services are sold in the form of prepaid training credits that are redeemed based on a fixed rate per course. Training revenue is recognized when the associated training services are delivered.

Significant Judgments and Estimates

Determine the Transaction Price

The transaction price includes both fixed and variable consideration. Variable consideration is included in the transaction price to the extent it is probable that a significant reversal will not occur. The amount of variable consideration excluded from the transaction price for the year ended December 31, 2019 was insignificant. Our estimates of variable consideration are also subject to subsequent true-up adjustments and may result in changes to its transaction prices but such true-up adjustments are not expected to be material.

Allocating the Transaction Price Based on Standalone Selling Prices

We allocate the transaction price to each performance obligation in a contract based on its relative SSP. The SSP is the observable price at which we sell the product or service separately. In the absence of observable pricing, we estimate SSP using the residual approach. We establish SSP as follows:

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

2.Term license subscriptions - Given the highly variable selling price of our term license subscriptions, we have established SSP of term license subscriptions using a residual approach after first determining the SSP of maintenance and support. Maintenance and support is sold on a standalone basis, with renewals of our legacy perpetual software licenses, within a narrow range of the net license fee and because an economic relationship exists between the license and maintenance and support, we have concluded that the residual approach to estimate SSP of term license subscriptions is an appropriate allocation of the transaction price.

3.Maintenance and support - We establish SSP of maintenance and support as a percentage of the stated net subscription fee based on observable pricing of maintenance and support renewals from our legacy perpetual software licenses.

4.Consulting services and training services - SSP of consulting services and training services is established based on the observable pricing of standalone sales within each geographic region where the services are sold.

Contract Balances

Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. Contract assets primarily relate to unbilled amounts for contracts with customers for which the amount of revenue recognized exceeds the amount billed to the customer. Contract assets are transferred to accounts receivable when the right to invoice becomes unconditional. As of January 1, 2019 and December 31, 2019, contract assets of $25.8 million and $22.8 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet.

Contract liabilities consists of deferred revenue and include payments received in advance of the satisfaction of performance obligations. For the year ended December 31, 2019, we recognized $66.6 million of revenue that was included in deferred revenue as of January 1, 2019. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.

Transaction Price Allocated to the Remaining Performance Obligations

As of December 31, 2019, we had an aggregate transaction price of $175.8 million, allocated to unsatisfied performance obligations related to SaaS subscriptions, term license subscriptions and maintenance and support. We expect to recognize $153.7 million as revenue over the next 24 months with the remaining amount recognized thereafter.

Transition Disclosures

For periods prior to January 1, 2019, we recognized revenue in accordance with FASB ASC Topic 605, Revenue Recognition ("ASC 605"). In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for the annual periods during the first year of adoption of ASC 606.

Consolidated Balance Sheets - Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard

The following table summarizes the impacts from the adoption of the new revenue recognition standard on our consolidated balance sheet as of December 31, 2019 (in thousands):

	As of December 31,
	2019						2018
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Assets
Current assets
Cash and cash equivalents	$	159,755	$	—	$	159,755	$	94,930
Accounts receivable, net of allowance	70,408		—		70,408		79,383
Deferred commissions, current	14,543		(6,061)		20,604		14,020
Prepaid expenses and other current assets	32,955		16,343		16,612		21,293
Total current assets	277,661		10,282		267,379		209,626
Property and equipment, net	39,554		—		39,554		7,539
Operating right-of-use asset	24,205		—		24,205		—
Deferred commissions, net of current portion	28,979		15,780		13,199		15,088
Deferred tax assets	494		—		494		326
Other assets	592		—		592		601
Total assets	371,485		26,062		345,423		233,180
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	5,222	$	—	$	5,222	$	9,249
Accrued expenses	7,488		—		7,488		7,464
Accrued compensation and related benefits	10,691		—		10,691		13,796
Deferred revenue, current	82,201		(28,985)		111,186		95,523
Operating lease liability, current	3,836		—		3,836		—
Finance lease liability, current	1,447		—		1,447		—
Other current liabilities	1,395		—		1,395		2,369
Total current liabilities	112,280		(28,985)		141,265		128,401
Operating lease liability, net of current portion	44,416		—		44,416		—
Finance lease liability, net of current portion	2,375		—		2,375		—
Deferred revenue, net of current portion	7,139		(4,891)		12,030		16,145
Deferred tax liabilities	38		—		38		42
Deferred rent, net of current portion	—		—		—		15,400
Total liabilities	166,248		(33,876)		200,124		159,988
Stockholders’ equity
Class A common stock	3		—		3		3
Class B common stock	3		—		3		3
Additional paid-in capital	340,929		—		340,929		218,284
Accumulated other comprehensive (loss) income	(285)		320		(605)		542
Accumulated deficit	(135,413)		59,618		(195,031)		(145,640)
Total stockholders’ equity	205,237		59,938		145,299		73,192
Total liabilities and stockholders’ equity	$	371,485	26,062		$	345,423	$	233,180

The following summarizes the significant changes on the consolidated balance sheet as of December 31, 2019 as a result of the adoption of ASC 606 on January 1, 2019 compared to if we had continued to recognize revenue under ASC 605:

•Total deferred commissions increased $9.7 million due to the increase in the amortization period of costs to obtain a contract for a new customer or up-sell from the contract term to the five year estimated economic life.

•Prepaid expenses and other current assets increased $16.3 million and total deferred revenue decreased $33.9 million due to the change in timing of when we recognize revenue under ASC 606.

Consolidated Statements of Operations - Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard

The following table summarizes the impacts from the adoption of the new revenue recognition standard on our consolidated statement of operations for the year ended December 31, 2019 (in thousands):

	Year Ended December 31,
	2019						2018
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Revenue:
Subscriptions	$	151,299	$	(8,786)	$	160,085	$	126,012
Professional services	109,053		2,791		106,262		100,731
Total revenue	260,352		(5,995)		266,347		226,743
Cost of revenue:
Subscriptions	17,098		—		17,098		11,997
Professional services	76,743		—		76,743		72,928
Total cost of revenue	93,841		—		93,841		84,925
Gross profit	166,511		(5,995)		172,506		141,818
Operating expenses:
Sales and marketing	117,440		(4,625)		122,065		105,992
Research and development	58,043		—		58,043		44,724
General and administrative	41,496		—		41,496		37,821
Total operating expenses	216,979		(4,625)		221,604		188,537
Operating loss	(50,468)		(1,370)		(49,098)		(46,719)
Other (income) expense:
Other (income) expense, net	(941)		(47)		(894)		2,295
Interest expense	367		—		367		198
Total other (income) expense	(574)		(47)		(527)		2,493
Loss before income taxes	(49,894)		(1,323)		(48,571)		(49,212)
Income tax expense	820		—		820		239
Net loss	$	(50,714)	$	(1,323)	$	(49,391)	$	(49,451)
Net loss per share attributable to common stockholders:
Basic and diluted	$	(0.77)	$	(0.02)	$	(0.75)	$	(0.80)

The following summarizes the significant changes on the consolidated statement of operations for the year ended December 31, 2019 as a result of the adoption of ASC 606 on January 1, 2019 compared to if we had continued to recognize revenue under ASC 605:

•Subscriptions revenue decreased $8.8 million for the year ended December 31, 2019 under ASC 606 primarily due to the change in timing of when we recognize term license subscription revenue. Additionally, a significant amount of our

unrecognized term license subscriptions revenue was recorded as an adjustment to accumulated deficit under ASC 606. Under ASC 606, our term license subscription revenue is recognized at the time of delivery, as opposed to ratably over the contract term under ASC 605.

•Professional services revenue increased $2.8 million for the year ended December 31, 2019 under ASC 606 primarily due to the fact that our professional services are sold together with SaaS or term licenses. Under ASC 606, the professional services represent distinct performance obligations and therefore are recognized as services are performed. Under ASC 605, professional services sold together with term licenses were recognized ratably over the contract period of maintenance and support.

•Sales and marketing expense decreased $4.6 million for the year ended December 31, 2019 under ASC 606 primarily due to the increase in the period over which we amortize our deferred sales commissions.

Consolidated Statements of Comprehensive Loss - Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard

The following table summarizes the impacts from the adoption of the new revenue recognition standard on our consolidated statement of comprehensive loss for the year ended December 31, 2019 (in thousands):

	Year Ended December 31,
	2019						2018
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Net loss	$	(50,714)	$	(1,323)	$	(49,391)	$	(49,451)
Comprehensive loss, net of income taxes:
Foreign currency translation adjustment	(827)		115		(942)		103
Total other comprehensive loss, net of income taxes	$	(51,541)	$	(1,208)	$	(50,333)	$	(49,348)

Consolidated Statements of Cash Flows - Reconciliation of the Impacts from the Adoption of the New Revenue Recognition Standard

The following table summarizes the impacts from the adoption of the new revenue recognition standard on our consolidated statement of cash flows for the year ended December 31, 2019 (in thousands):

	Year Ended December 31,
	2019						2018
	As Reported (ASC 606)		Impacts from Adoption		Without Adoption (ASC 605)		As Reported (ASC 605)
Net loss	$	(50,714)	$	(1,323)	$	(49,391)	$	(49,451)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,742		—		4,742		2,021
Loss (gain) on disposal of equipment	146		—		146		(4)
Bad debt expense	99		—		99		211
Deferred income taxes	(334)		—		(334)		(218)
Stock-based compensation	16,443		—		16,443		16,054
Changes in assets and liabilities:
Accounts receivable	7,432		—		7,432		(23,332)
Prepaid expenses and other assets	8,972		4,313		4,659		(1,025)
Deferred commissions	(9,319)		(4,625)		(4,694)		(7,615)
Accounts payable and accrued expenses	(4,039)		—		(4,039)		7,461
Accrued compensation and related benefits	(3,072)		—		(3,072)		(3)
Other current liabilities	1,318		—		1,318		1,823
Deferred revenue	12,573		1,717		10,856		23,023
Operating lease liabilities	6,827		—		6,827		—
Deferred rent, non-current	—		—		—		(266)
Net cash used in operating activities	(8,926)		82		(9,008)		(31,321)
Cash flows from investing activities:
Purchases of property and equipment	(32,421)		—		(32,421)		(7,014)
Proceeds from sale of equipment	—		—		—		4
Net cash used in investing activities	(32,421)		—		(32,421)		(7,010)
Cash flows from financing activities:
Proceeds from public offering, net of underwriting discounts	101,653		—		101,653		58,258
Payment of costs related to public offerings	(350)		—		(350)		(429)
Proceeds from exercise of common stock options	4,899		—		4,899		3,133
Principal payments on finance lease obligations	(653)		—		(653)		—
Net cash provided by financing activities	105,549		—		105,549		60,962
Effect of foreign exchange rate changes on cash and cash equivalents	623		(82)		705		(1,459)
Net increase in cash and cash equivalents	64,825		—		64,825		21,172
Cash and cash equivalents, beginning of period	94,930		—		94,930		73,758
Cash and cash equivalents, end of period	$	159,755	—		$	159,755	$	94,930

Legacy Revenue Accounting Policy

For periods prior to January 1, 2019, revenue was recognized in accordance with ASC 605. Under ASC 605, 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 rights of return.

Subscriptions Revenue

Subscriptions revenue is primarily related to (1) SaaS subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support.

We generally charge subscription fees on a per-user basis, or alternatively, non-user based single application licenses. We bill customers and collect payment for subscriptions to our platform in advance on a monthly, quarterly or annual basis. In certain instances, our customers have paid their entire contract up front.

SaaS Subscriptions

Our SaaS subscription revenue is derived from customers accessing our cloud offering pursuant to contracts that are generally one to three years in length. We perform all required maintenance and support for our cloud offering and we do not separately charge customers for hosting costs. In these arrangements, our customers do not have the right to take the software on-premises and, as a result, such arrangements are not accounted for within the scope of the software revenue guidance. Revenue from SaaS subscriptions is recognized ratably over the term of the subscription, beginning with the date our service is made available to our customer.

Term License Subscriptions

Our term license subscription revenue is derived from customers with on-premises installations of our platform pursuant to contracts that were historically one to three years in length. The majority of recent contracts are one year in length. Customers with term license subscriptions have the right to use our software and receive maintenance and support. Since we do not sell maintenance and support separately from the subscription, revenue for the term license subscription and maintenance and support is recognized ratably over the term of the subscription, upon delivery of the platform to the customer when sold on a standalone basis.

Professional Services

Our professional services revenue is comprised of fees for consulting services, including application development and deployment assistance and training related to our platform. Our professional services are not essential to the functionality of our platform because the platform is ready for the customer’s use immediately upon delivery and is not modified or customized in any manner.

Consulting services are billed under both time-and-material and fixed-fee arrangements. For standalone time-and-material contracts, we recognize revenue at contractually agreed upon billing rates applied to hours performed. For standalone fixed-fee contracts, we also recognize revenue as the work is performed using the proportional performance method of accounting. Training revenue is recognized when the associated training services are delivered. Training is sold in the form of prepaid training credits that are redeemed based on a fixed rate per course.

We defer recognition of revenue from work performed on pending contract modifications until the period in which the modifications are accepted and funding is approved by the customer. Costs of work performed on pending contract modifications are expensed as incurred.

Multiple Element Arrangements

Our multiple element arrangements are from SaaS subscriptions and term license subscriptions that are generally sold in combination with maintenance and support service and frequently with professional services.

SaaS Subscriptions

For multiple element arrangements involving SaaS subscriptions that include professional services in addition to the subscription to our platform, we evaluate each element to determine whether it represents a separate unit of accounting.

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.

Cost of Revenue

Subscriptions

Cost of subscriptions revenue consists primarily of fees paid to our third-party managed hosting providers and other third-party service providers, personnel costs, including payroll and benefits for our technology operations and customer support teams, and allocated facility costs and overhead.

Professional Services

Cost of professional services revenue includes all direct and indirect costs to deliver our professional services and training, including employee compensation for our global professional services and training personnel, travel costs, third-party contractor costs and allocated facility costs and overhead, as well as the costs of billable expenses, such as travel and lodging. The unpredictability of the timing of entering into significant professional services agreements sold on a standalone basis may cause significant fluctuations in our quarterly financial results.

Concentration of Credit and Customer Risk

Our financial instruments that are exposed to concentration of credit and customer risk consist primarily of cash and cash equivalents and trade accounts receivable. Deposits held with banks may exceed the amount of insurance, if any, provided on such deposits. We believe that the financial institutions that hold our cash deposits are financially sound and, accordingly, minimal credit risk exists with respect to these balances.

With regard to our customers, credit evaluation and account monitoring procedures are used to minimize the risk of loss. We believe that no additional credit risk beyond amounts provided for collection loss are inherent in accounts receivable. Revenue generated from government agencies represented 17.1%, 15.7% and 15.4% of our revenue for the years ended December 31, 2019, 2018 and 2017, respectively, of which the top three U.S. federal government agencies generated 7.4%, 7.8% and 8.4% of our revenue for the years ended December 31, 2019, 2018 and 2017, respectively. Additionally, 32.3%, 28.7% and 27.0% of our revenue during the years ended December 31, 2019, 2018 and 2017, respectively, was generated from foreign customers.  

Cash and Cash Equivalents

We consider all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase, as well as overnight repurchase investments, to be cash equivalents.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectability of accounts. 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. Activity within the allowance for doubtful accounts was as follows (in thousands):

	Year Ended December 31,
	2019		2018		2017
Balance as of January 1	$	600	$	400	$	400
Additions	99		211		62
Less write-offs, net of recoveries	(99)		(11)		(62)
Balance as of December 31	$	600	$	600	$	400

Non-trade Receivables

We record non-trade receivables to reflect amounts due for activities other than sales of subscriptions to our platform and professional services. Our non-trade receivables related entirely to a receivable resulting from our tenant improvement allowance. The tenant improvement allowance receivable was $14.4 million as of December 31, 2018 and was classified within prepaid expenses and other current assets in the accompanying consolidated balance sheets. We recognized our initial tenant improvement allowance receivable of $15.8 million related to our new headquarters once we took initial possession of the space in October 2018. We recognized additional tenant improvement allowance receivable of $2.6 million when we took possession of adjacent office space in February 2019. We had received the entire tenant improvement allowance of $17.0 million as of December 31, 2019, and therefore, there was no receivable balance remaining as of such date.  

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

We capitalize the incremental costs of obtaining a contract with a customer, including, sales commissions paid to our direct sales force. These costs are recorded as deferred commissions in the consolidated balance sheets. Costs to obtain a contract for a new customer or up-sell are amortized on a straight-line basis over an estimated economic life of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals. We determined the estimated economic life based on both qualitative and quantitative factors, such as expected renewals, product life cycles, contractual terms and customer attrition. We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the estimated economic life. Commissions paid relating to contract renewals are deferred and amortized on a straight-line basis over the related renewal period. We also capitalize the incremental fringe benefits associated with commission expenses paid to our direct sales force. Costs to obtain a contract for professional services arrangements are expensed as incurred in accordance with the practical expedient as the contractual period of our professional services arrangements are one year or less.

Amortization expense associated with commission expense is recorded to sales and marketing costs in our consolidated statements of operations.

The following table summarizes the activity of costs to obtain a contract with a customer for the year ended December 31, 2019 (in thousands):

	Year Ended December 31, 2019
Balance as of January 1	$	29,108
Adoption of ASC 606	5,094
Additional contract costs deferred	25,004
Amortization of deferred contract costs	(15,684)
Balance as of December 31	$	43,522

Commission expense was $15.7 million, $15.6 million and $11.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

For the periods prior to January 1, 2019, under ASC 605, 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.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Significant additions or improvements extending the useful life of an asset are capitalized, while repairs and maintenance costs which do not significantly improve the related assets or extend their useful lives are charged to expense as incurred.

Asset Category	Useful Life (in years)
Computer software	3
Computer hardware	3
Equipment	5
Office furniture and fixtures	10
Leasehold improvements	Shorter of useful life of assets or lease term

Impairment of Long-Lived Assets

Long-lived assets and certain intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable through undiscounted cash flows from the use of the assets. If such assets are considered to be impaired, the assets are written down to their estimated fair value. No indicators of impairment were identified for the years ended December 31, 2019, 2018 and 2017.

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 December 31, 2019 and December 31, 2018 because of the relatively short duration of these instruments.

We use a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires us to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:

•Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;

•Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

•Level 3. Unobservable inputs for which there is little or no market data, which require us to develop our own assumptions.

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

There were no instruments measured at fair value during the years ended December 31, 2019, 2018 and 2017.

Leases

Effective January 1, 2019, we adopted FASB ASU 2016-02 Leases (Topic 842), as amended ("ASC 842"). In accordance with ASC 842, at the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present and the classification of the lease. Operating leases with a term greater than one year are recognized on the balance sheet as right-of-use ("ROU") assets, lease liabilities and, if applicable, long-term lease liabilities. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. We have elected not to recognize on the balance sheet leases with a term of one year or less. For contracts with lease and non-lease components, we have elected not to allocate the contract consideration and to account for the lease and non-lease components as a single lease component. Finance leases are included in property and equipment, net, finance lease liability, current and finance lease liability, net of current portion in our consolidated balance sheets.

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

Expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense. We have lease agreements which require payments for lease and non-lease components (i.e. common area maintenance) that are accounted for as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as maintenance costs based on future obligations, are not included in the ROU assets or lease liabilities. These are expensed as incurred and recorded as variable lease expense.

For periods prior to ASC 842, we recorded rent expense on a straight-line basis over the term of the related lease. The difference between the straight-line rent expense and the payments made in accordance with the operating lease agreements were recognized as a deferred rent liability on the accompanying consolidated balance sheets.

Stock-Based Compensation

We account for stock-based compensation expense related to stock-based awards based on the estimated fair value of the award on the grant date. We calculate the fair value of stock options containing only a service condition using the Black-Scholes Option Pricing Model. The fair value of restricted stock units is based on the closing market price of our common stock on the Nasdaq Global Market on the date of grant. For service-based awards, stock-based compensation expense is recognized on a straight-line basis over the requisite service period. For performance-based awards, stock-based compensation expense is recognized using the accelerated attribution method, based on the probability of satisfying the performance condition. For awards that contain market conditions, compensation expense is measured using a Monte Carlo simulation and

recognized using the accelerated attribution method over the derived service period based on the expected market performance as of the grant date. For restricted stock units, stock-based compensation expense is recognized on a straight-line basis over the requisite service period. We account for forfeitures as they occur, rather than estimating expected forfeitures.

Basic and Diluted Loss per Common Share

We compute net loss per common share using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock are substantially identical, other than voting and conversion rights. Accordingly, the Class A common stock and Class B common stock share equally in our net losses.

Basic net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period increased by common shares that could be issued upon conversion or exercise of other outstanding securities to the extent those additional common shares would be dilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net loss per share by application of the treasury stock method.

Due to net losses for the years ended December 31, 2019, 2018 and 2017, basic and diluted net loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.

Income Taxes

We use the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. We recognize the effect on deferred tax assets and liabilities of a change in tax rates as income and expense in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.

Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not the position is sustainable upon examination by the taxing authority. We measure the tax benefit recognized as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. We recognize penalties and interest related to unrecognized tax benefits as income tax expense.

We calculate the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years and record adjustments based on filed income tax returns when identified. The amount of income taxes paid is subject to examination by U.S. federal, state and foreign tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to our assessment of relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, we record the change in estimate in the period in which we make that determination.

Segment Reporting

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. Our CODM is our chief executive officer, who reviews financial information presented on a companywide basis for purposes of allocating resources and evaluating financial performance. As such, our operations constitute a single operating segment and one reportable segment.

Foreign Currency

Our operations located outside of the United States where the local currency is the functional currency are translated into U.S. dollars using the current rate method. Results of operations are translated at the average rate of exchange for the

period. Assets and liabilities are translated at the closing rates on the balance sheet date. Gains and losses on translation of these accounts are accumulated and reported as a separate component of stockholders’ equity and other comprehensive income.

Gains and losses on foreign currency transactions are recognized in the accompanying consolidated statements of operations as a component of other expense, net. Transaction gains and losses from transactions denominated in foreign currencies resulted in net transaction losses of $0.2 million and $3.0 million for the years ended December 31, 2019 and 2018, respectively and net transaction gains of $2.6 million for the year ended December 31, 2017.

Research and Development

Research and development expenses include payroll, employee benefits, and other headcount-related costs associated with product development. Our product utilizes a common codebase, whether accessed by customers via the cloud or via an on-premises installation. Since our software is sold and licensed externally, we consider our software as external-use software for purposes of applying the capitalized software development guidance. Product development costs are expensed as incurred until technological feasibility has been established, which we define as the completion of all planning, designing, coding and testing activities that are necessary to establish products that meet design specifications including functions, features and technical performance requirements. We have determined that technological feasibility for our software products is reached shortly before they are released for sale. Costs incurred after technological feasibility is established are not significant, and accordingly we expense all research and development costs when incurred.

Advertising

We expense advertising costs as they are incurred. Advertising expenses were $4.1 million, $3.9 million and $3.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Recent Accounting Pronouncements

Adopted

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which aims to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. ASU 2016-15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The adoption of ASU 2016-15 did not have an impact on our condensed consolidated financial statements for the year ended December 31, 2019.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"), which provides entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income ("OCI") that the FASB refers to as having been stranded in accumulated OCI as a result of tax reform. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018. The adoption of ASU 2018-02 did not have an impact on our condensed consolidated financial statements for the year ended December 31, 2019.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides new guidance for revenue recognition. The new revenue standard provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.

We adopted ASC 606 on January 1, 2019 using the modified retrospective method. Under this method of adoption, we applied the new revenue standard only to contracts that were not completed prior January 1, 2019. Upon adoption, we recorded an adjustment of $55.8 million to our accumulated deficit. The adjustment was offset by a $35.4 million reduction to deferred revenue and the addition of a $20.4 million contract asset, primarily due to our on-premises term license subscriptions.

ASC 606 materially impacts the timing of revenue recognition related to our term license subscriptions. Prior to our adoption of ASC 606, we have historically concluded that we did not have VSOE of fair value of the undelivered services related to on-premises term license contracts, and, accordingly, have recognized on-premises term license contracts and related services ratably over the contract term. Under the new revenue standard, the requirement to have VSOE for undelivered services is eliminated. Therefore, revenue allocable to the license portion of the contract is recognized upon delivery of the software. Maintenance and support sold with our term license subscriptions is distinct from the term license subscription and the revenue attributable to the maintenance and support continue to be recognized ratably over the contract term. Under ASC 606, we allocate the transaction to performance obligations based on SSP, which impacts the timing of revenue recognition depending on when each performance obligation is recognized. These changes to the timing of revenue recognition also affect our deferred revenue balances.

In addition, ASC 606 requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our commission expense. Prior to the adoption of ASC 606, we deferred the direct and incremental commission costs to obtain a contract with a customer and amortized those costs over the term of the related customer contract consistent with the related revenue. Under the new revenue standard, the direct and incremental costs to obtain contracts with customers, include sales commissions, are deferred and recognized over a period of benefit that we have determined to be five years. In addition, we capitalize the incremental fringe benefits associated with commission expenses paid to our direct sales force. Upon adoption of ASC 606, we reduced our accumulated deficit and increased our asset for deferred commissions by $5.1 million.

In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842), which requires companies to recognize on the balance sheet the assets and liabilities for the rights and obligations created by the leased asset. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We adopted this standard effective January 1, 2019 using the modified retrospective approach for all leases entered into before the effective date. We also elected to implement the new standard at the adoption date with a cumulative-effect adjustment, if any, recognized to the opening balance sheet of accumulated deficit in the period of adoption.

For comparability purposes, we will continue to comply with the previous disclosure requirements in accordance with the existing lease guidance for all periods presented in the year of adoption. We elected the package of practical expedients as permitted under the transition guidance, which allowed us: (1) to carry forward the historical lease classification; (2) not to reassess whether expired or existing contracts are or contain leases; and (3) not to reassess the treatment of initial direct costs for existing leases. In addition, we elected an accounting policy to not recognize leases with an initial term of one year or less on the balance sheet. We did not elect the hindsight practical expedient to determine the lease term for our existing leases and assessing impairment of the ROU assets.

Upon the adoption of this standard on January 1, 2019, we recognized a total lease liability of $51.4 million, representing the present value of the minimum rental payments remaining as of the adoption date and ROU assets of $33.8 million. We did not have finance leases (formerly referred to as capital leases prior to the adoption of ASC 842), therefore there was no change in accounting treatment required.

Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) ("ASU 2016-13"), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not expect the standard to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Entities can choose

to adopt the new guidance prospectively or retrospectively. We do not expect the standard to have a material impact on our consolidated financial statements.